The highest denomination of notes in the US is $100, which is 0.25 per cent of their Per Capita Income, or $40,000. By comparison, India’s Rs 1000 notes comprise 1 per cent of our PCI. So, we have a disproportionately higher component of higher currencies even when compared to a developed economy.
Ever since the war on terror began to be tracked via its money trail, a parallel war on cash began simultaneously. While the timing of the announcement—that India will be eliminating existing Rs 500, Rs 1,000 notes, and will introduce a new Rs 500 and Rs 2,000 note with embedded tracking technology—has taken India by surprise, the advantage set to be gained by any loss in transactional convenience to a consumer is offset by the inroads the government will make in combating illegal and criminal activity. To be fair, eliminating High-Denomination Currencies (HDCs) would not be met with a perceptible drop in the crime rate, but it would definitely make life harder for those who seek to escape surveillance.
The problem with the underground economy is that 90 per cent of the population does not use HDCs. Even in the US 90 per cent of HDC notes are circulated outside the country and it is suspected that they are used primarily for illegal transactions. In India too, there has been some suspicion that HDCs are primarily used to either escape the tax net, if not worse: they form the prime money trail in arms and terror financing. For years, many advocates globally have been calling for the demonetisation of HDCs to this end.
The highest denomination of notes in the US is $100, which is 0.25 per cent of their Per Capita Income, or $40,000. By comparison, India’s Rs 1000 notes comprise 1 per cent of our PCI. So, we have a disproportionately higher component of higher currencies even when compared to a developed economy. With the Prime Minister’s Jan Dhan Yojana, more than 240 million new bank accounts were brought under the revolutionary financial inclusion scheme in record time. The country will see an exponential proliferation of Aadhar-based mobile payments and those using the United Payment Interface. The new app-based cashless society have put the benefits of cashless transactions up on public display.
The new app-based cashless society have put the benefits of cashless transactions up on public display. With the new economic inclusiveness, mobile wallets and micro payments will get a boost, the need for currency will go down further. It is then supposed that HDC use will be used to escape surveillance and track illegal activities. The sectors that are likely to be most hit will be real estate, education and election funding, among others.
The swiftness of the announcement has taken everybody by surprise. Either way, it’s a brave new move by the government and a much needed tough stand sure to draw the black money out of the closets. While the black money clean-up last month was aimed at taking old funds out of circulation, the current move will also block new funds from infiltrating the market. Black money has a crippling effect on institutions and governance in society. It reduces the availability of legitimate funds that contribute to actual infrastructure building and widens the trust deficit in society. In as much, the demonetisation is to be welcomed all around.
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