Modi’s Currency Crackdown Not Enough to Catch the Big Fish

One thing is certain: with the Rs 500 and 1,000 rupee notes dramatically demonetised, as of midnight on 8 November, the bank account and post office savings coffers are going to swell substantially.These represent, numerically, 25 percent of all the Indian currency in circulation. The Rs 500 notes account for 17.4 percent, and the red Rs 1,000 ones represent 7 percent.Collectively, they are worth Rs 14.95 lakh crore, or nearly 86 per cent in value terms of the cash in circulation, as of March end 2016. All of it, theoretically, is headed for the bank, post office, and the official economy.Also Read: Bye-Bye Rs 500 & 1,000 Notes: Modi’s ‘Achhe Din’ Are Finally HereJolt for the ISIThese 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 notes, just demonetised, constitute 50 percent of this fake currency, and the ISI has been making an annual profit of about Rs 500 crore 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. ּBenami RouteUbiquitous black money hoards, with individuals, traders, politicians, professionals, businessmen, industrialists, construction barons, builders, real estate and property owners, retailers, restaurateurs, farmers, service providers, and so on, will find its way, albeit involuntarily, into the official system. And many who choose not to 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 percent 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 crore as declared, but charged at 45 percent.The key difference this time, is that all the money will have to be compulsorily deposited by 30 December in the banks, post offices – and then up to 31 March 2017 for late-comers, at the designated Reserve Bank of India (RBI) locations.Identities of depositors, and their PAN numbers, will be checked, under the watchful eyes of CCTV cameras, and declarations will have to be signed post-30 December 2016.Also Read: Modiji, Kudos But Why the Rush to Scrap Rs 500 & 1,000 Overnight?Catching the Big FishStill, the optimism associated with 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 percent of the population that lives in rural India, and those urban residents who use the device of ‘agricultural income’ to both avoid taxes, and hoard their cash, will also have to beat a path to the banks.Also Read: Real Estate in Fix? Withdrawn Notes Bring in Homebuyers’ MiseriesGood News for BanksThe phenomenally numerous Jan Dhan Yojana bank accounts, created for the ‘unbanked’ earlier, 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 crore.With Rs 15 lakh crore 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.Also Read: PM Modi’s ‘Note-Worthy’ Move: Here Are the Winners and LosersOther PositivesThis 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.Curbing Black MoneyIndia 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 $2.3 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 percent 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 crore worth, and forcing it into the banks, cannot but have a substantial impact on multiple fronts.(Gautam Mukherjee is a plugged-in commentator and instant analyser. He can be reached at @gautammuk. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)Also Read: Junking Those Old Notes: A Way Ahead? Or a Harbinger of Woes?

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Modi’s Currency Crackdown Not Enough to Catch the Big Fish

Ban on Rs 500 & 1,000 notes won’t be enough to catch big fish involved in money laundering, writes Gautam Mukherjee.

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Topics: Narendra Modi Black Money 500 rs note