Everyone agrees that there is a lot of black money in the country. Some say it is 50% of Gross Domestic Product. Black money is generated when a transaction is either illegal, or is hidden from tax authorities. The easiest way of doing this is through cash transactions. Hence the popular notion of ‘suitcases’ of currency notes changing hands.
There is a suspicion in many circles that a large number of counterfeit notes are also in circulation in India. [Nepal, where Indian currency notes are commonly used, does not like to accept 500 rupee notes. ] Such fake notes add to money supply, fuel inflation, and over time reduce confidence in the national currency. It is in the nature of counterfeit notes that they are physical paper. They can have devastating effects on any economy.
One way of dealing with the menace of both black money and counterfeit currency notes is to ‘demonetise’ high denomination notes—say those of Rs 500 and Rs 1000. In fact, when he was Prime Minister, Morarji Desai did demonetise Rs 1000 rupee notes of that time. These were reintroduced later.
It is my contention that the time has come to do this once again.
In order not to inconvenience ordinary citizens, the RBI could authorise banks to accept such demonetised notes, up to a specified date, and up to a specified amount—say 1 lakh—with no questions asked for 1 transaction by an account holder. Larger sums could also be accepted if the PAN number of the person depositing/owning the money is given. In return for these demonetised notes, an equivalent amount is credited to the person’s account, to be spent via banking channels only. After a specified date, all these notes cease to be legal tender.
This is a good time for such an action. Elections are times when cash transactions abound; before each election, we read in the papers about the huge hauls of cash unearthed by the Election Commission. Demonetisation of high value currency notes before the coming elections would be a wonderful, rational step.
To ensure that the menace does not recur, it will be important to encourage the use of debit and credit cards. Card reading machines could be subsidised for small traders. Bus fares etc could be via smart cards. It should be possible to top up such smart cards in the ATM’s of banks, or in various other authorised locations.
Banking transactions are already possible on mobile phones. This could be encouraged.
India can ‘leapfrog’ in electronic cash usage fairly easily.
I am sure there are details that need to be discussed and sorted out.
If the basic premise of demonetisation is accepted, we should have a public debate on encouraging the use of electronic money. But we should immediately demonetise 500 and 1000 rupee notes.
The new RBI Governor, I hope, can get on with it.