Why in News?

Indian Prime Minister Narendra Modi on 8th November, 2016 publically announced the central government decision to demonetize the high value currencies i.e. currency notes of Rs. 500 and Rs. 1000 with an aim to unearth the black money, and to restraint the corruption, counterfeit currency as well as terror financing. 

Demonization refers to the ending of legal tender of any currency in an economy prevailing at that time by a competent public authority to curb the parallel or ghost economy. Demonetization is necessary (this happened when Euro was introduced) whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit.

When did Demonetization happened before?

1946: Rs. 1,000, Rs. 5,000, and Rs. 10,000 notes were taken out of circulation in January 1946. The Rs. 10,000 notes were the largest currency denomination ever printed by the Reserve Bank of India, introduced for the first time in 1938. All three notes were reintroduced in 1954

1977: The Wanchoo committee (1970), a direct tax inquiry committee, suggested demonetization as a measure to unearth and counter the spread of black money.

The High Denomination Bank Notes (Demonetisation) Act deemed the Rs 1,000, Rs 5,000 and Rs 10,000 notes illegal for the second time. At the time, then-RBI governor I.G. Patel disagreed with the measure.

What was the need for such a move?

  1. The incidence of fake Indian currency notes in higher denomination has increased
  2. Unaccounted money, often used in any form of corruption or illicit deals, usually takes the form of high-value notes, which in this case are the Rs 500 and Rs 1,000 bills
  3. The Financial Action Task Force, a global body that looks at the criminal use of the international financial system, notes that high-value bills are used in money laundering schemes, racketeering, and drug and people trafficking

What were the previous actions taken by the Government to curb Black Money?

  1. Jan Dhan scheme, under which 22-crore new bank accounts were opened in one-and-a-half years (May 2016. Most of these accounts brought those people into the network who were outside the ambit.

According to the Economic Survey for 2015-16 released in February this year, leakages in LPG subsidy transfers fell 24 percent and the exclusion of beneficiaries had been greatly reduced, thanks to the infrastructure created by Jan Dhan accounts, Aadhaar and mobile networks, or the JAM trinity.

  1. Income Declaration Scheme: By 30 September, all illegal asset holders had the chance to declare their holdings and pay 45 % tax and a penalty in exchange for anonymity and immunity from criminal proceedings.

How it will curb black money?

  • In the United States, the highest denomination bank note is $100. When it comes to the United Kingdom, the highest denomination bank note issued by the Bank of England is £50
  • Cash Transactions resulted into parallel economy with unaccounted money, even much stronger than regular economy. The parallel economy black money, corruption, counterfeit currency and terror financing. These issues hampered growth and development of the economy.
  • Demonetarisation of Rs 500 and Rs 1,000 currency notes will address issues like black money and corruption and also help the economy become more digital.
  • Demonetisation will curb the menace of black money and will help check stashing of funds to a large extent.
  • Similarly it has major impact on corruption that exists in India and also on financing of terror activities in India. Hence it was considered as courageous step in the fight against unaccounted money.

What are the challenges?

  • Prepare for the challenges of cashless economy: The UPI (unified payment interface) system is likely to be fully operationalised only by January 2017.  India was recently hit by one of its biggest financial security breaches compromising hundreds of thousands of debit cards.
  • Currently high-value currency notes accounts for the value of 86% of the notes in circulation in India.
  • The black economy in India range from 20% to 60% of GDP and more and the currency in circulation is just 12% of GDP. 
  • Even if more than 50% of money in circulation is black money, but most of it will find its way back to the banking system one way or another, and be recycled as new notes. 
  • The black money holders, tax evaders and corrupt official may not slash these money in cash in their homes due to sheer scale of logistics.

Central government’s recent decision to demonetise the high value currency is one of the major step towards the eradication of black money in India. The demonetization drive will affect some extent to the general public, but for larger interest of the country such decisions are inevitable. Also it may not curb black money fully, but definitely it has major impact in curbing black money to large extent.

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