A monetary Tsunami struck India on the midnight of November 08 this year. A tidal wave that sucked out of circulation 86% of the nation's currency at one stroke . As much as 16 billion notes in the denomination of Rs 500 and 6 billion in the denomination of Rs 1000 were rendered invalid legal tender by a government announcement that had been kept a closely guarded secret for a whopping six months.
Barring a studied leak of a possible introduction of a Rs 2000 currency note on the social media through SMS and Watsapp on the five crore mobiles of the country , the nation had no clue of such a drastic step was in the offing. The leak was apparently from a printing press in Hyderabad.
Even Modi's Cabinet Ministers and Bank Chairmen had no inkling of such a drastic move was going to be unveiled on the fateful night of November 08 when a nation was glued to the TV screens chasing the bitterly fought and campaigned Presidential elections of Trump Vs. Hilary in the United States.
Reports circulate to the effect that Prime Minister Narendra Modi convened a cabinet meeting at short notice to discuss matters of national importance at which ministers for the first time were frisked by security men and asked to keep their mobiles outside the conference room. The Prime Minister reportedly excused himself and rushed to the President to get his concurrence on the demonetisation move and then went on TV to announce his war on Black Money in one of the boldest moves the country has ever seen and been shocked out of its wits. Modi indeed proved it was his finest hour in politics and a hit with the masses.
Bank Chairmen who had assembled at the request of the RBI Governor were told to watch the TV when they learnt of the historic move of the government. Even as PM was speaking, government was informing through various channels banks, financial institutions and everyone in government who ought to know of how to deal with the emerging situation.
Modi successfully managed to edge out what was expected to be the screaming headlines in the newspapers the next day, the US Presidential Elections, with his own historic step – demonetising the high value currency notes at midnight of November 08 2016 in pursuance of his avowed objective of rooting out the menace of black money, cutting terror funding and choking corruption, all in keeping with his rhetoric of election campaign in 2014 that swept him to power.
What followed is history. The appointment of a supreme court judge to head a Special Investigating Team to track the origin , flight and repatriate unaccounted money stashed away in secret accounts in Swiss banks and tax havens across the world allegedly by unscrupulous politicians , stealthy businessmen and suspect groups that were funding terrorist activities to disrupt the unity and integrity of India besides sovereignty.
Prime Minister Modi followed this up with a series of measures to flush out black money that included: the passage of a legislation in 2015 for disclosure of foreign black money;
initialling agreements with many countries, including the USA, add provisions for sharing banking information; a strict law enunciated in August 2016 to curb benami transactions, used to deploy black money earned through corruption; and finally a scheme of declaring black money after paying a stiff penalty of some 45% that led to receipt of some Rs 60,000 crore and still counting.
Taken over the last two and half years, these measures brought into the open nearly 1.25 lakh crore rupees of black money stashed away by the movers and shakers and wheelers and dealers in politics and business in tax havens or foreign banks. Prime Minister Modi in his TV broadcast asked if honest citizens want this fight against corruption, black money, benami property, terrorism and counterfeiting to continue. "Which honest citizen would not be pained by reports of crores worth of currency notes stashed under the beds of government officers? Or by reports of cash found in gunny bags?" he asked.
So to reflect that refrain of his, Modi's demonetisation was the last straw in the camel's back on his all-out war on black money, corruption and terror funding. To break the grip of corruption and black money, Modi announced his government had decided to scrap five hundred and thousand rupee currency notes. "The five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. The rights and the interests of honest, hard-working people will be fully protected. Let me assure you that notes of one hundred, fifty, twenty, ten, five, two and one rupee and all coins will remain legal tender and will not be affected, Modi said in his broadcast.
Notwithstanding the inconvenience caused to people who were virtually cashless next day as all banks were closed and ATMs shut to restock new currency to replace the old stock rendered invalid legal tender, the move was hailed by most people , corporate honchos, financial institutions Indian and Foreign – IMF hailed Indias move as a bold one to fight corruption and unearth black money – and political parties though some of them such as Congress and TMC opposed on grounds of the inconvenience it caused to people.
Congress has historically opposed demonetisation as any rightful solution to tackle the menace of black money. In the 70's its then revenue minister VC Shukla had said government did not think it was a rightful solution. But the Janata Party did push ahead with the first demonetisation in early 80s. Now its offspring BJP has done it.
Will it affect the GDP growth which has been estimated at near 8% for 2016-17 by the government? Some Economists feel it will pull down GDP growth to 7.1% against the targeted 8% because there is less cash in circulation, only 14% cash is in circulation as 86% has been sucked out which has to be replaced with the new. Of the 6 billion Rs 1000 notes withdrawn, government is pumping in 3 billion Rs 2000 currency notes to offset the loss.
The economists feel that when retailers or sellers of goods don't have cash to buy, then they will stop buying from suppliers and the suppliers will in turn not lift goods from manufacturers leading to lull in consumer sales and purchase and a cascading effect will hit the economy. Some other economists feel it could have minimal impact as the country was moving towards a cashless society and a paperless world where most monetary transactions were being conducted on cheques or credit or debit cards. Most high volume monetary transactions were not on cash but in digital instruments.
Whatever the actual result on growth, one thing is clear that Modi government will not tolerate black money generation, corruption in government circles or terror funding through counterfeit notes. The government has taken the war to the enemy's camp in an assault never ever before seen in Indian economic history. Historic step indeed.
By T N Ashok, Editorial Advisor, PreSense and Senior Economic Journalist at Delhi