Demonetisation of high-value currency notes, announced dramatically by the Prime Minister, has happened in the past -- though with much less trumpeting (for instance, the change in 1000 rupee notes in 2013, and in 500 rupee notes earlier). Overall, it's a fair step, and would to an extent kill some of the unaccounted money in our economy. Unfortunately, people who amass wealth in the form of currency notes are not a large number. Most of them prefer to invest in gold, property, assets, etc. So this will help but only partially. It’s a welcome step all the same, but I'm not convinced it will impact our economy majorly.
There's a there is a substantial difference between the 1000 and 500 rupee notes. A 500 rupee note is much more of an aam aadmi note today. Therefore, summarily extinguishing it will create problems for a huge number of people who still deal with cash, live in a cash economy, and are engaged in businesses and professions that do not require accounts and paper proof of cash. The government should have perhaps given more time for exchange of 500 rupee notes.
Will this measure kill the black economy and reduce corruption? No. The black economy does not exactly rest on its cash reserves. It thrives on opportunities of black money generation, which remain as robust as before. Demonetisation may suddenly have made cash in hand useless for many officers, politicians, etc, but how does it prevent them or the tax evader or the excise evader from continuing in the old way? It does not. In fact, in the short run, this loss may spur many to go on an overdrive to replenish their treasure chest.
Anyway, since this has come as a political announcement by the Prime Minister, we must understand that the reason for this announcement was the announcement itself, not much concerning the black economy. The vast resources stashed away abroad remain where they are, the rules and power of the government that lead to payments for work or favours done remain precisely where they are.
Will this bring black money out into the open? This might destroy a lot of black cash, but since the exchange system entails that unless it is loose cash you have to account for the notes you want exchanged, black cash is not likely to be brought into circulation in a significant manner. Further, as I said earlier, this will not kill the black economy. The black economy has its logic, needs, and opportunities, and since this moves will ends none of them, it will remain. Yes, it would incentivise people to dabble less in black, but that can achieved far more effectively through easier laws to comply, regulatory agencies that are scrupulously honest, tax rates that attract people, lack of discretionary and favouring powers vested with the bureaucracy and the political executive, and so on. The 12 years in Gujarat never showed such changes, and these two and half years haven’t shown any either.
Some questions do arise. How do we estimate the black cash extinguished by this move? How much will the aam aadmi, the small shop-keeper, small manufacturer, small entrepreneur, small contractor suffer? As a newspaper has estimated, just the cost of the new currency is upwards of Rs 11,000 crore. So what would be the overall cost-benefit? Third, how do we ensure that a robust black economy does not keep operating, the way it is?
For the government, the challenge will be to ensure that the exchange of old notes happens without hassles for common people. Not a single paisa of the honest and the common person should get lost in this deal, and we must ensure that local economies do not collapse due to the lack of cash. Unfortunately, as past experience shows, the Ambanis and Adanis will swim through this, but the common man? We can only wait and hope.
Sandeep Dikshit is a national spokesperson of the Congress Party.