Dr Ashwani Mahajan
On the evening November 8, 2016, a sudden tweet from Prime Minister Narendra Modi surprised the nation that Rs. 500 and Rs. 1000 currency notes will no longer remain legal tender money. That is, these currency notes can no longer be used for normal transactions. Later Reserve Bank of India issued new currency with Rs. 2000 denomination and Rs. 500 with new design. So far rupees 4 lakh crores have come to the banks and it’s expected that deposits of banks would go up. In anticipation, banks have started reducing rate of interest on deposits and lending.
Who has Currency and How Much?
It is notable that up to March 2016, total currency in circulation was Rs. 16.63 lakh crore, out of which Rs. 500 and 1000 notes amounted for Rs. 14.17 lakh crores that is 85.2 percent of the total currency was in Rs. 500 and 1000 currency notes. Though, there will be only a few persons who do not possess these demonetised notes, however, most of these notes are held by a few rich people. According to census report of 2011 there are 74.5 percent households who have highest income earning member income with less than Rs. 5000 and 91.7 percent household have less than Rs. 10000 income. This implies that only 8 percent people have more than Rs. 10000 income. It implies that there are very few people who possess these demonetised currency notes in big amounts.
Menace of Fake Currency
Fake currency has been expanding for the past many years. Although there has been many laws against the use of fake currency, however, due to practical problems in the implementation of these laws, fake currency has been on rise in the country. In the past Pakistani terrorist network used to be financed using fake currency at a large scale and the dubious business of fake currency had been expanding very fast. But later it went much beyond the terrorist network and enemy countries started using the fake currency as an instrument to weaken Indian Economy. With this decision of the Government, fake currency has been eradicated from the system in one go automatically.
Attack on Black Money
So far, total Rs. 1,25,000 crores of black money has been taken out, by this Government through its two disclosures schemes recently. However, general belief in that it was only a tip of the iceberg. Some days back, Government has enacted a new law against ‘Benami’ properties, according to which these ‘Benami’ properties, could be forfeited by the Government without any compensation. Thus we can say that the Narendra Modi Government has now attacked black money and corruption from all sides.
Relief to Common Man
There are different estimates about how much money would not come back to the legal banking channel, however, experts believe that this figure may be between Rs. 2.5 lakh crores to Rs. 5 lakh crores. According to Irving Fisher’s Quantity Theory of Money, there is a direct proportionate relationship between quantity of money and the price level (subject to assumptions). So far huge sums of black money in the form of currency have been a major cause of inflation in the country. Therefore, it is believed that demonetisation would reduce inflation, making life easier for the common man. Interest rates have already started coming down, and common man will get relief in EMI and economy may get a boost by encouragement to investment and infrastructure building.
Revenue May Increase and Debt Reduced
It is said that in our country size of black economy (declared incomes and assets) is larger than the size of white economy. After demonetisation, black economy will shrink, while white economy will expand. This would lead to increase in Government revenues. Black money which used to be deployed in unproductive activities (like purchase of property and gold, lavish life styles, etc.), now would be deposited with banks and the same would be deployed in productive channels. Further, the part of currency, which does not come back to the banking channels, would reduce the liabilities of RBI and RBI will ultimately retire the debt of the Government accordingly. This will be a big relief to the Government, struggling with mounting public debt, a big part of which is debt from RBI. It would lead to decline interest burden of the Central Government. This may provide more space to the Central Government to increase expenditure on social services.
Move towards Cashless Economy
With time due to technological advancement and expansion of banking, use of cash in transaction has been going down in the country and we have been moving towards a cashless economy. However, after this step of the Government we will move faster towards ‘cashless economy’, as people would be discouraged to use cash in transactions. Naturally this will improve transparency, and also Government revenue. Lesser use of currency would limit the black money and we would move towards more equitable distribution of property.
As a side effect of this decision, we find that violence in Kashmir has drastically come down, as we don’t find incidence of stone pelting. It is believed that due to demonetization, terrorist outfits are not able to finance terror. Need of the hour is that distribution of income and wealth be more equal, inflation is controlled and corruption and black money is combated. For all these objectives, this decision of the Government seems to be in the right direction. However, in the days to come, Government, banks and other agencies involved in this task will have to work hard and walk extra miles, so that the initial inconveniences and hiccups are taken care of.
(The author is Associate Professor, PGDAV College, University of Delhi)
feedbackexcelsior@gmail.com
Trending Now
E-Paper
Follow our WhatsApp channel