While the world was biting the nails over the election for the President of the United States, Prime Minister of India launched a massive setback to the ‘black economy’ operating through the vault of crony capitalists in India.
Performing a ‘surgical strike’ against the parallel economy (black economy), Prime Minister Narendra Modi announced that the Reserve Bank of India (RBI is the issuer of currency in India) is cancelling the legal tender of high denomination currency notes of ₹500/- and ₹1,000/-. In consequence thereof, these bank notes cannot be used for transacting business and/or storage of value for future usage. These bank notes can be exchanged for value at any of the 19 offices of the Reserve Bank of India or at any of the bank branches or at any head post office or sub-post office. According to the RBI press conference, there are 16.5 billion ‘₹500’ notes and 6.7 billion ‘₹1,000’ notes in circulation right now.
An expected hullabaloo followed the announcement with people getting uneasy about the short term effects of the second demonetization drive (first failed attempt was made in 1978) by the Government. This internal scavenging has various ramifications for the economy in the short, medium and long term.
What are the repercussions of this demonetization drive?
- Legal cash with people will see the vault of the banks, which will increase the lending activity of banks. The banking sector which is otherwise facing liquidity crunch because of the issue of NPAs (Non-Performing Assets) might get a temporary relief.
- Interest rates may come down due to surge in deposits which would make credit cheap for the businesses to expand and flourish.
- Black money got a shot in the foot with the hidden cash becoming obsolete. Transparency might follow the game now.
- People from the poor and middle income group would rejoice because of sinking of prices of real estate sector and higher education (the two harbingers of black economy).
- Organisations operating in the field of cashless economy such as ‘Payment Banks’ and the Government of India sponsored ‘UPI (Unified Payment Interface)’ would get a boost from this pragmatic move.
- Appreciation of rupee against the foreign currency basket can also be anticipated which would bring down inflation in long term giving relief to the poor and middle income population.
- Initial transition of black money into gold purchases have also paved the way for the success of Government’s ‘Gold Monetization Schemes’.
- Due to lower value of currency available in the market, businesses would be forced to shift towards a cashless economy to prevent hassles of currency maintenance.
- Internal security of the nation would get a boost with the funds cycling across the nation to propagate terror operations, smuggling, drug trafficking, human trafficking etc. getting obsolete with the dawn of the day.
- The issue of counterfeit currency causing huge loss to the exchequer would be resolved with this one big solution.
What are the challenges to this demonetization drive?
- Government should ensure smooth transition towards the new currency with minimization of volatility in the circulation of currency.
- Income Tax Department needs to keep a close watch over the cash deposits above ₹250,000 with adequate safeguards in place to track the unaccounted wealth.
- The economy would transit swiftly to a cashless economy; therefore, an adequate IT Infrastructure should be in place to ensure security of transactions.
- In both short and medium terms, the real estate sector would suffer from reduction in market prices and the gems and jewellery sector getting an increase in prices, due to the uncovering of the parallel economy and demand-supply mismatches respectively. SEBI and RBI should work in tandem to keep close watch on this phenomenon too.
- RBI would need to bring frequent revisions to its monetary policy to get itself in sync with the currency fluctuations which may otherwise have inflationary repercussions.
The government’s move is tantamount to the fact that a strong political will and good intentions can unearth even the decade old secrets. While the intent is clear, the implementation and impact is yet to be seen. It is laudable that if the Government wants to keep a secret, it really can, with some people calling it ‘Pokhran-3’.
With India showing the way forward, the world can descend into a new form of ‘Keynesian economics’ whereby the electorate may put forward its desire to confront the political leadership with similar demands to strike against the crony capitalism prevalent in every nook and corner of the world. When and how it happens, depend upon the resolute stance of the targeted populace with customized efforts. But it is high time to get serious about this issue at all the multilateral forums, especially the United Nations, to unearth the potential unaccounted wealth from the tax havens around the world.