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A welcome measure

A welcome measure
Highlights

The sudden decision of the Government of India to withdraw currency notes of higher denomination is certainly a welcome move. It would bring the illegitimate money held by the black money holders to account.  

The sudden decision of the Government of India to withdraw currency notes of higher denomination is certainly a welcome move. It would bring the illegitimate money held by the black money holders to account.

However, considering this move as a panacea to the menacing problem of black money is romantic. In fact, such a move is not new. But, the past experience suggests that the circulation of currency notes of higher denomination continued to rise with each passing year. The nation needs an assurance that this would not repeat.

In case of limiting the circulation of currency notes of higher denomination, the electronic transactions have to be universalised. The recent experience of tampering with bank debit cards raises serious questions of online security.

The government should address the problem of lower use of electronic money, the security issues in such transactions and reducing the unbanked population.

As the government decided to withdraw the current series of such currency notes and replace them with new series, a smooth shift to non-cash economy has to be ensured.

It cannot be ignored that all those who use such higher denomination currency notes are not the affluent and possessing illegitimate wealth. Therefore, the easy transition to the new system should be ensured for the middle classes even.

As it cannot be used for buying financial assets, black money is generally used in real estate and purchase of gold and jewellery. The cash component is still very high in such transactions giving scope for circulation of black money.

Even the government’s white paper on black money acknowledged that these sectors are more prone to illegal wealth. Restrictions on cash transactions would certainly contribute to reduction in black money held domestically. However, the stashing away of black money abroad still remains a problem.

Estimates suggest that more than 80 per cent of money in circulation is through Rs 500 and Rs 1000 notes only. Therefore, withdrawal of these notes from circulation would be a onetime measure to crack down on illegitimate money.

Legitimate money holder has no problem with this measure. But, governments should ensure that the circulation of higher denomination notes will not rise in future. This requires an urgent shift to electronic transactions. But, India is still not fully prepared for this. Other measures are immediately required.

The current move would make large unaccounted transactions difficult, thus impeding generation of black money in future. It would also crack down on fake currency now in circulation.

The move to withdraw higher denomination currency notes will result in immediate unearthing of domestic black money circulated in cash as people hoarding black cash currency will be forced to come to banking system for converting it.

However, this measure alone would not unearth the entire black money as most of it is held in the form of assets and even benami properties. Though it is a good measure, the latest move should not be viewed with romanticism.

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