Midnight Body Blow To Black Money, Terrorism, & Drug Financing

Midnight Body Blow To Black Money, Terrorism, & Drug Financing

One thing is certain: with the 500 and 1,000 rupee notes dramatically demonetised, as of midnight on the 8^th of November, the bank account and post office savings coffers are going to swell substantially.

These represent, numerically, 25% of all the Indian currency in circulation. The Rs. 500 notes account for 17.4%, and the red Rs. 1,000 ones, represent  7%.

Collectively, they are worth Rs. 14.95 lakh crores, or nearly 86% in value terms of the cash in circulation, as of the end of March 2016. All of it, theoretically, headed for the bank/post office, and the official economy.

These junked notes will be replaced by new ones of Rs. 500 and Rs. 2,000 denomination, with better security features, and a rumoured embedded tracking device, so that higher denomination cash just cannot be hidden in future.

Counterfeit currency, estimated at 250 in number out of every 10 lakh notes, piped across our borders, mostly at the instance of Pakistan’s Inter-Services Intelligence (ISI), in these denominations, has been suddenly rendered useless.

Rs. 1,000 rupee notes, just demonetised, constitute 50% of this fake currency, and the ISI has been making an annual profit of about Rs. 500 crores on it.

This move will halt, at least till new remedies are found, underground financing of Islamic and Maoist terrorism, other insurgents, and multi-national drug and small-arms-trading.

Ubiquitous black money hoards, with individuals, traders, politicians, professionals, businessmen, industrialists, construction barons, builders, real-estate and property owners, retailers, restauranteurs, ‘farmers’,  service providers, and so on, will find its way, albeit involuntarily, into the official system.

And many who choose not take the split-up-the-money-into-small-lots and operate the benami route, via employees, relatives etc. to make deposits over the next six weeks, will be hoping to still get away with a top 30% tax rate. These people will be expecting to avoid penalties and prosecution under the new draconian laws too.

They expect to end up better off, than in the recently concluded income disclosure scheme (IDS), that yielded Rs. 65,000 crores declared, but charged to tax at 45%.

The key difference this time, is that all the money will have to be compulsorily deposited by December 30^th in the bank/post office - and then up to March 31^st 2017 for late-comers, at designated Reserve Bank of India (RBI) locations.

Identities of depositors, and their PAN numbers, will be checked, under the watchful eye of CCTV cameras, and declarations will have to be signed post December 30^th 2016.

Still, the optimism on a fresh opportunity to regularise matters, is probably based on creating a narrative via reverse engineering of books of accounts, to be presented in the forthcoming tax submissions.

Chartered Accountants (CAs), can hope to reap a veritable bonanza from this activity and related services.

However, most big fish will not want to be identified at all, and will choose to bank their money through surrogates, reworked privately held company balance sheets, cross-holdings, multiple heads of accounting, even multiple companies.  

Money in the hands of the 50% of the population that lives in rural India, and those urbanites who use the device of ‘agricultural income’ to both avoid taxes, and hoard their cash, will also have to beat a pathway to the banks.

The phenomenally numerous Jan Dhan Yojana bank accounts, created for the ‘unbanked’ early in the day, and long derided for being inactive, will swell, all over the country, with deposits of a few thousand each. But this too, in aggregate, will run into tens of thousands of crores.  

With Rs. 15 lakh crores coming into the banking system, the burgeoning non-performing assets (NPA), issue, will also be considerably eased. The banks will also have a lot of fresh money to lend.

This demonetisation is likely to reform the operations of the real estate and jewellery sector for the better, after the initial shock, in terms of future legitimacy, yield of taxes, stamp duties, et al.

It will also force election funds to seek laundering via the official economy after this bold move.

India has demonetised Rs. 1,000 and Rs. 10,000 bank notes in 1946; and again in 1978, when the Rs. 1,000 denomination, reintroduced in 1954, along with Rs. 5,000, and Rs. 10,000 currency notes, were demonetised once more . This too was to curb forgery and  reduce the proliferation of black money.

But, in those times, the official economy was only valued at under $ 200 million, to today’s S2.3 trillion; and these high value notes, comparatively few in number, were only in the hands of the rich.

Today the parallel cash economy, accounts for at least 25% of the official, though estimates vary widely.

Critics point out that that this abrupt move will just lead to inconvenience and chaos, the bulk of black money having been spirited away abroad.

Still, demonetising Rs. 15 lakh crores worth, and forcing it into the banks, cannot but have a substantial impact on multiple fronts.

For: The Quint

(819 words)

November 9^th, 2016

Gautam Mukherjee