The poor bear the brunt of India's crackdown on black money
Narendra Modi, India’s prime minister, has announced the demonitisation of high currency notes as part of a revolutionary move to curb the proliferation of illegal money in the local market. The action aims to improve tax collections and economic growth in the country.
- The Indian government has decided to scrap Rs500 ($7.5) and Rs1000 ($15) currency notes
- The move is part of a total crackdown against the high proliferation of black money in the Indian market
- Citizens holding high currency notes should deposit their cash at banks and postal offices until December 30, 2016
In an effort to clean the economy, Indian prime minister Narendra Modi announced on November 8 his surprise decision to scrap Rs500 ($7.5) and Rs1000 ($ 15) currency notes, which was demonotised on the midnight on the same day. This revolutionary step is expected to affect about 85% of the bank notes currently in circulation. Modi was to control corruption and black market in the country that the government beieves is funding terrorist organisations and criminal operations.
In his speech,the prime minister pointed that “For years, this country has felt that corruption, black money and terrorism are festering sores, holding us back in the race towards development.”
“The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways. The poor have to bear the brunt of this,” he added.
Many transactions in real estate and election-related funding have high cash incidence. The country has also been battling with fake currency notes. The demonitisation of high currency notes is not only expected to tackle all these challenges. It will also give a boost to formal payment channels and cashless transactions. It follows the income declaration scheme implemented last month in which the government managed to get Rs650 billion ($9.75 billion).
Citizens holding Rs500 ($7.5) and Rs1000 ($ 15) currency notes should deposit their cash at banks and postal offices until December 30, 2016. There will also be a gradual withdrawal of money in tranches, as needed. The Reserve Bank of India (RBI) will also be issuing new Rs500 and Rs2000 ($30) notes in the next few days.
The move has come as a shock and a significant inconvenience to most people in the short term. In the long run, however, the house cleaning of unaccounted cash in the parallel economy will be good for the country. Larger savings and money will be deployed in the mainstream economy, while digital payments are expected to increase. Various industry and banking sector experts have lauded this bold move by the government.
However, the government will need to ensure that such move will have a lasting impact to root out black money and corruption in the country. The government should complement the crackdown with increased efforts in ensuring declaration of all income.
Keywords: RBI, India, Black Money, Demonitisation