Not yet a surgical strike

The NDA government’s decision to demonetise Rs 500 and Rs 1000 notes has been met with both praise and derision in equal measure. To break down the government’s decision in everyday language, notes that accounted for 86 percent of the Indian currency in circulation have become useless. Speaking to a national audience on live television, Prime Minister Narendra Modi argued that it was a necessary move to crack down on black money, corruption, and terrorism. Going by the commentary on social media, it seems many have bought into this argument. Some have even deemed it to be a “surgical strike” on black money. However, it is imperative to introduce a little nuance to this discussion before one loses sight of the bigger picture. The Centre’s belief in its mission comes on the back of a flawed assumption that a larger share of the black money is held as cash stocks. Experts have contended that the Centre’s latest decision will disrupt black money transactions in the short term, but will do little to affect corruption in the long term. At best, the move will prevent the flow of counterfeit currency, assuming banks and post offices do a very efficient job of detecting such notes. Speaking to The Quint, Ajay Shah, a reputed macroeconomist at the National Institute of Public Finance and Policy, said: “Demonetising high-value notes assumes a Hindi film idea of wealth involving guys with stacks of hard cash in Indian currency. But today, unaccounted wealth is created in the form of front companies, and benami equity stakes.” In other words, cash is only one of many different forms of exchange available to those who want to avoid the prying eyes of tax authorities. The nature of black money has changed significantly, and most of it enters the country through the stock market, real estate, or is parked outside the country via dubious financial instruments. In seeking inputs from various tax lawyers with high-profile clients, it is evident that the black economy has also been cashless for many years. Meanwhile, the introduction of new Rs 500 and Rs 2000 denominations have only delayed the inevitable—hawala operators will restart their business after a brief pause once they figure out their features. Contrary to certain news reports, these new notes are not embedded with a GPS nano chips. There were rumours that this chip would track large stacks of these notes via satellite. It is also hard to draw a fine line between the black market and formal market. CP Chandrasekar, an economist at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, presents an interesting scenario: “Suppose you pay in cash to buy a house from a property developer. He uses this "black" money to pay his workers, who funnel the money back into the formal economy when they buy food from a shop, a train ticket home, an education for their children.” Experts contend that the decision to demonetise is likely to affect those holding money rather than a fixed asset.   

In other words, a large section of those affected by the decision will be workers in the service sector, small traders, and the informal economy. At the heart of the matter, there seems to be a concerted effort to move millions of workers in the informal sector (domestic help, plumbers, vegetable vendors) and even small traders who survive on legitimate cash transactions to a cashless economy. There is still a long way to go before India becomes a cashless economy. Despite the Centre’s claims, large swathes of India are bereft of a functional and efficient financial architecture for formal banking and cashless transactions. For example, there are also serious structural concerns surrounding monetary transactions that have not been resolved, especially in frontier regions like the North East and Ladakh. These areas often suffer massive cash shortages and the requisite financial architecture for both formal banking and cashless transactions have not been adequately developed. On Thursday, participants of the cash economy, primarily those of the middle class and below, were seen queuing up in long lines at banks to change their Rs 500 and Rs 1000 notes. Despite the government’s subsequent clarifications, the decision to demonetise has created a lot of panic among the masses. Our institutions, primarily the RBI, seem unprepared to deal with this fear. Meanwhile, corporate giants continue to over-invoice imports and follow either the stock market or real estate route to generate black money that funds political parties. In the fifty-day interim period before the December 31 deadline, politicians across the country will find various means to change their notes and gain fresh Rs 2000 notes, which will be a lot easier to carry come elections time. “Introduction of the Rs 2,000 note is a puzzle,” said senior Congress leader P Chidambaram. “How will this help in preventing generation of black money?” Maintaining that the introduction of the new series of notes is estimated to cost Rs 15,000-20,000 crore and “the economic gains of demonetisation should be at least equal to that amount,” he added. The government has provided no adequate answers.

The people of this country are well aware of the nexus that exists between political parties and large corporate houses. In the Centre’s recent SIT report on black money, corporate giants were found to have laundered billions of dollars by over-invoicing imports. The Directorate of Revenue Intelligence (DRI) is investigating six firms belonging to the Adani group for over-invoicing coal imports from Indonesia. Besides a few notices, no real punishment has been forthcoming. Does the Centre have the courage to go after this corporate big-wig? If the government comes down on the cosy relationship between corporate houses and political parties and introduces wholesale electoral finance reforms, only then will Prime Minister Modi have fulfilled his promise to tackle black money.