(This paper was presented in a workshop held in Faculty of Law, University of Delhi.)
What would you do if one day most your cash was suddenly worthless?
In India millions were shocked when government placed an immediate ban on 500 and 1000 rupee notes. These two bills account for vast majority of currency in India, an economy where some 98% transactions are conducted in cash. Citizens were only given 50 days to exchange them for new notes, but for the limit on the amount that they could withdraw from the banks.
The country went into panic mode, people rushed to exchange the newly defunct bills or spend them at very few remaining businesses that were temporarily accepting the old denominations. Banks were chaotic, within some cases hundreds of people in the line for a same ATM. Many businesses ran out of small denominations unable to even give change. This demonetisation of currency was done to address a major problem in the Indian economy – untaxed and unaccounted form of cash not kept in banks called ‘Black Money’. This illicit cash is often kept illegally through corruption, bribery or kickbacks without having report of its use to the government. This shadow economy is extremely persuasive accounting upto a quarter of India’s GDP.
Much of this cash is in the form of hoarded 500 and 1000 Rupee notes, stuffed in mattress
or laundered in foreign bank accounts where it can’t be taxed. Exchanges with illicit money short the government crores of rupees every year. It also exaggerates inequality, as wealthier citizens are able to evade taxes and hold on much more money. Under the demonetisation rules, anyone seeking exchange more than 2,50,000 Rupees must explain why they’re holding so much cash or they face a penalty.
The hope was that all the unaccounted money would dissolve, the economy would reset, and those who overstep the law with black-money would be punished.
So not to lose millions, many wealthy citizens searched for loopholes, some who went over the limit reportedly paid other citizens to hold onto their bundles of cash in bank accounts to be returned at later dates. Others made large purchases of travel tickets, one of the few items available to be purchased with old money, hoping to refund those tickets past the 2016 December 30th deadline. Many gave up altogether and donated huge sums, soon to be worthless, of money to charity or just threw them away.
[I intend to show] The effects of ‘demonetisation’ on the economy. I’ll mention that the step of initiating this policy was well pre-planned, accounting some examples from rest of the world. Followed by my take on its effect in optimistic viewpoint. Later, mentioning some demerits and finally the conclusion. As I have already explained what happened during the state of demonetisation period and what caused it, let’s put forth the commanding setup of Narendra Modi’s government policy. It can be statically observed that the government had all the sects covered when thinking about demonetisation implementation in the country.
First, ‘Pradhan Mantri Jan Dhan Yojna’ was launched in 2014, an attempt to make banks reach even to the remotest of areas and to poorest of civilians. Bank accounts were opened free of costs, customers were lured with free accidental insurance coverage upto Rs.1 Lac, no necessity of minimum balance, among other offers.
Second, the introduction of ‘Direct Benefit Transfer’ scheme called upon the transfer of subsidies directly to accounts of the citizens rather than discounting the products. It was hoped that this act would reduce the leakages and delays. Income through Mahatma Gandhi National Rural Employment Guarantee Act can also be seen in effecting light of this scheme, which also required the Jan Dhan Yojna to be a success, as both are mutually related.
Third, government’s relentless press on people with undisclosed income to make their earnings known to the authority was launched in 2016. This made the people to disclose unaccounted money if they wish to counter the measures-about-to-be-taken by the government. The’ Income Declaration Scheme’ drew in some Rs.62,000 crores.
Fourth and finally, the government completely understands the alleged traditional practice of money laundering for the upcoming state assembly elections. This illicit money helps the political parties and candidates to spurn the wheel of fortune into any desired direction. Since most of the laundered money is kept in high denomination notes, it could become a reckless task to convert them into new bills or use them for elections. Linking it with the elections to be more transparent, free and fair; the people would have increasing monotonic preference of candidates who deserve instead of the ones who entice the voting audience with might of the money.
All these moves indicated that the government was considering reduction in the use of currency notes and pushing forward provisions of digital transactions. It was not a hurried decision. From Jan Dhan to direct subsidy transfer, and from income declaration to money-laundered elections, the government of India deviated from the path of wrongfulness and constructed a road to a better India. Since the government had committed itself to cleaning the economy, an option available was to demonetise some high denomination currency.
Many other countries of the world have had tried demonetising their hard currency in the past but few have succeeded. Out of these few no one has ever had the courage of paralleling the success of implementation such that of India. All the countries have struggled in a manner that is still unknown to the Indian audience and the matter of fact that none of implementation was well planned, organized, and executed. Venezuela’s inflation rate was estimated to touch 475%, the country announced that it has demonetised its most valuable note- the 100 bolivar bill. The government gave citizens a 72 hour window before withdrawing the currency, which accounted for 77% of the nation’s cash in circulation.
The government said old notes will be replaced, at some point, with new ones in denominations between 500 and 20,000 bolivars. However, the government was forced to give citizens an extended deadline for the use of the 100 bolivar bill after a serious shortage of currency led to violent protests and looting. The government ultimately had to withdraw the decision and tried to retract the earlier established state of affairs. Nigeria witnessed a similar failed attempt to demonetise the currency to institute an anti- corruption drive. This involved a new coloured currency notes forcing the old ones to be replaced within a stipulated limited time. The move was fruitless and proved deficit in improving an already debt-burdened and inflation-ridden Nigerian economy. Countries like Myanmar and Ghana have also experienced such cases.
There is no second thought in majority of the population and pundit forces that the intention behind demonetisation is not for a good cause. The government realises the actual concerning fact of corruption, bribery, and shadow economy. These problems are endeavoured in developing and under-developed countries, where either resources are available in abundance or are scares.
UN depicts northern European states are the most corruption-free countries where people are not only loyal to the state and society but state also reciprocates the same. For example in Sweden, a lucky draw is arranged for the vehicle drivers who have not been involved in any violation of the road traffic rules, while the fund of the draw is procured from the fines and challans received by those who actually did the violations. When a state rewards its citizens of their behaviour and encourages them, directly or indirectly, to continuously adhere to the law…the citizens help the government in curbing the law violation rate in the country. This kind of situation can also be brought up in India, a place that is bidding with economic growth can also encouraged for state loyalty. When people get to know about the successful hard-works of their elected representatives, the same people will revert back with their own portions of hard work and sanity. Mahatma Gandhi once said “Be the change you want to see in the world.” And if a government can set an example for that, the people can surely choose the path of righteousness. Indian government wants India to be corruption free, clean and sanitised and so far has been successful, this hard work encourages Indians to follow the same guidelines.
Denmark, Norway, Sweden, New Zealand are economies of the world in which major transactions are done electronically. Denmark will soon go totally cashless. Installing e- payment modes increases the level of transparency, governance, and accountability. On November 8th, when Indian government rolled out the demonetisation it also rolled out some interesting measures. Service and transaction fees on all government related websites were levied, the government encouraged people to use e-wallet mobile application apps such as PayTM and Freecharge. The government soon launched its own e-wallet app named Bhim. PayTM alone has witnessed an unprecedented increase of about 7000% in overall transactions mainly due to the demonetisation drive. These apps are providing amazing offers to its customers and users who in turn have started switching to e-payments of their electricity bill, telephone bill, among other services. Now big merchants to small shops, government offices to school buildings, recharge coupons to train tickets, are all transforming their domains into an electronically superior figure.
The government made all the banks to eliminate debit and credit card charges, reduced USSD charges from Rs.1 to Rs.0.5 so that remote areas where Internet connectivity is not that apprehensive can take advantage of this drive. The government’s launching of UPI (Unified Payments Interface) is a platform of transferring money from one bank account to another, in the realm of smartphone mobile. This interface helped the government to limit the queues inside the bank.
Let’s do some math here, a country where around 344 billion dollars are lost due to tax evasion, a country where practical economic equality means advantage to the rich, electronic payment modes are one of the best counter-measures. 344 billions dollars is a gigantic sum, to know how big is it lets compare it with the economy of Pakistan which is around 280 billion dollars. This means tax evasion in India is way more than the whole of Pakistan’s economy! If this amount of evaded tax reaches government then think of the endless possibilities. We Indians have unyielding hope when we see this sum accounts upto 22% of India’s GDP and would transcend into double figure economic growth per year.
India currently hosts world’s youngest force, a force that completely changed the Japanese economy into global manufacturing hub, a force that enhanced the American dream in 1960s. This young generation of mind can result in transformation of India from a third world country to a major superpower of the world.
Many critics say demonetisation actually ended up hurting many of the people it was intended to help. In a country where cash rules everything and illicit money is practically mainstream, government intervention may have done more harm than good. Demonetisation has had a profound effect on India’s population. Newspapers have reported deaths over a hundred, mainly in non-metropolitan areas. Cash didn’t reach the banks on time and even if it did the banks were out of money soon. The World Bank predicts a decrease by few decimal points in the growth rate and WHO is concerned about health effects of people in already polluted cities. Many businesses that completely run on cash-to-cash basis have seen a market downfall as people don’t have cash to pay. Many poor citizens don’t have bank accounts and were unable to exchange their cash due to currency shortages at the bank. India also has people who can’t read and write, and therefore making strenuous efforts for them to understand the government’s newly implemented policy.
All in all, as a conclusive retrospective nature of the essay, the chronological sense of setting up a stage for introduction of new currency was kept in top secret mode as less than half a dozen people in the whole of India knew about it. They were the major forces in making this drive a success and an example for the rest of the world to follow, if they choose to. I personally stand with the optimistic and cleanest view of the whole concept of demonetisation and would like to compliment the our constitution’s drafter Dr. Bhim Rao Ambedkar, who said that change of currency must be done every ten years as it keeps the economy in check. A balanced economy is everyone’s dream and therefore every civilized citizen of India hopes in achieving this sooner or later.
Digitalising the economy through encouragement of e-payment methods in urban and rural is a radical step given that India lacks the internet infrastructure in all of its places, but for a step that is considered radical and sudden we also may refer ourselves to the great leap of china that made it what it is today. Young ones abiding by the rule of law conceptualise India into a house of cards with all four aces. We take pride in ISRO’s satellite launch, we take pride in our cricket wins, then why can’t we take pride in a step that will only help the economy in long run. We are the catalyst for the future, we are the generation that defines our upcoming generation’s life, we are the ones that derive a ray of hope in the darkest of times, and we are the ones who love those even at the furthest of seas. We love our nation and if we tend to change ourselves so that the country can change into good, we must be sacrificial to temporary benefits and give thumbs up to policies like demonetisation.
Shubham Gaur