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Evaluation of De-monetization of currency (Relevant for GS Prelims and Mains Paper II and III, Topic: De-monetization of Rupee)

De-Monetization is considered a bold step 
Prime Minister Narendra Modi’s move of the sudden withdrawal of legal status of highest denomination notes of Rs.500 and Rs.1000 within three-odd hours of the announcement ,was an absolute game changer to trap in net the corrupt officials stashing kilos of ill-gained cash under their mattresses, and such illicit black money fuelling inflation as well as terrorism. 

He pointed out how difficult it is for honest taxpayers to buy a house as the real estate sector seldom operates without a cash component, some of which finds its way to political funding. The increase in the circulation of these notes in the past five years has been disproportionate to the economy’s growth. 

Importance of de-monetization:
1. The introduction of new Rs.500 and Rs.2,000 notes, the government argues, would not only check counterfeit currency, a problem that has assumed serious dimensions, but also purge India’s economy of the black wealth amassed in the form of high-value notes. 

2. Finance Minister Arun Jaitley said “the demonetisation move is a big step towards cashless economy and to maintain international credibility. 

3. The demonetisation would impact the terror financing, particularly in Jammu and Kashmir. The terror funding module will be affected as the terrorist operatives always store money in the form of big currency notes. That money has become a piece of paper now.

4. Government will have more money for developmental projects without taxing the citizens.

5. Indian rupee will appreciate and become stronger.The RBI control over inflation will become more effective.

6. Real estate business will slow down as money to it will dry up further resulting in price correction of properties.

7. Many incompetent politicians will lose their money power that will make them weaker in electoral battles. 

Any decision like this needs to be sudden, and it is not surprising that it has caused hardship as people scramble to get notes of smaller denomination for daily expenditure. The only defence for this is that the larger public purpose outweighs the immediate difficulties.

Limitations of Demonetisation step:
1. It will not affect black money in foreign banks since that money is in dollar denomination.

2. The next cycle of generation of black money will commence since the machinery to generate the black money is intact.

Preparatory steps of Govt. before De-monetization of rupee
The Govt.’s earlier initiatives of wide propagation of Jan Dhan Yojana for financial inclusion and opening Black Money Disclosure Scheme clearly indicates towards the preparatory steps of govt before de-monetization to curb the black money menace.

Current Position
1. More services to accept Rs. 500, Rs. 1,000 notes: The government has extended the exemption list for payment with old Rs. 500, Rs. 1,000 notes to metro tickets, toll plaza payments, LPG gas cylinders, railway catering, ASI monuments, and chemists.
Banks, which are scheduled to open on Thursday, will remain open on Saturday and Sunday as well for the convenience of people who need to exchange their high-value currency notes.

2. Penalty for tax evasion: It said those depositing over Rs. 10 lakh of unaccounted income in their accounts would face tax and a penalty of 200 per cent under the Income Tax Act.

Statistical evidences presented to justify the sudden move of de-monetization
Different agencies have their own estimates based on the recoveries made by them.
1. As per a study done by the Indian Statistical Institute, Kolkata, in 2015, at any given point of time Rs. 400 crore worth of fake currency notes were in circulation in the economy. 

This is merely 0.025 per cent of the total budget outlay of Rs. 19.7 lakh crore as announced this fiscal.

2. According to the National Crime Records Bureau (NCRB), in 2015, various law enforcement agencies seized 1,78,022 pieces of fake Rs. 1,000 currency notes. 

This means Rs. 17 crore fake notes which were in circulation could be calculated as they could be seized.

Way Forward
1. The Centre must ensure that no poor person is saddled with old, useless notes due to the lack of official identity documents or a bank account, and avoid putting to disadvantage older citizens unable to visit a bank repeatedly to exchange high-value notes. 

2. It should find ways to check black money parked in benami properties (possibly through a digital land and realty inventory) and gold. 

3. There must also be administrative and electoral reforms to advance digital payments and eliminate the prospect of the new currency regime spawning the ghost economy afresh.

 



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