Editorial Articles

Editorial Volume-34

Demonetisation to Fight Corruption & Black Money

Jayanta Roy Chowdhury

In a surprise move, Prime Minister Mr Narendra Modi announced demonetisation of the current series of Rs 500 and Rs 1000 notes from mid-night of November 8, 2016. The move is also expected to weed out large caches of black money. “To break the grip of corruption and black money, we have decided that the 500 and 1,000 rupee currency notes presently in use will no longer be legal tender from midnight that is 8 November, 2016,” the Prime Minister said in a surprise televised address to the nation.“This means that these notes will not be acceptable for transaction from midnight onwards.” After a one-day shutdown of all banks and ATMs, new 500 and 2,000 rupee denomination notes are being issued from Thursday November 10, 2016, by the Reserve Bank of India.

Why was the decision taken ?

Prime Minister Mr Modi had promised to combat the menace of black money when he came to power two-and-half years back,  pledging to crack down on parallel economy  in india which has seen tax to GDP ratio being abnormally low. While the Indian economy grew by 30 % during 2011 and 2016, the circulation of money in the economy increased by 40 %. However circulation of Rs 500 notes increased by

76 % and of Rs 1000 notes by an astounding 109 %. Which means the demand for high denomination notes grew at a faster rate, causing suspicion that much of this was being hoarded as black money. 

“This measure was necessary to maintain the financial integrity of our economy,” said Secretary Economic Affairs Shaktikanta Das. Demonitisat-ion is a move which had been suggested by several quarters. 

The move will also check fake note flows, a bane which has been dogging the Indian financial markets for years. The Reserve Bank said while the Indian currency’s security features have not “been breached”, the fake notes being pushed by Pakistan’s spy agencies were similar to legal tender and were causing confusion in the market. Currently there are 16.5 billion legal Rs500 notes and 6.7 billion Rs1000 notes. But estimates point to larger numbers of high denomination notes circulating in the market, clearly pointing to fake currency being pushed into india in large numbers.

The  Government’s decision to demonetise Rs 500 and Rs1,000 currency notes will also push India towards a cashless economy. “This one decision will change the way the people spend and keep their money,” asserted Finance Minister Mr Arun Jaitley. India has been trying to push the country’s cash dependent economy towards paperless transactions. It published a draft paper of sops and incentives, which may be considered for those opting for online and plastic payments. However, the move has remained nascent at best till now. 

High-denomination banknotes account for 86 % of the 1,64,000  crore rupees of currency in circulation. With inflation raising prices, most people preferred higher denomination notes. However, by now taking steps to discourage high value notes, the government could push more people to opt for e-commerce and plastic money. Analysts believe the move to scrap high denomination notes will now force people to use their accounts and financial technology for transactions. Estimates say the mobile commerce market in India will grow from a current $2 billion to $19 billion by 2019. 

Officials point out that studies by McKinsey suggest large-scale adoption of digital finance by emerging economies could boost their GDP by up to 6 % The study says “India could see a boost of $700 billion, an 11.8% increase by 2025. This additional GDP could create up to 21 million.”  The idea is to move society towards electronic transactions and away from cash, as this helps us monitor money flow and check black money. 

What Next for the common man ?

The old Rs 500 and Rs 1,000 notes are being exchanged at post offices and banks from November 10. It shall go on till December 30 with any valid ID such as a passport, ration cards, PAN card or Aadhaar card. Those who are unable to exchange their notes by December 30 will be allowed to declare them with the Reserve Bank of India till March 31. While there will be a cap  on the amount of money that can be exchanged in a day.  However, there will be no limits on the amount of old money that can be deposited in a bank account. Tourists and Indians returning from abroad can change these notes at airports upto the value of Rs 5000.

A new series of Rs 500 notes with Mahatma Gandhi on one side and Red Fort are being  issued as will be a new series of Rs 2000 with the Mangalyan space rocket from November 10. The new series of notes would be Braille compliant and could be read by blind persons by touching the notes. Currency printing notes had been printing these notes in secrecy and these had been transported to RBI currency chests. All who exchange such notes will have to produce valid ID cards and the exchange would be recorded.

Pakistan’s spy agency ISI is believed to have secured currency notes from the source from which India buys currency notes and was printing high quality fake Indian notes which it was pushing through various borders. Officials said while starting midnight on November 8, Rs 500 and Rs 1,000 notes will no longer be legal tender, other currency notes – Rs 100, Rs 50, Rs 20 and Rs 10 – would remain valid, as would be all coins. All cashless transactions, such as cheques, cards and demand drafts, will continue as usual.

Real estate sector, particularly property resale market, is expected to take a hit because of the decision. With large caches of black money eliminated, black money deals are expected to reduce in the realty sector. This is expected to bring down prices of property and bring about transparency in the industry which unfortunately has earned a dubious reputation of being flush with  black money.  According to an expert, prices coming down to more reasonable levels in the housing market cannot be ruled out. In the immediate future, the sector will be under serious pressure with volume and number of transactions in residential and land markets seeing a substantial downward trend.

What Next for the Government 

The Government and financial institutions could also build a credit history using e-transactions to give consumers easier credit terms and higher credit flows.  Tax collections in medium term will increase and bank deposits will also rise. "India cannot afford to live with black money any longer. Honesty, integrity & ethical conduct are requirements of India's development.", said the Finance Minister.

The Government will be keeping an eye on all cash deposit of over Rs 2.5 lakh and could if it finds that the deposit does not match tax returns, impose a penalty of 200% on the income deposited besides extracting taxes on it.

According to a senior official, “We would be getting reports of all cash deposited during the period of 10th November to 30thDecember, 2016 above a threshold of Rs. 2.5 lacs  in every account.  The department would do matching of this with income returns filled by the depositors. And suitable action may follow.”

If a huge amount of cash is deposited which does not match with income declared,”this would be treated as the case of tax evasion and the tax amount plus a penalty of 200% of the tax payable would be levied as per the section 270(A) of the income tax Act,”.

Section 270 A of the IT Act provides that in case of under-reporting of income flowing from deliberate mis-reporting, the penalty which may be imposed can be 200 % of the amount under-reported. However, if it is a case of under-reporting, but not due to willful mis-reporting then the penalty can be 50 % of undeclared income.

However, cash deposits of upto Rs 2.5 lakh will not be scrutinised and ordinary people who make such deposits will not be harassed. People need not worry about such small amount of deposits up to Rs.1.5 or 2 lacs, since it would be below the taxable income. There will be no harassment by Income Tax Department for such small deposits made.

All denominations of currency notes, beginning with Rs 1000 notes, will be reintroduced with enhanced security features in the coming months. The fresh notes will come with a new colour combination and design.

History of Demonetisation

This is not the first time the Indian governments has demonetised currency notes. RBI first demonetized Rs1,000 and Rs 10,000 banknotes  in January 1946. Banknotes for Rs 1,000, Rs 5,000 and Rs 10,000 were reintroduced in 1954. However,  Rs 1,000, Rs 5,000 and Rs 10,000 were once again demonetised  in January 1978 once again. In 1978 the then Government said the move was aimed tackling the issue of the black money which had grown to large proportions at that time. The measure was enacted by passing the  High Denomination Bank Note (Demonetisation) Act, 1978. The law’s preamble said that this was  an Act to provide in the public interest for the demonetisation of certain high denomination bank notes and for matters connected therewith or incidental thereto.

However, Rs 1,000 was big money in those days, clerks earned Rs 200-300, most officers earned between Rs 500- 1500 and even President of India earned a mere Rs 10,000, while Managing Directors of even the largest corporation earned just Rs 5,000. Most Indians in those days had never seen such a note in their lifetime. 


(The author is a senior journalist based in New Delhi. Views expressed are personal)