DEMONETISATION 

            WAR AGAINST CORRUPTION.

   On the evening of 8 Nov 2016, Prime Minister Narendra Modi announced a positive shock to the country, which opened the floodgates of Facebook memes and WhatsApp jokes before making way for more serious discussions. Having promised during 2014 election campaign to bring back black money worth lakhs of crores stashed abroad, the NDA govt was under pressure to do something dramatic. The Income Declaration Scheme hadn’t yielded anything substantial.

   Prime Minister declared that currency notes of  500 and  1000 would be demonetized from midnight, thereby withdrawing their status as legal tender. Instead, advanced currency notes of denomination  500 and  2000 would be introduced.

   This step of demonetization has been taken as much with a view to curbing financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN) and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India, as with a view to eliminating black money, which casts a long shadow of parallel economy on our real economy. One of the most important reasons was to lower the cash circulation in the country, which is directly related to growing corruption in our country, as cash transactions are not likely.

   This is not the first time India has taken such an extensive stride. The first demonetization took place in the Jan 1946 when  500,  1000, and  10,000 notes were taken out of circulation; all these notes were re-introduced in the economy in the year 1954. Then again in 1978, when the Janata Party coalition govt led by Morarji Desai was in power, a similar measure was taken with notes of  100,  5000 and  10,000 to curb counterfeit money and corruption.

   In order to implement the decision of the govt, RBI issued certain operational guidelines on Nov 8 keeping in view the need to minimize inconvenience of the people. Old high-denomination bank notes of aggregate value up to  4000 could be exchanged at any bank branch or issue office of RBI provided a requisition slip as per the format specified by RBI was presented with a proof of identity. Similar services were also made available in Post Offices. The exchange process was supposed to close on 30 December 2016. A withdrawal from ATMs was restricted to  2000. But there was no limit on deposits, except in case where the compliance with extant Know Your Customer (KYC) norms was incomplete – the maximum value that could be deposited in that account should not exceed  50,000. Cash could be withdrawn against withdrawal slip or cheques subject to a ceiling of  10,000 in a day and  20,000 in a week. Petrol, gas and CNG stations, govt hospitals, railways and airline booking counters, state-govt recognized dairies and ration stores and crematoriums were to accept  500 and  1000 banknotes till 24 Nov 2016. However, the guidelines have been changed frequently depending on the changing circumstances.

   There has been apparent inconvenience to the common man initially, given the short span of time (ie 50 days) to get these notes exchanged or deposited in banks and post offices. In rural economy “cash is king” and thus reduction I cash flow has hit the villagers badly. Poor penetration of internet and low level of digital literacy are among the factors that make people depend on cash for transactions.

   Bank employees have had a tough time dealing with the problem. Handling long serpentine queues tested their nerves and kept them busy for much longer days. One must admit that the estimated value of these demonetized notes – 86 per cent of the entire cash circulation – is huge in the first place. This was also coupled with panic that people may even have to starve in spite of having cash in their banks. And then there are those with black money who have tried to launder their savings through their employees and clients.

The demonetization drive is expected to have positive effects. Banks will experience healthy growth in savings accounts. The measure will lead to higher tax collection, better business environment, less corruption and transparency. It will also help lower inflation rate as there will be a fall in corruption and black money. (However, critics believe it will have the contrary effect as they speculate and increase in investment in gold, real estate and foreign currency, thereby leading to inflation.) The move would lead to more foreign investments as it sends out a green signal to investors uncertain about the security of their investment due to corruption, wherein India is ranked 78th.

   This initiative of the govt is expected to make it extremely difficult for the law breakers and the corrupt to carry out tax evasion, financial crime and money laundering. However, the success of this “war against corruption” cannot be scaled as of now as it totally depends on its implementation.