For long the nation has debated about the strategies to put an end to shadow economy. On the night of 8th November 2016 one bold step by the current government, termed as, demonetisation of 500 and 1000 notes took the nation by surprise, so much that some panicked to death. With much hue and cry all around some discussed about the effectiveness of the policy change, other got themselves busy in finding out ingenious ways to flee the out-turn of this move.
In simple words, black money is the income obtained illegally or not declared for tax purposes. There are several estimates of amount of black money going around in economy, but they all stand on one common point that the amount is large enough to run an almost parallel economy , well known as shadow or black economy.
With demonetisation (the act of stripping a currency unit of its status as legal tender) of 500 and 1000 notes the current government has put forth three basic objectives. First and foremost is to flush out the unaccounted income from economy, secondly, to obstruct the funding for terrorist groups and lastly, to minimize the flow of fake currency. Along with these, in the backdrop we can also observe that the government has approached towards a “go cashless” sort of economy where most transactions are carried out through online platforms and would thus be accounted indirectly.
The big question is can the currency ban really curb the black economy? By making 86% of cash in circulation in India worthless overnight, government tried its best to abstain people from converting their currency into physical assets. The main target of this move seems to be those, who hold their black money mostly in form of cash. Practically, its very naive to think that ‘big sharks’ would be securing their black money in form of cash stored up in suitcases. Thus this policy keeps ‘the tycoons’ out of frame , who secure their cash in foreign currencies.
Real estate and hawala operations are two of the major sources of black money. With liquidity crunch in real estate the situation in bleak and dull for the targeted population, whereas, hawala operators are left with no choice but to use the currency for ephemeral warmth.
Instead of such hurried announcement government should have backed up this idea with better logistics. The government cannot do away with just the unusual broadcast of its policy and not justifying its policy regarding reaping in the big sharks. Its very unusual of a government to create a state of confusion and fuss.
Irrespective of all the efforts to clean up the economy , the targeted population is trying hard to come up with innovative ways to escape the radar, wherein, they are taking help of senior citizens, relatives, domestic help or in better words the ‘insignificant’ section of population, in a way that they can get their currency notes exchanged avoiding the radar of income tax department. This is one loophole which makes the entire chaos meaningless and the struggle of common man in vain.
Along with this there are can be two effects on economy. Firstly, with decrease in cash transactions prices are supposed to drop and with increased deposits with banks, interest rates may trickle down. This move will do wonders for financial inclusion i.e delivering financial services to the disadvantaged. However the logistics are making things difficult. Long queues outside ATM, banks running short of cash, service providers not accepting the old currency has thrown life of people out of gear and brought market to a standstill with huge losses in business all around. This situation is not as smooth as claimed by the authorities.
One can well imagine the situation in villages where people don’t have a bank account or have never been to a bank. This move has severely affected the purchasing power of the unprivileged. Despite the chaos, the overall effectiveness of policy can only be observed with passage of time.
There is no doubt about the fact that this is a master stroke to eliminate the fake currency. Also this policy would loosen the grip of terrorism because the agents would be caught if they dared to reach out to banks or would either die of hunger anyway.
Demonetisation has been carried out previously in the year of 1978, though the motive of eliminating black money was hidden, remarkable results were not obtained. Yet we should not forget that 2016 is lot different from 1978. With upcoming elections, this move may seem to be a big unannounced political knockout for other parties but this should not undermine the motive of welfare.
Having analysed the three basic objectives we can observe that instead of such hurried announcement government should have backed up this idea with better logistics. The government cannot do away with just the unusual broadcast of its policy and not justifying its policy regarding reaping in the big sharks. Its very unusual of a government to create a state of confusion and fuss all around without a specified estimate of its consequences. Instead of figuring out the loopholes in black money fix, the citizens should cooperate for a better future.