Demonetization and Accountability By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran
Posted by bobbysrinivasan on January 10, 2017
Dec. 30, 2016 was a deadline date by which all old 500 and 1000 Rupee should have been deposited with the commercial bank except through depositing until March 31, 2017 with RBI. These high denominated currency are not any more legal lender and now the demonetization scheme is now complete atleast for time being. Our student is perplexed about what the scheme has done and whether it served the purpose it was created. These are the sequence of questions he is asking his Professor and seeking an answer.
Student: What was the original purpose of demonetization?
Professor: In the case of India, to track the money (black and white) in circulation by depositing high denominated currencies with the commercial bank. These high denominations are Rs. 500 and Rs. 1000 and account for 86% of all money in circulation.
Student: How was this done?
Professor: Through an ordinance by RBI. RBI made it compulsory that anybody holding these high denominated currencies should surrender to any commercial bank for credit to an account. It started on midnight Nov 8, 2016 and ended on Dec 30, 2016.
Student: What happened if the high denomination money is not deposited by Dec 30, 2016?
Professor: There is yet a small window open with RBI. Money not deposited by Dec 30, 2016 could still be deposited with the RBI. Any old money held beyond March 31, 2016 is now considered illegal and punishable under law.
Student: Why was this exercise necessary?
Professor: To eliminate black money, to remove forged currency from circulation and to make the money invalid which are in the hands of terrorists. Ofcourse all will become clear in due course of time.
Student: When old currency was removed, did the government kept new currencies ready to replace them?
Professor: Not really. There was due to maintaining secrecy. The government has since replaced old 500 and 1000 Rupee notes with new 500 and 2000 Rupee notes. The government gave itself time to replace it completely. Initially it caused a lot of pain but they are history. Currently 50% is already replaced. In 2 to 3 months this hardship will be eliminated.
Student: What became the behavior of people when currency in circulation was dramatically reduced?
Professor: This is the saddest part. Feeling insecure people who had influence with the Bank took away a significant portion of the new currency. This reduced the money available for exchange. While some people stood in queue for say 3 hours to pull out Rs. 2000 these influential people had Crores of new currency stacked in their houses.
Student: Let me ask you some questions about black money. What proportion of it is in the hands of people?
Professor: I am just a Professor. I don’t have any of it. Anyway I will guess where the black money could be hiding. It starts with cash followed by investment in gold, properties and the Stock Market. Besides it was used to buy big ticket items like car. According to estimates only 6 to 8% of black money is found in cash.
Student: What exactly is accountability?
Professor: There are several aspects to it. First for those with high income but dodged the IT will now pay with a severe penalty. Ample time was given to them for voluntary declaration. Second now every Rupee in the bank will be owned by somebody and the government knows who infact is the owner of the money. Third where there is a large deposit in an individual’s account and he or she has not filed IT they will now be included in the IT net. Of the population of 130 Crores only 3.65 Crores people file tax returns. Given our economy size, there are more people cheating the tax than paying it. This to some extent will come to an end.
Student: I am holding you too long. What else can you say about black money?
Professor: High tax rate encourages black money. The government should bring down Direct Tax but increase GST to offset for decrease in IT. Government IT department should be converted to GST department. Encourage people to save by removing tax on interest dividend, short term capital gain etc.
Government can easily raise money through treasury and if these funds are utilised productively the revenue for government coiffeurs will swell up. Like individual family government should work towards making the country rich and eliminating poverty and uneven distribution of wealth.