To Print or not to Print is the question
Before the Announcement: On 8th Nov 2016, PM Modi along with National Security Advisor Ajit Doval was having long meetings with Chiefs of Army and Navy Staffs along with Vice Chief of Air Staff on the security preparedness of the forces manning the border outposts. When it was announced that the PM will be addressing the people, everyone was anticipating some announcement regarding the ongoing conflict with Pakistan.
PM announced a surgical strike not of the kind everyone was anticipating, but of a completely different kind. It was an abrupt surprise about the decision to demonetize higher denomination notes, giving only a few hours to the targeted black money hoarders to respond.
Will it really hurt the intended black hoarders? UP Chief Minister Akhilesh Yadav was suggesting that this move is being timed now because of the UP elections, tacitly acknowledging that money power was intended to play a big role in the upcoming elections
Experts are however divided on the potential outcome of this move. Many Economists and Bankers have already called for taking high denomination notes out of circulation because in spite of so many anti-money laundering measures and transaction surveillance systems, only a fractional percentage of the illicit financial fund flows is being apprehended. Skeptics like Abhiroop Sarkar, a professor at the Indian Statistical Institute, point out that since black money is mostly stashed in undisclosed accounts in Swiss banks rather than as Cash, this move would not affect the big fish at all.
In Pre-Independence India, there were notes of Rs1,000, Rs5,000, and Rs10,000 denominations. They were taken out of circulation in January 1946. However, all three notes were reintroduced in 1954. There was speculation in the early 70s that the government would demonetize these notes based on the recommendation of the Wanchoo Committee. It was implemented only 1977 by the then prime minister Morarji Desai to counter counterfeits and black money.
There are many global precedents for demonetization as well. Recently, in 2009, North Koreans were given seven days to exchange a maximum of WON 100,000 in WON 1,000 notes for WON 10 notes. The revaluation was intended to restrict private market activity and inflation. The move practically wiped out many North Koreans' savings and destroyed the fortunes of many black market money traders. In the US also, there were higher denomination bills with values like $5000 and $10,000. The Federal Reserve took the high-denomination currency out of circulation in 1969 based on the executive order by President Nixon.
However, the scale of the denomination move now is unprecedented. The difference is in the sheer volume of currency being taken out from circulation is almost 80%. Based on the experiences of North Koreans, we might have to really wait and see how this move really turns out after all the jokes about demonetization have settled down.
Currencies in Digitized Economies
The role of cash is diminishing in the digitized economies the world over. Even in India, Mobile wallets like PayTM and online money transfers enabled through Credit and debit cards are making cash redundant.
According to RBI data, even in India, the value of transactions settled electronically is well over 90% now. Income tax refunds are increasingly made electronically. All of India’s Highway tollgates might also become fully electronic in a few months. The number of people who are using electronic transactions are also crossing 300 million as seen in the case of Indian Railways’ online ticketing portal. As the central government has already opened accounts for crores of people to transfer money directly to them bypassing the intermediaries, the number of those who are outside of the digital economy is becoming very less. Experts also report that high denomination notes are not frequently used in legitimate transactions. It is estimated that more than 50% usage of cash is to avoid taxes.
The Puzzling Element
Today, most high value goods like Smart-mobiles, Televisions etc. are in thousands. If the available maximum denomination is only hundred, then it is practically more convenient to make the transaction through digital means rather than with cash because of the sheer count of notes needed to be carried. This would incentivize more and more people to turn to digital transactions which cannot avoid tax. So the move to remove high denominations of currencies is a right move. However, what is puzzling to most is the proposed re-issuance of new notes having a value of Rs.2000. If the intention of the government is to curb black money, we have to question not the move to demonetize the high denomination notes but the decision to reprint higher denomination notes in the coming days.