PM Modi’s Demonetization Effort is a Giant Leap for India

Black money was and is the bane of our Country because it corrodes government, democracy and state institutions 

Amongst the many debilitating legacies in the last 7 decades of our democracy is the Black Money economy – which is a fuel for the terrible corruption in our political and government systems and a threat to our democracy, economy and country. Conversely, cleaning up this black economy would mean cleaning up Politics, Elections, Government, Businesses and also addressing the complex issue of Terror Funding and counterfeiting.

Prime Minister Modi had long signaled his determination to it head on and this promise to ‘clean-up’ our system was core to his political belief. Very early on he had signaled his ownership of this goal and that his plan would revolve around systematically compressing the black economy with stick and carrot. So in the last 2 years of his Government, there have been initiatives that have systematically built out this plan, which include the SIT on black money, JDM banking and direct benefits, incentives for e-payments, disclosure window for black money etc. As a popular headline put it, “Cash is No Longer King”. Transforming India into a cashless society, is something that Finance Minister Arun Jaitley promised us in his Budget 2014 address.

So yesterday, 8^th Nov as people were gearing up to find out about the next US President, Prime Minister Modi rolled out next phase of this effort – of voiding the 1000 and 500 Rupee notes in circulation. It’s a no-brainer that much of the cash economy relies on the circulation of these notes and so it was a natural step. That he managed to do it smoothly and surgically without any leaks was commendable.

Demonetizations are never smooth and some disruptions in the short term are to be expected. RBI and the Government seem to have addressed issues of liquidity permitting small swaps and reasonable window till Dec31st for deposits into Banks. That there will be logistical challenges and some innocent citizens may get caught up in unforeseen circumstances of liquidity or other short term challenges are to be expected – which is why the PM in his speech requested citizens to bear with the few days of inconvenience and trouble as the cost of the larger reform that he is undertaking.

That it’s a game changer that has grabbed the imagination of most Indians is confirmed by the quality of criticism by some of the political parties – Congress chipped in with this being anti common man (leading to questions about who they considered a common man), and the Left had its state Finance Minister claiming that black money was all abroad implying that there was none in India!

Moving beyond the expected political carping that’s the norm for everything that’s a reform in India – demonetization was a necessary and important step in this process of moving to an economy with minimum cash. It is worth reminding ourselves of the deeply entrenched character of the black economy in India - A June 2016 study has estimated India's black economy at over Rs 30 lakh crore or about 20% of our multi trillion dollar GDP – which is bigger than the economies of small nations such as Argentina and Thailand! Tax evasion too is pernicious - central bank data indicates that over the last 4 decades, Indians have exported goods and services, worth over Rs 17 trillion, but have not remitted an equal amount in foreign exchange. There is no elegant or non-disruptive way of fixing a problem that has been allowed to fester for decades and hence the need to physically remove from circulation illegal and/or counterfeit cash that is in circulation. This was the most efficient way to do this.

Off course there are those who loose from this move – those heavily invested in and involved in the Illegal economy, which include terror funders, political operatives, counterfeiters etc. Of particular relevance is the impact of this on national security – given the links between terror attacks and hawala transactions. After the Uri terror attack in Jammu and Kashmir earlier this year, the Director of the Intelligence Bureau clearly stated that ending the financing of terrorism was perhaps one of the most important means to fight it, especially given the high reliance on fake currency by terrorist groups.

Some of India’s political parties that have long funded their political elections through hoards of unaccounted cash will also be hit. These parties receive enormous sums in “cash donations”. Which, according to the Association for Democratic Reforms can comprise of nearly 75% of total party funds. This marks the systematic unwinding of the link between elections and black money. The Real estate sector which is being forced to transform and reform with RERA bill will now be under additional pressure to change its model of depending on cash and move further away from that old model to a more sustainable model like other businesses.

Of course this is neither the start nor the end of this process of compressing the cash economy.  Demonetization will further incentive small businesses and individuals to move to the formal banking sector. It will bring into the tax net all large cash deposits between now and Dec 31^st. Tighter KYC norms in Banks makes it more difficult for those with cash to open new accounts to launder through cash deposits. This aspect is still not foolproof though as recent loopholes in Aadhaar and therefore JDM have shown. But any attempt to launder these old 500/1000 Rupee notes through Banking system will be subject to increased scrutiny and difficult.

This is a significant step, because it follows the disclosure window that the Government had offered to black money holders. The PM and Government had made clear that this was the last opportunity to do this in voluntary manner and so demonetization is a critical first step in the next stage in the fight against black money and also in the process of the transformation of our economy into an efficient, transparent and clean one.

Black money was and is shame of our country because it corrodes government, democracy and the country’s institutions. It has shamed our country and economy for long and is cause and effect of corporate malfeasance, corruption and capture of policy and government. Demonetization marks an important next step in this transformation.

This article appeared in Mint on November 11, 2016

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