It has long been an open secret as to how black money is generated and that it is stored anywhere but a bank.
People will now have to account for their cash if they want to convert or deposit it. The second target is Pakistan’s anti-Indian activities. Pakistan’s terror networks are lubricated by fake currency, the ISI pays for itself by selling counterfeit Indian rupees. And decommissioning stymies inflation arising from Pakistan, injecting tens of crores of counterfeit currency into India annually.
It is apt to recall that this momentous moment in our financial history arises from years of preparation under former PM Manmohan Singh. In taking his project forward, albeit in unexpected ways, Modi is to be commended.
Nevertheless, the shape of things to come is delineated by a framework already in place. And that is a triptych made of the 2012 White Paper on Black Money, the Swabhimaan Scheme that metamorphosed into the Jan Dhan Yojana programme and RuPay, and the National Identification Bill of 2010 that became the Aadhaar Act. Working on the assumption that black money was squirrelled away overseas, the White Paper focused on international means to tackle it.
Unfortunately, attempts to identify illegal wealth at multilateral organisations enjoyed a very modest success. Modi learnt the lesson, and shifted focus on cleaning up at home.
Meanwhile, Swabhimaan sought to expand the formal economy by enticing the bulk of Indians, who live in rural poverty, to open accounts and receive welfare payments direct. This project has been enhanced so that the poor, regardless of location, can make payments electronically using RuPay, or India’s alternative to Visa and Mastercard.
These advances are possible because the Aadhaar card verifies the identity of account holders. The purpose of legislation has, therefore, shifted from plugging leakages in welfare programmes, to an enthusiastic broadening of the formal economy.
Underlying all this is the war against undeclared taxable income. The timing of the announcement, which afforded people a few hours, was patently designed to ensure evaders will not be able to convert their ill-gotten cash into assets.
Moreover, legal holders of the now-defunct tender have nearly two months to change their money. Nor will there be a shortage of large notes, because the government will issue new Rs 500 and Rs 2,000 notes. It is here that the government fell short.
The new notes will be paper when they ought to have been polymer. It employs much better antiforgery technology, such as Optical Variable Devices (OVDs). Though more expensive to manufacture, these notes (used in Australia, for instance) last much longer, thereby reducing the cost of money.