DEMONETIZATION
Historical
back ground: -
Governments generally adopt Demonetization of high
denomination currency notes to counter black money and for containing forgery
and fake currency.. In the year 1970s, the government of India had set up “Wanchoo
committee” under the chairmanship of Mr. Justice K.N.
Wanchoo, former Chief Justice of Supreme Court, to
curb generation of black money. The committee suggested demonetization to unearth and counter the
spread of black money. However, this suggestion was not implemented till 1978.
In the year 1938 the Reserve Bank of India for the
first time introduced notes of Rs10,000, Rs. 5,000, and Rs. 1,000.. These were
the largest currency notes printed by the Reserve Bank of India. These higher
denomination notes were in circulation till 1945, when during January 1946,
these notes were demonetized. This was the first demonetization of Indian
currency.
In the
year 1954 the Reserve Bank of India again introduced these higher denomination
notes which were in circulation till 15th January 1978, and,the government of India again demonetized these higher notes on yon 16th
January 1978 ,after passing an ordinance on 16th
January 1978
The preamble to the Demonetization Ordinance stated that: “availability of high denomination
bank notes facilitates illicit transfer of money for financing transactions
which are harmful to the national economy or which are for illegal purposes and
it is therefore necessary in the public interest to demonetize high
denomination bank notes.“
It would be observed from preamble of Demonetization
Ordinance that the demonetization was a measure for controlling illegal
transactions and against anti-social elements. Demonetization of 1978 was the second demonetization which was done after a gap of over
32 years.
During
1978 the Reserve Bank of India
again issued higher denomination notes of Rs.1,000. During October 1987 Reserve
Bank issued bank notes of Rs. 500 for the first time.
In exercise of the powers
conferred under sub-section (2) of section 26 of
the Reserve Bank of India Act, 1934 (2 of 1934) the Central Government on 8th
November, 2016 again demonetized currency notes of the denomination of Rs.1,000/- and Rs. 500/-. The sudden demonetization of
India’s highest currency notes shook the lives of not only upper middle class
and rich people but also the common man and small savings of housewives.
Demonetization of currency on 8th
November 2016 was the third demonetization of Indian currency. With effect from
the 9th November, 2016, these notes ceased to be the legal tender.
On 31st December 2016 the President of India passed an ordinance
“Specified Bank Notes (cessation of Liabilities) ordinance 2016 under Article
123 of Constitution of India. (As there was no session of parliament)
The government informed
countrymen that since the fake currency notes of the specified bank notes have
been largely in circulation and that it was found to be difficult to easily
identify genuine bank notes from the fake ones and that the fake currency notes
are also used for financing subversive activities such as drug trafficking and
terrorism it was thought proper to demonetize Rs.1,000/-and Rs.500/ notes.
Government also informed that
high denomination bank notes are also used for storage of unaccounted wealth
i.e. black money. This fact of storing black money was also revealed from the
raids of large cash recoveries made by law enforcement agencies after
demonetization.
According to Shri A K Mehrotra,
Issues Department, RBI, Bengaluru,. “Fake notes of Rs. 500 dominate the scene,
although currency counterfeiters appear to have started targeting Rs. 100 and
Rs. 1,000 denominations. The banking system detected over 2.52 lakh pieces of
counterfeit notes of Rs. 500 denomination in 2013-14, as against the 2.81 lakh
in the year 2012-13, while the number of Rs 1,000 denomination fake notes rose
to 1.10 lakh as against the 98,459 in the year 2013-14. However, the year
2014-15 seems to have seen more counterfeit currencies than ever before’’
Source:-RBI
Addressing the nation on November 8th 2016 Prime
Minister Shri Narendra Modi said that those facing genuine difficulty in
depositing demonetized notes by December 31 2016 would get a chance to deposit
them till March 31.The speech of Prime Minister gave hopes to people particularly
senior citizens, disabled etc. who could not with stand the rush at bank’s
counter and could not stand in serpentine queue. Prime Minister’s message gave
them a hope that those who missed the December 31 deadline could deposit their
old notes by 31, March 2017, once they have explained their difficulty.
Prime minister said "Your money will remain yours. You
need not have to worry on this point. If you miss that date too, you can go to any
branch of RBI and exchange your money after filling a declaration form. As mentioned earlier RBI has 19 regional
offices and 11 sub offices. But the government backed out of its commitments and
put majority of people in lurch. The Central government also came out with an Ordinance
making possession of a large number of scrapped notes a penal offence that will
attract monetary fine. Why should people suffer when government backed out of
its words?
After demonetization, cashless economy became the buzzword.
Government encouraged people to make maximum use of credit cards, debit cards,
internet banking and digital payment solutions. Without understanding the fact
that when digital transaction increases, the number of cyber crimes and online
frauds would also rise.
The Reserve Bank of India (RBI) came out with conditions for
exchanging defunct notes for those Resident
Indian citizens who were abroad from November 9 to December 30 can avail this
facility up to March 31, 2017, and NRI citizens, who were abroad during this
period, can exchange their defunct notes up to June 30, 2017. Though RBI has 19 regional offices and 11 sub-offices but this
facility was available only through its offices at Mumbai, New Delhi, Chennai,
Kolkata and Nagpur.
Neither government nor Reserve Bank realized the problems
faced by those who were abroad from November 9 to December 30 2016. that whether
a person staying at any part of India other than at Mumbai, New Delhi, Chennai,
Kolkata and Nagpur could go to RBI for
exchanging currency notes at these places? What could RBI have done that it
should have permitted all its regional offices till 31st March and
30th June 2017 for exchanging notes?
Many resident Indians whom were abroad from November 9 to
December 30 2017 could not exchange notes as they had to travel to Mumbai or
New Delhi or Chennai or Kolkata or Nagpur for exchanging notes, as they had to put
in a hotel at that place, stand in queue for depositing currency notes.
These people thought that it was not worth spending good
money for exchanging couple of thousand demonetized currency notes. It
transpires that the whole idea was not to exchange notes of those who were out
of India. Those who ventured to visit RBI’s offices in those places have not
yet got credit in their account as they are at the mercy of RBI. The words of Prime
Minister that "Your money will remain yours. You need not have to worry on
this point.” Is it not a breach of trust committed by the government?
A resident Indian who was out of India from 8th
November2016 till 31st December 2016 and who deposited currency notes in RBI not only looses interest but is also
deprived of his hard earned money for the time being. According to the RBI,
Indian citizens resident in Nepal, Bhutan, Pakistan and Bangladesh cannot avail
this facility. Why this discrimination?
As per RBI’s annual financial report for the year 2015–16, the two presently demonetized denominations account for more than 86% of all currency notes circulated in the market. The 80-20 rule in economics (The Pareto principle) refers to the fact that 80% of a country's wealth is usually controlled by 20% of its population. It means that for the sake of 20% of Indian population 80% masses have to suffer. In our country most of the senior citizens who are not pensioners rely of interest income from their savings made through out their life are the worst sufferers. We celebrate senior citizens day but quietly ignore them.
Generally economy takes time to
survive and mature from the shock of demonetization. For the time being demonetization
may have a temporary impact in illegal transactions until operators of illegal
transactions find out an alternative ways of financing such transactions.
If we look into the past trend of
demonetization the chances of next demonetization may be some were around 2040-50. Demonetization resulted into large demand for gold bullion and
jewellery. Though government has made Aadhar card mandatory for opening bank
account and pan card for conducting financial transactions of Rs. 50 thousand
and above this may to some extent curb black money. But in future it would be difficult to control black money as people
would instead of keeping black money would keep in crypto currency.
Crypto currency:
Crypto currency is not issued by any central bank
or other centralized authority. These are an open-source software,
peer-to-peer, digital decentralized currency. There are over 900 crypto currencies.
Some of them include Bitcoin,
Ethereum, Ripple, Litecoin, Dash etc.
There
are over 45 crypto currency exchanges to buy Bitcoin & Crypto currency. Despite
restriction on forex trading by The Reserve Bank of India on Indian residents’ crypto
currency has gained momentum. Due to demonetization of higher denomination
currency of Indian rupees purchase of crypto currency have increased by 20-30
percent.
Crypto currency can be sent anywhere, anytime, for a
fee. The Reserve Bank of India (RBI) has issued a warning
against the use of digital currencies, particularly Bitcoin. The Reserve Bank
of India advises that it has not given any licence / authorization to any entity
/ company to operate such schemes or deal with Bitcoin or any virtual currency.
As such, any user, holder, investor, trader, etc. dealing with Virtual
Currencies will be doing so at their own risk.”
What is Black Money?
“There is no
uniform definition of black money in the literature or economic theory. In
fact, several terms with similar connotations have been in vogue, including
‘unaccounted income’, ‘black income’, ‘dirty money’, ‘black wealth’,
‘underground wealth’, ‘black economy’, ‘parallel Black money gives false information about the economy’, ‘shadow economy’, and ‘underground’ or ‘unofficial’ economy”.1
Black
money gives false information about the economy which is mainly due to Tax
evasion, from illegal activities such as crime, corruption and acceptance of
illegal gratification etc. Black money does not affect those who have black money but affects
common man. It is a socio economic problem which results into inequality
amongst people which results in to unrest as consumption pattern is titled in
favour of rich and elite classes. It affects inflation and results into
higher commodity prices.
Reasons for Black Money?
As mentioned earlier during March
1970. Government of India appointed an enquiry committee, under the
chairmanship of Mr. Justice K.N. Wanchoo, former Chief Justice of Supreme
Court, for studying the problem of black money, tax evasion, tax avoidance and
tax arrears etc.
According to the Wanchoo Committee
Report, “Black money denotes not only unaccounted currency which is either hoarded
or is in circulation outside disclosed trading channels but also its investment
in gold, jewellery and even precious stones made secretly, and in land and
buildings and business assets over and above the amounts shown in the books”.
Wanchoo Committee reported the
principles causes of black money which are : (i) Higher rates of taxation.(ii)
Economy of shortages and licensing system.(iii) Donations to political
parties.(iv) Corruption.(v) Ineffective enforcement of tax laws.(vi) Corruption
in business practices
The committee suggested demonetization of currency to unearth
and counter the spread of black money. However the then government was
reluctant to demonetize higher denomination notes. It was only on Jan. 16, 1978
that the high denomination bank notes of Rs1,000, Rs5,000 and Rs10,000 were demonetized
under The
High Denomination Bank Notes (Demonetization) Act. The time lag of
submission of Mr. Justice K.N. Wanchoo report and implementation of the report escalated
the quantum of black money in the economy.
Corruption:
Corruption is dishonest or fraudulent conduct by
those in power, typically involving bribery. The foreword of United Nations
Convention against Corruption,(2004) states that “Corruption is an insidious
plague that has a wide range of corrosive effects on societies. It undermines
democracy and the rule of law, leads to violations of human rights, distorts
markets, erodes the quality of life and allows organized crime, terrorism and
other threats to human security to flourish. This evil phenomenon is found in
all countries—big and small, rich and poor—but it is in the developing world
that its effects are most destructive. Corruption hurts the poor
disproportionately by diverting funds intended for development, undermining a
Government’s ability to provide basic services, feeding inequality and
injustice and discouraging foreign aid and investment. Corruption is a key
element in economic underperformance and a major obstacle to poverty
alleviation and development.”
In India Corruption has become a routine day to day affair. Barring a few, most of the people occupying higher position are corrupt.(Apr 6, 2017 Hindustan Times “ED conducts nationwide raids against govt. officials facing corruption charges.)
With Mr. Mody becoming head of the country, India has been
ranked 79th among 176 countries in the Corruption Perception Index 2016
released by the Transparency International organization. The score runs from
zero to 100, from highly corrupt to 100. Though the score has marginally
improved from 38 in 2015 to 40 in 2016. Still there is a tremendous scope.
Though the Government made several attempts to stop tax evasion but it did not
yield expected result
Conclusion:
It
is really a difficult task to completely eradicate black money which has
permeated every section of our society and every sector of economy. Withdrawal
of high-denomination notes may to some extent curb corruption in the country
and may control parallel economy as most of the transactions involving black
money are carried out in high denomination notes. But people would certainly
find out a way and black money would continue to dominate economy. Today corruption is perceived as one of the major challenges
faced by the country, and the government is fully committed to countering it.
However, unless almost all section of society does not mend their ways,
corruption would never come to an end.
References : 1.Black Money Ministry of Finance
Department of Revenue Central Board of Direct Taxes New Delhi – May 2 0 1 2
2. Ministry of
Finance (Department of Economic Affairs) Notification New Delhi, the 8th
November, 2016.
3. United Nations Convention against Corruption,(2004)
4.
Transparency International organization Index 2016
