Demonetization: The Ultimate Weapon against Black economy

There was an urgent and necessary need to end the black money using the kind of surgical action that our Prime Minister has taken.

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Commentary | 18-11-2016

The black money is a much bigger problem than what appears to it. It provides a fertile ground for all the anti-social and anti-national activities like illicit drug menace, prostitution rackets, human trafficking, arms smuggling, kidnapping, fake currency (FICN), terrorism, destabilizing governments through espionage, etc. The sudden stop in the stone pelting in Kashmir is just one example of how the black money is used to destabilize the nation. The Telgi stamp paper scam was also a result of collaboration of politicians, mafia, police and press using the black money. So, if the money doesn’t leave a trail then it always gets involved in the black economy. The electronic transactions, on the other hand, will always have a potential to be tracked and hence, making it almost impossible to generate black money. So, there was an urgent and necessary need to end the black money using the kind of surgical action that our Prime Minister has taken. Indira Gandhi had told her finance minister YB Chavan in May 1971 that “the problem of black money can only be tackled through some person who feels very strongly about it.” (Declassified black money files of Prime Minister’s Office, no 37 (465)/71 PMS). (1)

The black money in India has a long history and a person needs to keep a tab on not only mainstream media, but also international publications and publications like Wikileaks to gain an in-depth understanding of the issue. In 2009, the CBI revealed that the secret security template used to print currency notes introduced in 2005 had become compromised. In other words, the counterfeiters had managed to gain access to the intricacies of currency notes printing, including the special ink, paper, and other ingredients used in them. When asked whether the country was still using the compromised security template, the then CBI Director, Ashwini Kumar, had said “yes”. (2)

The fake currency notes had also been found in the custody of one of the former Finance and Home Minister of India and even from RBI itself! The then supplier of Indian currency notes, De la rue office at Hampshire was also found to be involved with many alleging that insiders both from the Indian side and the company side were involved in the whole episode. (3) (4) (5)

Many people know how and why participatory notes were introduced and how it was a brazen attempt to embolden black money holders. Now, to force the government to roll back demonetization, the black money holders and “some” corrupt politicians are trying to provoke the people through the media by projecting false rumours and exaggerated accounts of difficulties faced by the common people.

Demonetization

I had the similar demonetization plan in my mind for long to end black economy and as soon as our Prime Minister opened Jan Dhan accounts, then it had stuck me that he may be on his way to take the crucial step of demonetization of high denomination notes. However, I had expected such a move to happen only after the implementation of UPI, since it would provide a backup in the form of cashless economy. Since, it has come much earlier, there must have been much pressing reasons, possibly based on intelligence inputs behind this sudden decision.

However, there are some steps that are further required to be taken as mentioned below, to successfully make the transition to a cashless economy and to ease the demonetization process.

  1. Immediate partial payment to all government employees and NREGA workers in cash to address the cash crunch in the short term. Basically, the government should find all the avenues where they owe the money and pay the amount in cash. This will flush the system with cash.
  2. Separate line for depositors and maximum two deposits allowed till December end.
  3. Distribute cash in form of new 500/2000 notes to merchants holding POS machines and allow them to disburse cash for card swipes. Pay transaction charges to all such merchants to motivate them.
  4. Declaring cash transactions above Rs. 2000 as invalid transaction and removing legal cover for its protection in next three months.
  5. Speedy installation of POS machines across all government departments accepting cash for transactions like transport tickets, fines, utility bills, hospitals, etc. and make PAN or Aadhar mandatory for all cash transactions.
  6. Limit daily withdrawal limit of ATMs to 2000 and monthly limit to 10000.
  7. Mandatory linking of bank accounts with Aadhar or PAN and mandatory linking of PAN and Aadhar, if both are possessed by a customer.
  8. Speedy implementation of UPI and removing bottlenecks at fast place. Developing digital payment infrastructure at grassroots level. Withdraw the limitation of UPI implementation licenses to banks only, as that would foster innovation with better competition.
  9. Remove card/electronic transaction charges for transactions below 2k and introduce cash transaction charges for transactions above 2k.
  10. Instead of 500, 1000 and 2000 denomination notes, the government should not have introduced the new currency in 300 and 600 denominations. However, the government could partially rectify this in future by withdrawing 2000 denomination notes.

Conclusion

  • India is already a low-cost place to live and it will become even cheaper with decreased real estate prices, deflation, lower taxes and interest rates. (6)
  • Reduction of cash-transactions and adoption of e-transactions will bring transparency, reducing corruption and crimes. The PM has already announced that he would be pursuing benami properties next.
  • Rational taxes, minimizing social spending, avoiding wasting public money on failed government organizations like Air India, etc. will bring more public satisfaction. Dharmic scriptures have mentioned one sixth of one’s income should go towards taxes.
  • Framing only those rules that are implementable will also reduce corruption as otherwise they just empower those government officials that have discretion power to decide in either way and that generally leads to corruption.
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