Master stroke on black money to make India Swachch Bharat

Master stroke on black money to make India Swachch Bharat

The mid night scrapping of Rs 500 and Rs 1000 currency notes , as announced by Prime Minister Shri Narendra Modi in his address to the nation on November 8,  is being seen as a master stroke against black money and  corruption that has been eating into the Indian economy like a termite for several decades.  The sudden announcement of a decision which may be well thought over several months with only a handful of the top  echelons in the government having a whiff of it, would cause some disruptions in the interim, but then as the Prime Minister called upon the people , it is the price each citizen is called upon to  pay for defeating the monster of corruption and black money which, combined with counterfeit currency and terror funding, can strike at the root of a nation. 

 “There comes a time in the history of a country’s development when a need is felt for a strong and decisive step,”   Shri Modi said. But for the Donald Trump victory, India’s war on black money would have created instant ripples the world over. In any case, the ripples of the Modi move to hit at the hoarders of ill-gotten money where it would hurt them the most, would be felt for the Indian economy far too long. 

While Swachch Bharat is being implemented for cleaning up streets ,roads  and building toilets ,  PM’s  sweep  shot on corruption is the biggest ever exercise launched anywhere in the world to broom and clean up the economy which was growing at the fastest clip among the global peers , yet yielding low results for the common people.  Imagine the scale at which the brooming exercise can clean up the system. By some estimates as much as Rs 14 lakh crore currency notes of Rs 500 and Rs 1000 denomination are in circulation and would be withdrawn by December 31, 2016 or at the most  March 31, 2017. 

Some bankers feel that there could be as much as one-third of this amount which may not be deposited with the banks, since taking the ownership of the loads of money stashed in gunny bags may land some people in trouble . Now that would mean the country gets a windfall of Rs 4.33 lakh crore which would accrue to the nation in terms of reduced liability of the Reserve Bank of India which will replace the surrendered currency that much less. 

Going forward, this huge cleaning up would lead to a much better fiscal position of the Central Government with several positives for the macro picture , the biggest being on the inflation front. As is common knowledge that inflation is fuelled by a large margins by the black money which finds its way into conspicuous spending on theme parties and building of assets like real estate.  In fact, the real estate market has been thriving only on the cash part of the deals which of course would stop, giving a jerk to the sector in the transit till it readjusts itself to the new reality. So, it is being rightly interpreted by the analysts that the crack down on black money would be a big deflationary move, ultimately helping the common people, who may have to go through some temporary pains . 

Besides, the decision to scrap high value notes would drastically reduce premium on corruption in the public services since the risk –reward would be highly tilted towards the peril of being caught off-guard. As enumerated in the PM’s address to the nation, the NDA Government has taken several other measures to check the black money in the last two years.  These include:  a law for disclosure of foreign black money; agreements with many countries to add provisions for sharing banking information;  strict law to curb benami transactions; and a  scheme for declaration of  black money after paying a stiff penalty.  As much as Rs 1.25 lakh crore has already been brought out through these efforts and if  we add another Rs 4.33 lakh crore which may not return to the banking system and become junk, over Rs 5.50 lakh crore , a humungous figure, would have been neutralized.  The benefits would certainly accrue in the medium to long term.

The only challenge for the government in the interim is to ensure that a minimum inconvenience  is caused to the common people and the banking system is geared up to instill a sense of confidence among the people that the common households’ money is very much safe.  

“Honest citizens want this fight against corruption, black money, benami property, terrorism and counterfeiting to continue. Which honest citizen would not be pained by reports of crores worth of currency notes stashed under the beds of government officers? Or by reports of cash found in gunny bags? “, a decisive Prime Minister said.  

He is so right when he says that in spite of  being ranked as the fastest growing economy in the world, India figures so high on the global corruption index. With so many steps having been already initiated, India still ranks 76 on this dubious distinction.

Even though initial reactions in the stock markets were adverse, as was expected, the sentiment was also related to the Trump victory which had spooked the global markets which would slowly digest the new global paradigm of challenging the status quo.