The Congress has welcomed the government’s efforts to stamp out black money, but it wanted to know how introducing Rs. 2000 denomination notes, while demonetising Rs 500 and Rs 1000 notes, would help achieve that goal.
Former Finance Minister P. Chidambaram said he was waiting to see whether the government had put in place a mechanism that would make the process of exchanging of Rs 1000 and Rs 500 notes smooth. If the common man had trouble exchanging demonetised notes, it would amount to “pure and simple harassment,” he said.
“We support the objective of the government to stamp out black money. But the method they have adopted raises questions... The move has come as a bolt from the blue for the common man.”
The real test for the government would begin tomorrow [Thursday], Mr Chidambaram said. “How efficiently and how quickly the money is exchanged.... If there is harassment or inconvenience and all kinds of questions are asked, then I think that will be completely counterproductive.”
A similar move had been contemplated by the previous Congress-led UPA government, he recalled. But the idea was dropped as “the economic gains were not too great.”
Mr. Chidambaram said the introduction of the new series of notes was estimated to cost Rs. 15,000 crores to Rs 20,000 crores. “The economic gains of demonetisation should be at least equal to that amount.”
The former Finance Minister wondered how the introduction of Rs. 2000 notes would help prevent generation of black money. “If new income or wealth is unaccounted, will it not be hidden in Rs. 2000 notes? How will the purpose of demonetising high denomination notes be served if a new and higher denomination note is introduced? The government must explain this apparent puzzle.”
The “economic wisdom” of the government’s decision, Mr Chidambaram said, would be tested on three parameters: a) the present cash to GDP ratio is 12 per cent. Will it come down to the world average of about 4 per cent? b) The value of the high denomination notes currently in circulation is about 15 lakh crore rupees. Will that value come down significantly? c) Will gold imports surge, indicating that unaccounted income/ wealth is seeking refuge in bullion and gold jewellery?
Will the move be an “antibiotic” against terrorism, corruption and black money? “Antibiotics are good, but an overdose can be bad,” Mr. Chidambaram said.
Answering a question, he said the proportion of counterfeit notes was just 0.07 per cent. The amount of money said to be coming in to fuel terror here had been “exaggerated.”
“Let us not call all the people in the country black money launderers,” he said. Ninety-nine per cent of the people had only legitimate hard-earned money. “40 or 50 years ago, or even 30 years ago, black money was perhaps stored as cash. Empirical evidence tells us that today unaccounted wealth and income is largely stashed away in construction, real estate sector, bullion, jewellery and perhaps securities,” he said.
Mr. Chidambaram warned that the demonetisation exercise could cause initial contraction and disruption of economic activity. The real test, he said, would be how quickly the old notes are replaced.
Mr. Chidambaram spoke soon after party vice-president Rahul Gandhi targeted Prime Minister Narendra Modi on the move. In a series of tweets, he said: “Well done Mr. Modi… Real culprits sitting tight” while the lives of farmers, small shopkeepers and housewives “have been thrown into utter chaos.”
In 1978, Mr. Chidambaram said, the then Janata Party government had demonetised high denomination notes. But that action failed to achieve its objectives as high denomination notes were reintroduced shortly afterwards and the volume of unaccounted wealth and income admittedly increased.
