Currency Demonetisation in literal sense is the act of stripping a currency unit of its status as legal tender. Demonetization historically becomes necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit.
However in case of India, PM Modi announced the demonetization of Rs 500 and Rs 1000 currency notes to check corruption. The move sent shock waves across the country with people figuring out its actual impact in rooting out black money. Some questioning on the futility of replacing these notes with a higher currency of 2000 Rupee notes.
Reactions from the political world included that of Ms Mamata Banerjee, Chief Minister of West Bengal who went on to term the move as “Heartless” and “Chaotic” and called upon PM Modi to withdraw the measure, terming it as “Draconian”.
Heartless and ill- conceived blow on the common people and the middle class in the fake name of anti-corruption
— Mamata Banerjee (@MamataOfficial) November 8, 2016
Many banks, govt institutions hailed the move as one that will help in anti-corruption. Even former BJP President Shri LK Advani backed it and had the following to say.
PM's bold, decisive step has given effective direction to efforts for making a corruption-free system: LK Advani on #demonetisation.
— Press Trust of India (@PTI_News) November 9, 2016
In the same context and not very long ago, the Expert, former Reserve Bank of India governor Raghuram Rajan during the 20th Lalit Doshi Memorial Lecture on the topic of currency swap, demonetisation and its effects had opined as below:
Rajan Says: I am not quite sure if what you meant is demonetise the old notes and introduce new notes instead. In the past demonetisation has been thought off as a way of getting black money out of circulation. Because people then have to come and say “how do I have this ten crores in cash sitting in my safe” and they have to explain where they got the money from. It is often cited as a solution. Unfortunately, my sense is the clever find ways around it.
They find ways to divide up their hoard in to many smaller pieces. You do find that people who haven’t thought of a way to convert black to white, throw it into the Hundi in some temples. I think there are ways around demonetization. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch. I would focus more on the incentives to generate and retain black money. A lot of the incentives are on taxes.
My sense is the current tax rate in this country is for the most part reasonable. We have a reasonable tax regime, for example, the maximum tax rate on high-incomes is 33%, in the US it is already 39% plus State taxes, etc., it takes it to near 50. We are actually lower than many industrial countries. Given that, there is no reason why everybody who should pay taxes is not paying taxes. I would focus more on tracking data and better tax administration to get at where money is not being declared. I think it is very hard in this modern economy to hide your money that easily.
While its too early to gauge the reactions and the day to day conduct of business, post junking of Rs 500 and Rs 1000 notes, the scenario seems unexpected for unprepared rural masses that comprise most of India.