Prime Minister Narendra Modi’s move to curb unaccounted cash, or black money, circulating in the Indian economy by >withdrawing the highest-value currency notes of Rs.500 and Rs.1,000 as legal tender within three-odd hours of the announcement, is a bold one. He invoked provocative imagery to explain the measure — of corrupt officials stashing kilos of ill-gained cash under their mattresses, and such illicit black money fuelling inflation as well as terrorism. He pointed out how difficult it is for honest taxpayers to buy a house as the real estate sector seldom operates without a cash component, some of which finds its way to political funding. The increase in the circulation of these notes in the past five years has been disproportionate to the economy’s growth. The introduction of new Rs.500 and Rs.2,000 notes, the government argues, would not only check counterfeit currency, a problem that has assumed serious dimensions, but also purge India’s economy of the black wealth amassed in the form of high-value notes. Any decision like this needs to be sudden, and it is not surprising that it has caused hardship as people scramble to get notes of smaller denomination for daily expenditure. The only defence for this is that the larger public purpose outweighs the immediate difficulties.
Having promised during the 2014 election campaign to bring back black money worth lakhs of crores supposedly stashed abroad, the NDA government has been under pressure to do something dramatic. The two amnesty schemes it launched over the past year, including one for foreign assets, didn’t yield anything near the 23.2 per cent of GDP that the World Bank had estimated India’s shadow economy to be in 2007. Today that would be nearly $479 billion in unaccounted wealth, according to rating agency Crisil. While there will be pain and confusion in the short term for common people and the economy, a disruptive measure was perhaps the only way to shake up the system to a new compliance normal. But the Centre must ensure that no poor person is saddled with old, useless notes due to the lack of official identity documents or a bank account, and avoid putting to disadvantage older citizens unable to visit a bank repeatedly to exchange high-value notes. It should find ways to check black money parked in benami properties (possibly through a digital land and realty inventory) and gold. There must also be administrative and electoral reforms to advance digital payments and eliminate the prospect of the new currency regime spawning the ghost economy afresh.