Declaring old currency (like Rs.500 & Rs.1000 note) as illegal tender will prevent accumulation of black money in India? Yes it will. Why black money is such a big concern for the nation?
Accumulating black money is a crime. Even common people accumulate black money. They do it to evade tax. But the volume of black money accumulated by them is small. On flip side, there are few serious hoarders of black money. The volume of black money they hold is very high. Though both types of black money is bad for the economy, but the later does more harm.
There is also a criminal angle to the black money. There are people who use channels of black money to fund terrorism in India. Now a days, with emergence of terrorist organizations like I.S. State etc, use of black money for spreading terrorism is a world’s phenomenon & a common problem.
How black money gets accumulated?
Whenever there is a transaction in cash for which no record is maintained, accounts for black money.
Many businesses in India works on cash transactions only. But it does not mean that all of them hoard cash (black money). These people deposit the cash in bank, on which they pay income tax. This way every cash transaction is notified and becomes white money. When earned cash does not get accounted / declared while filing income tax returns, it leads to accumulation of black money.
Accumulating coins is taught to children in India from very young age. In a way this is a very good way of developing a savings habit. This is not black money. But when people start hoarding non-accounted cash transaction at home etc, this becomes black money.
So what government can do to remove black money?
There is no easy way to remove black money. But the most effective of all is to stop circulation of old notes. Declaring all old notes as illegal tender is one of the most effective ways of removing black money. The next step will be to print new notes and bring them into circulation.
But doesn’t RBI keeps printing new notes? We see new notes when we draw money from ATM’s, isnt it? Yes those are new notes printed by RBI. Generally when RBI prints new notes, old notes are kept in circulation as legal tender. Hence it doesn’t help to remove black money
Like our PM & current ruling BJP government saying goes, to eliminate black money, it needs a phenomenon like surgical strike. A BIG surprise element is necessary to check-make black money hoarders.
So what type of surgical strike government plans to do? Declare the old currency as illegal tender overnight. This gives very less time for black money hoarders to take corrective actions.
Surprise element is a must to tackle black money effectively. This is one reason why, in a late night address to the nation, PM Narendra Modi declared the decision to shelve old Rs.500 & Rs.1000 currency notes. In a way this is a very brave and calculated risk taken by Indian Government. Kudos to the whole “Team”, RBI+PM+Finance Ministry+ Banking System.
Was the decision to ban Rs.500 and Rs.1000 abrupt?
Some people are questioning this abrupt move of the government of India. They think that due to miss management they had to make this declaration in such a hurry. I also heard one Congress party spokesperson doubting the PM’s speech as a mere drama. But actually there is no mismanagement. In fact it has been executed to near perfection. There are hardly other ways to deal with black money hoarders more effectively.
It was essential not to declare such steps in advance. This is one reason why, even banks were not informed that Rs.500 and Rs.1000 will be made illegal tender from 08-Nov-2016 midnight.
It was also important to give time to banks and financial system to implement this concept. Hence Banks were declared closed on 09-Nov-2016 and ATM’s will be inoperative for 2 days starting from 09-Nov-2016.
Another step is also important for seamless implementation of this concept. Many people keeps petty cash at homes to manage their day-to-day expenses. What happens to such people? For such people, government allowed time (approx 50 days) to exchange old notes with new ones. How to do it? People must go to banks (India Post Offices also does it) and get their old notes exchanged.
Black money hoarders can also approach bank and get their money converted. So how they get punished?
While changing old notes from banks, PAN numbers or Identity proofs of all people will be asked by bank. This is particularly true for those people who are exchanging large sums of cash. There is a limit which a person can exchange old notes with cash. The limit is Rs.4000. To convert old notes beyond Rs.4000, one will be asked to deposit money in bank. This money they can later withdraw from ATM or cheque.
Moreover, people who are exchanging large sums, will be asked to deposit money in bank. They will not be allowed to exchange old currency for cash.
So what happens after the black money gets deposited in bank? Even here a small control is kept by the government. People will not be allowed to withdraw large sums of cash from bank, otherwise cash will again start to disappear. The withdrawal limit is Rs.4000/day from 19th-Nov onwards.
Moreover, RBI will also limit the maximum number of new notes (of 500 & 2000 denominations) that will be released to public. Less number of larger denomination notes in cirulation will further make it difficult for black money hoarders.
But is this idea sustainable?
Without public participation, implementation will be difficult. The sustainability of black money free economy is only possible when everyone starts using plastic money or online payment systems. People must be encouraged to use cash-less transactions. People who has mind set to deal only in cash should be made aware of the benefits of cash less transactions. This awareness will encourage people to keep more money in bank. This way people who continue to hoard cash will stand out of the crowd and can be identified comparatively easily.
People who hoard black money (cash) doesn’t want to get recognized. They work in shelter of honest tax payers. But decisions like these force them to come out in open. They are forced to approach bank to deposit tons of black money they have hoarded since ages.
Its like an opportunity for black money hoarders to fall in line or perish. As cash hoarders have very short time to show up, either they will approach bank fast or their whole black money becomes a trash. The left over black money will be as good as waste paper. They can continue using it as paper napkins, nothing else.
There can also be a very interesting outcome of declaring old currency notes as illegal tender. Suppose rich people have hoarded black money abroad in foreign countries. What happens to them? They also need to show up in local banks and get their money converted. This process will further highlight to Indian Government that how much black money is being exchanged in which country. The countries which will emerge as maximum black money hoarder will be dealt differently by Indian government.
Black money and terrorism…
These days black money is also used for terrorist activities. Countries which are hoarding excess Indian currency as black money will either lose cash or will come upfront. Generally, such terrorist supporting countries will have no other way but to lose all black money. They cannot afford showing up themselves. This way, terrorist activities will not have funds to execute their evil plans.
It has also been established that the neighboring nation of India was printing fake Indian currency notes (Rs.500 and Rs.1000). These notes were so so similar to original notes that its identification was almost impossible. The fake notes were hurting the Indian economy very badly. It was said that nearly 40% notes in circulation in India were fake. It was also believed that these fake notes were very accessible to the terrorists. Banning of the Rs.500 and Rs.1000 will hurt the terrorists the most.
All in all, just by declaring few old currency as illegal (mainly large denominations), there will a huge positive effect on GDP and on Indian economy as a whole.
Black money is that money which is generally not in circulation. They lie idle and does nothing good. When people will start depositing their hoarded black money in banks, there will be more useful money with the banks. When banks have more money, they can issue more lower-interest loans to public. This way, banks will also earn more profit, and public will also have extra cash which they will eventually spend.
An economy where people are spending more is bound to have better GDP growth rates. Higher GDP growth rate means more long term prosperity for the nation.
Some facts about black money
1. Swiss banks have very stringent banking rules which allows it to keep the identity of its client a secret.
2. Indians have close to Rs.9000 crore (equivalent Swiss franks) in Swiss Banks. Not all are black money but a major chunk is supposed to be black money.
3. Close to 40% money parked in Swiss banks, 40% are held through fund managers. Balance are held in names directly of Indian account holders.
4. Out of the total Indian black money, only 10% is parked abroad. Majority black money is hidden in India.
5. Out of the total population of India, only 1% pays income tax.
6. India has more black money than any other country in the world.
7. HSBC Bank is a name that is said to handle maximum black money.
8. It is not a crime to hold banks accounts abroad. Declare the savings in foreign bank accounts. If tax has been avoided, pay tax, 300% (of tax not paid) penalty and continue maintaining a foreign bank account.
To conclude, the step taken by Indian government to remove all old Rs.500 and Rs.1000 notes is a very welcome step. The effectiveness of this step to eradicate black money is unquestionable. This step will not only prevent black money but also prevent its laundering. Accumulation and money laundering is also helping terrorists. Terrorism is a very big concern for India which has plagued it since independence. Demonetization of Rs.500 and Rs.1000 currency notes with immediately hurt the terrorists really bad.
Such drastic step will also deter people from hoarding black money henceforth. Less Indian black money in the system will eventually improve the overall well being of the nation.
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