The reigning government has delivered another massive blow on the parallel economy in the ongoing war against it. In an unprecedented move, government demonetized Rs. 500 and Rs. 1,000 notes with effect from November 9, 2016. Black money is like the legendary Greek monster kraken which has been sinking the growth of Indian economy. Government is fighting it on all fronts but the question remains. Will the government be successful in destroying parallel economy or its efforts will prove fruitless like they have been several times in the past?
Demonetization is nothing new for India. Highest denomination notes ever printed by Reserve Bank of India were Rs 10,000 in 1938 and again in 1954 which were subsequently demonetized in January 1946 and in 1978 respectively. In fact, in 1978 notes of Rs. 1,000, Rs. 5,000 and Rs. 10,000 denomination were demonetized. The Rs. 1000 note made a comeback in November 2000 and Rs 500 was introduced in 1987. Indeed, Rs 2000 are for the first time introduced by the present government. The new design is part of the Mahatma Gandhi (new) series and has a motif of Mangalyaan on the reverse side. Even the new series of Rs 500 with the image of the heritage site Red Fort comes with enhanced security features and both Rs 500 and Rs 2000 are braille compliant. Time will tell how secure the new currency notes are. However, the existing black money in the economy needs to be flushed out. The thrust of demonetization of Rs 500 and Rs 1,000 notes was to curb a parallel economy thriving on black money in the country. Ironically, the very move has given birth to a new kind of parallel economy, especially in the rural areas.
The government which is fighting an all-out war against black money had also launched schemes for the benefit of the poor. However, the hoarders of unaccounted money are said to be using those schemes as an escape route. Bank accounts of the poor are being used to deposit cash and then withdraw it, for a small sum. Most of the accounts being utilized to launder black money are those opened under the Pradhan Mantri Jan-Dhan Yojana, a central scheme for financial inclusion. With people allowed to deposit up to Rs 2.5 lakh without any hassle, even dormant accounts have become suddenly active and are brimming with cash. Similarly, a Jan-Dhan account holder is allowed to deposit up to Rs 1 lakh. However, new bank accounts opening up daily and existing accounts flooding with cash is also a positive sign. In a way it is serving the purpose by bringing in black money into the system.
Impact of demonetization is also clearly visible in the private lending market. As the money is fast losing its value, the private lending market has become very lucrative. Lenders have suddenly become generous as interest rates being offered to the borrowers have suddenly dropped by 5-6 times.
Government’s monetization drive to reveal black money met with tough resistance initially when gold items suddenly saw a spike in demand immediately after the announcement regarding demonetization. People resorted to buying gold to save their black money instead of declaring their illegally hoarded cash. Government countered this by making it necessary to provide PAN details when making gold purchases. Some people resorted to throwing away redundant currency finding no other option to use it.
Despite all this, government’s efforts seem to have received some positive results so far. Though honest taxpayers are depositing and exchanging old currency in banks, black money hoarders are discarding black money. People are shying away from declaring black money and resorting to abandoning their stock of illegal money. Whether the black money is deposited in banks or simply discarded, it will ultimately flush it out of the system. However, this endeavor alone is not enough to destroy parallel economy completely as only 6% of black is said to be in the form of cash.
It is too early to see demonetization making any significant impact on the economy. Time will tell whether this move is a true game changer or not.