Shock treatment

There seem to be three objectives behind the Centre’s bold move to demonetise ₹1,000 and ₹500 currency notes, reminiscent of the Morarji Desai government’s initiative in 1978: stopping the counterfeiting of these notes, allegedly being instigated by Pakistan to support terror activities here; mopping up black money; and nudging a shift towards cashless transactions. This demonetisation, however, differs sharply from the earlier one; the withdrawal of high-denomination notes in 1978 affected only a very small segment of the population, whereas this time, great swathes of the working class and the poor too have been impacted. Given the widespread impact, it is important that the Centre achieves the objectives behind the move. The surgical strike may well achieve the first, and indeed seems to have been the prime motive of the entire exercise. The crackdown against black money seems less convincing. While tax-evaders are likely to come under government scrutiny when they surrender huge sums of cash, the question is whether they will reform themselves or go back to their usual ways. Only time will tell if the measures put in place to prevent any subversion of the system by hoarders of unaccounted cash prove effective. In this context, the issue of ₹2,000 notes cannot be easily explained.

As for the mop-up of old ₹500 and ₹1,000 notes, any sum less than ₹10 lakh crore flowing back into the banks would suggest that the hoarders have somehow got away. The amount is calculated on the assumption that black money, according to 2007 World Bank estimates, is 24 per cent of the GDP, or ₹34 lakh crore in 2015-16, of which the cash component is estimated at 40 per cent or ₹14 lakh crore. We may assume that 30 per cent of this money will not return to the system, fearing investigation by income-tax authorities, which would leave us with ₹10 lakh crore. It is also worth noting that black money cannot be unearthed merely through this step, as those at the apex of the pyramid have devised smarter ways of squirrelling their wealth away. In order to prevent a shift in concealment from cash to property, laws need to be tightened as well.

Issuing notes of ₹2,000 denomination also goes against the general policy thrust to create a less cash-dominated and, therefore, white economy. Alternatively, if fewer such notes are printed, it could create the conditions for digital transactions. But such a transition cannot be jump-started in a country where 98 per cent of all transactions are cash-based and financial inclusion eludes a considerable section of our population. Our coverage of Jan Dhan accounts looks good on paper, but many of these are not operational. Even the urban poor — daily wagers, security guards, vegetable vendors — are comfortable only with cash, with many lacking access to a bank account. These sections have been put through hardship these last two days. Their pain can be justified only if it leads to a cleaner, fairer economy for all.