“Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency”.
During a surprise television address, India’s Prime Minister Modi called for the instant elimination of all 500 and 1,000 denomination notes — 86% of currency in circulation — and gave his country’s 1.3 billion people a 50-day window to either deposit them into bank accounts or interchange them for newly designed and minted notes. This move was 100% proposed to be a surprise method to catch the black market with its pants down, so to speak, and not even the banks were informed of it until the official declaration and mobs of people launched lining up at their doors.
Almost needless to say, this didn’t go as efficiently as planned.If much planning even really went into it as there wasn’t enough new banknotes to switch the old, ATMs weren’t calibrated for the new sized bills, and people suddenly found themselves being pushed into depositing their cash into bank accounts (which half the people in the country would need to expose for the first time) to remain economically kinetic. Hundreds of millions of people suddenly rush to banks, jewellery shops, foreign-exchange counters, and ATMs to stand for hours in serpentine lines which often stretched for blocks just to re-validate their wealth.
India soon ground to a halt, businesses shut down, farmers reportedly couldn’t buy seeds, taxi and rickshaw drivers didn’t have any way to receive payments, employers had no way to pay their employees, hospitals were refusing patients who only had cash, fishermen watched their catch wither up and rot for lack of customers with usable money, weddings throughout the country were canceled, and some families reputedly even had difficulty buying food. It was a bonafide upheaval.
But India held it together. Through it all, besides some organized demonstrations by political opposition groups — who would probably protest anything the incumbent government does — the way that India handled this extreme inconvenience could be described as dutiful: most people went out, stood in line, and did what they had too do without violence or, for the most part, chaos. Indians rich and poor, Hindu and Muslim, technologically-adept and off-the-grid were suddenly all tossed into the same boat and set adrift on the same sea. If nothing else, demonetization united India on a mutual mission: to comply with their government’s policy and get life back to normal again as soon as possible.
Ever since demonetisation initiative was announced by Prime Minister Narendra Modi on November 8, several developments have taken place related to the move.
THE GOOD EFFECTS OF DEMONETISATION ARE :
DEMONETISATION LEADS TO LARGEST NAXAL SURRENDERS - Government policies in Left-wing extremism affected states, pressure built up by security forces for past few months and the latest demonetisation decision seem to be making a strong effect in the region with 564 Naxals and their supporters surrendering before the authorities in the last 28 days, the highest number to do so in a month ever.
PARENTS OF PATIENT DECLINED FINANCIAL HELP IN ‘BLACK MONEY’-At a time when PM Modi is harping on the need to combat black money, a poor family in Kolkata is doing its bit to send across a strong message. Kolkata teen Sumana has been suffering from a rare genetic disorder and requires at least Rs 3 lakh per month for her medicines and treatment, failing which she slips into coma. Her family has been finding it difficult to make ends meet. But soon after the PM’s demonetisation announcement, the family is flooded with calls from the rich willing to fund Sumana’s treatment. But with a rider – they will have to agree to take the money in their account and must return it in due course only for a tiny amount in return. Stunned and hurt, the family denied point blank. Her parents say they are willing to sacrifice their daughter’s life but will not accept black money for her treatment.
MAN IN WHEELCHAIR SUPPORTS PM MODI-A man in wheel chair supports PM Modi on demonetisation. He said freedom fighter Subash Chandra Bose had asked for blood for freedom while Modi is asking only for 50 days. The man, a paraplegic, said he is in support of action against black money.
FARMERS UNAFFECTED – Farmers in Assam are saying that they are not affected with demonetisation. They are supporting PM Modi.
THE BAD EFFECTS OF DEMONETISATION ARE :
DAD IN HOSPITAL WITH CANCER, GIRL TWEETS PM MODI FOR HELP – Unable for days to draw money from her account for her ill father’s medicines, a 25-year-old woman from Agra has tweeted to Prime Minister Narendra Modi and UP Chief Minister Akhilesh Yadav for help, saying she cannot stand in long bank queues, leaving her cancer-stricken father alone at home. Twenty-five-year-old Juhi Prakash tweeted asking for financial help in the crisis due to currency demonetisation. She is incapable to spend hours waiting for cash withdrawal at banks and ATMs because her father is a cancer patient.
NEWLY-WED MURDERED FOR BRINGING SCRAPPED NOTES AS DOWRY – A newly-wed woman was supposedly killed by her in-laws for bringing demonetised notes as dowry. In the shocking incident, Pravati Mandal (18) was found deceased in her home at Badasahi in Rangipur village under Golanthpur police limits in Ganjam district. Pravati’s husband, Laxmi Nahaka, and his family defended that she had committed suicide. But the victim’s father, Siba Mandal, has alleged that it as a dowry killing.
NOTE BAN HITS LABOUR INTENSIVE SECTORS – Workers in the textile, footwear, plastic and metal industry have been harmfully affected by the demonetisation move. While the commotion over the note ban remains within and outside the walls of the parliament, labourers in the organised and unorganised sectors bear the brunt of this move. Labourers from Delhi have been forced to leave National Capital Territory after demonetisation as they are not capable to get money.
SCRAPPED NOTES IN TEMPLE – Crores of Rs 500 and Rs 1,000 notes were found in Hundi temple of Chittorgarh In Rajasthan as donations.
Some of the reasons behind demonetization, its effect on economy:
1. Steps against Black Money: The Narendra Modi Government had absolute transparency from day one that it would move against the shadow economy and black money. It’s first decision was to establish SIT under the directions of the Supreme Court. The Prime Minister had suggested the G-20 at Brisbane that international cooperation in sharing information with regard to base erosion and profit shifting should be rushed. The arrangement with the United States fostered this object. The NDA Government accomplished its agreement with Switzerland that w.e.f. 2019, details of properties held by Indian citizens in Switzerland and vice versa would be provided to each other. Since 1996, the Double Taxation Avoidance Treaty with Mauritius was being renegotiated. The treaty effectively incentivised round-tripping. It was renegotiated. Similar treaties with Cyprus and Singapore have also been renegotiated. The Black Money Law dealing with unlawful assets outside India opened a window for exposure with 60% tax and provides a ten year imprisonment. The Income Declaration Scheme (IDS) 2016 was highly effective with a 45% tax. The PAN card requirement for cash transaction beyond rupees two lakhs put hurdles on expenditure through black money. The Benami law legislated in 1988 and never applied. It was revised and has been put into action. The GST, which is planned to be applied this year, will provide for better indirect tax administration and being a more effective law will check tax evasion. The demonetization of high denominational currency notes was the big step in the same direction.
2. The new normal: In the year 2015-16, 3.7 crore assesses of the total population of over 125 crores, filed income tax returns. Out of these, 99 lakhs declared income below Rs.2.5 lakhs and paid no taxes; 1.95 crores declared income less than Rs.5 lakhs; 52 lakhs declared income between Rs.5 to10 lakhs, and only 24 lakhs declared income above Rs.10 lakhs. No better proof is required to validate that both in the matter of direct and indirect taxes India continues to suffer being a hugely tax non-compliant society.
Expenditure required for poverty eradication, national security and economic development have to be negotiated with on account of tax non-compliances. For seven decades the Indian “normal” has been to undertake transactions partly in cash and partly in cheque. “Pucca” and “Kachha” accounts are a part of the business language. Tax evasion has not been considered as unethical. It was just a way of life. Several Governments have allowed this “normal” to continue even though this negotiated with larger public interest. The Prime Minister’s verdict is intended to create a new “normal”. It seeks to alter the expenditure pattern of India and Indians. It is clearly disruptive. They change the retrograde status quo. The demonetization puts a premium on honesty and reprimands dishonest conduct.
2. The adverse consequences of Cash: Paper currency is a zero interest anonymous bearer bond. It has no name or history attached to it. Crime can take place with or without cash but extreme cash as a medium of exchange is favoured by the underground economy. It results in non-conformity in the matters of tax payments which creates an unfair enhancement in favour of the evader as against the poor and the deprived. Mountains of cash money reach tax havens through the hawala route from the original paper currency. Cash enables real time undetectable payments.
Cash is the medium which funds bribery, corruption, counterfeit currency and terrorism. Developed societies aided by technology have steadily moved towards banking and digital transactions as against the excessive use of cash. Paper currency opens the doors for many vices. When Governments are able to gather more tax from tax evaders, they are in a better position to collect less tax from everyone else. Falling cash may not eradicate crime and terrorism but it can cause serious blow on them. States have shown that the stores of cash do not dissolve on their own till Governments take strong steps to reduce the quantum of paper currency.
4. The magnitude of the decision : The Prime Minister’s decision to substitute the high denominational currency and eventually demonetise it required both courage and stamina. The execution of the decision carried pain. It can lead to short term criticism and inconveniences. Drop in economic activity on account of the currency squeeze during the remonetisation period would have a transient impact on the economy. The decision involves high level of secrecy and printing substantial amounts of paper currency, distribution through banks, post offices, banking mitras and ATMs.
The fact that large quantum of high denominational currency has been deposited with the banks does not render this money to be valid cash. Black money does not convert its colour purely because it is deposited in bank. On the contrary, it loses its anonymity and can now be identified with its titleholder. The Revenue Department would thus be entitled to tax this money. In any case, the amendment to the Income Tax Act itself provides that the said money, if voluntarily declared or if involuntarily detected, would be answerable for variance and high rates of taxation and penalty.
5. The situation today : The era of pain and inopportuneness is getting over. Economic activity is being restored. The banks today admittedly have a lot more money available in order to lend for growth. Since this money constitutes low cost deposits with the banks, it is guaranteed to bring down the rate of interest. Both these things have already happened. Lakhs of crores, which were floating in the market as lose currency, have now entered the banking system. Not only has the money lost is anonymity, it’s titleholders, after being taxed, are entitled to put it to more effective uses. The size of the banking transactions and consequently the size of the economy is bound to grow. In the medium and long run, the GDP would be higher and cleaner. Money entering into the banking system and formally transacted would give an ample scope for higher taxation – both direct and indirect. The Centre and the State Governments would both stand to gain. The economy would also be serviced by both cash and highly digitized transactions.
6. The Opposition : There was no social conflict while implementing such a key decision. All opinion polls conducted by autonomous media organizations have shown that an overwhelmingly large percentage of people have held the Government’s decision. The opposition disrupted a full Session of Parliament. Their protests have been ineffective. Their exaggerated claims on the disruption of the economy have verified incorrect. It is a heartbreak that a national party like the Congress decided to adopt a political position, opposing both technology, change and reforms. It sided with black money friendly status quo.
7. The marked difference : There was a marked difference in the approach of the Prime Minister and his opponents. The Prime Minister was being innovative, and thinking of a more modern, technology driven cleaner economy. He is now speaking of reforming the political funding systems. His opponents want a cash dominated, cash generating and cash exchange system to carry on. The difference between Prime Minister Narendra Modi and Rahul Gandhi was strong – the Prime Minister was rational of the next generation while Rahul Gandhi was only looking at how to disrupt the next Session of Parliament.