Demonetization revisited India after 38 years. The large denominations of old currency has been disowned with a window period to exchange it with new currency within 50 days from any bank and thereafter from Reserve Bank in another 3 months. The secrecy of the plan and sudden announcement may make it success. Though doubts are raised that Indian Jugaad may hurt the objective. But there are other questions as well e.g. Would it eliminate black money?
What is the objective?
In short it is a soft reboot of economy by replacing entire cash in circulation with new one. But the implication is that person holding the cash would have to come forward to deposit it with disclosure of his identity. Thus a person having huge amount in cash would in turn have to explain, how s/he earned it.
For ordinary people who are regularly paying taxes and filing income tax returns, this is a mere formality but those who live off the radar, this is a serious trap.
There are groups of smugglers, Mafia thugs, politicians who have rooms full of currency notes for their operations. They are the real target of this operation. Of course neighbour Pakistan churning counterfeit currency is also the target.
But this exercise was undertaken in 1978 and it was a failure. What makes it work this time?
Why demonetization failed in 1978?
In 1978 Morarji Desai was prime minister as the leader of all opposition alliance called Janta Party. Morarji Desai was an upright man who had remained in Congress until Indira Gandhi made it impossible. Congress party has an illogical bias in favour of legislations. So did the Morarji Desai. They thought that legislation’s have Divine force and executive order is evil. There is no other reason to explain it. Hence Morarji Desai used an Ordinance to declare withdrawal of high denomination notes and in the process too many people had advance knowledge of the move.
Currency is issued by the Reserve Bank in its own prerogative under the law. Similarly decision to replace old currency with new happens all the time. But the Janta Government in 1978 promulgated an ordinance to out law currency. It was promulgated in the morning at 9 AM and it gave large leeway to the people to change the currency. Change was permissible across the counter. Perhaps no identity proof was asked or noted. In any case computers were not there and certainly not the AADHAR identity or Pan Cards of today. Nor all the people had bank accounts. Now there is Jan Dhan account for every person.
The announcement was made at 8 PM after close of markets. Thus giving only 4 hours notice.
Will it work?
It will certainly ruin the people with rooms full of cash. It will also catch middle class big fishes. People have two options:
1. Deposit money in bank and withdraw it again subject to present withdrawal limit of ₹2000 per day by ATM & ₹24000 per week by cheque.
2. Exchange upto ₹2000 of old notes with new notes once in 15 days.
Many people think that second route is easy and they are hopping from one bank branch to another, causing clogging and long Que. But they are mistaken. If they have exchanged too much, they can expect a notice from Income Tax department, very soon. In any case, the outflow of new money being restricted, it would be not easy for people to convert it into new currency, simply by logic of lack of new notes. After a circular route, changing many hands, it will end up either in trash or in some bank account.
On day two, every ID is profiled & those who had exchanged once, were returned. But they were back at another bank with different ID. Thus forming long ques.
Possibility of Jugaad:
The total money in circulation is about 14.5 trillion rupees. 86% of this money (about 12.5 trillion) is in High Denomination Notes which are now useless. Success depends upon the amount of money which lapses or not exchanged.
With 25 billion bank accounts recently opened for the marginal sections of people, the doubt is expressed that people may route the money through these accounts. But there is a limit on transactions in these accounts. Assuming every account would be used to deposit and withdrawal, half of it would be kept by account holder as the prevailing rates is being rumoured. That means huge benefit to ordinary & marginal citizens. Would that be any less success? I don’t think so. See
India Today (@IndiaToday) November 12, 2016
Black money eradication:
The move of demonetisation will certainly be a jolt to cash economy operating parallel to main economy. But it is not a panacea of all the black money problems.
To see who is affected most, see who is criticizing it. The political parties who have to fight election in a few months.
The generation of money in unaccounted cash is the real source of black money. Forcing people to not to use currency as assets, would boost economy as people would invest in other productive assets but it will have little or no impact on cash economy which in a few months would be business as usual unless something changes it. 30% Income Tax is too high to help people to remain honest.