Cash is now the new trash

Prime Minister Narendra Modi's announcement about the discontinuance of 500 and 1,000 rupee denomination notes has come as a shock. Though the Prime Minister's inner circle knew of the intentions, most did not believe it would be implemented so quickly.

Reasons for the decision

There are multiple reasons behind this move. First, the exponentially increasing back economy of India was crippling it from within. A white paper by the Government of India published in 2012 puts $2.1 billion as the total amount of India deposits in Swiss banks. Curbing black money was a major promise of the NDA government during its 2014 election campaign. Last year, the government had rolled out a scheme that allowed people to disclose foreign assets and pay a tax of 30 per cent on the disclosed amount. This year in March, the income disclosure scheme allowed citizens to disclose unaccounted income after paying a tax of 45 per cent. However, these schemes were unable to make a significant dent in the black money economy and received tremendous criticism. Secondly, India is facing a mammoth problem of fake currency in circulation largely due to the neighbouring states of Pakistan and Nepal. This decision is likely to cut the flow of money that funds terrorism. It is a far-fetched deduction but may help in India's fight against terrorism.

Impact on people

A move like this will hit hoarders with large stashes. They won't be able to exchange such huge amounts, which will hold no value now, at banks. People who disclosed income in this year's scheme will be relieved at being better off for having saved at least 55 per cent of their illicit money. Cash is now the new trash, at least for the people who have earned it by dishonest means. The decision has done justice to the hard-working, salaried middle class who always paid taxes. Every penny added to the mountain of black money is revenue lost by the government. With not enough money to run the economy, the government increases taxes. It is the honest, hardworking citizens who bear the brunt and also end up subsidising the black economy. This decision can go a long way in being fair and just to those true to tax compliance.

Part of the strategy

The move comes soon after the government introduced Goods and Services Tax, that would unify the country under common tax brackets. These are not easy changes to make and will involve some pain but once in place may take India in the direction it deserves to go. However, there is a little skepticism in the decision. The RBI has announced that it will be introducing new 500 and 2,000 rupee denomination notes. The current move may remove black money from the economy for once. But the introduction of the new high currency notes, in few years, may start contributing to a fresh pile of black money if the circulation of such high currency notes goes unchecked.