Bye-Bye Rs 500 & 1,000 Notes: Modi’s ‘Achhe Din’ Are Finally Here

Scrapping Rs 500, Rs 1,000 notes is right step in right direction by Modi to tackle black money, writes Rajiv Kumar.

Modi has walked the talk. He has taken the step, which honestly most of us felt was simply impossible in a country, in which the political process, real estate transactions, religious festivals and lavish weddings reek of black money or unaccounted wealth. With the de-monetisation of high denomination Rs 500 and Rs 1,000 notes, with effect from the midnight of 8 November, the Prime Minister has burnished his anti-black market credentials beyond any conceivable doubt. This measure is a game-changer and puts the Indian economy on a radically-different trajectory. Finally, it will not be fashionable or a status symbol to wave wads of cash and flaunt ill-gotten wealth in public. Bravo!

Also Read: Modiji, Kudos But Why the Rush to Scrap Rs 500 & 1,000 Overnight?

Rs 500 and 1,000 Notes Scrapped

The actual measure as plaintively explained in the press release is amazingly simple. Each one of us can convert up to Rs 4,000 in old high denomination notes and exchange these for the same amount at any commercial bank or post office either for new Rs 500 notes or any other lower denomination.

From February 2017, these could also be exchanged for the hi-tech Rs 2,000 notes, as RBI introduces them in the system. Individuals can also deposit any amount (without any upper limits) in their bank accounts by giving an adequate ID proof and completing a requisition slip to be specified by the RBI. In cases where appropriate ‘know your client’ (KYC) information is not available, such deposits will be limited to Rs 50,000, until I suppose the KYC process is completed.

Also Read: Live: Rs 500, Rs 1,000 Notes Scrapped, Rs 2,000 Note Introduced

Blow to Black Economy

The economic and indeed political implications of this measure are mind-bogglingly positive. It will, in one stroke, essentially kill the black economy, which is conservatively estimated at more than a fifth (20 per cent) of the formal economy and up to 50 per cent by some observers. Even at the conservative lower estimate, this amounts to a staggering Rs 30 lakh crore or about $440 billion.

This huge sum is held and circulated in cash in India. Very large parts, nearly all of it, will either become valueless after midnight except for transactions at hospitals, pharmacies, transport, funeral services and a few other specified locations that have been spelled out in the press release.

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Under the Income Tax Scanner

By having individuals deposit their cash in their bank accounts, the government will effectively be able to merge the entire black or parallel economy into the formal economy. Details of these deposits will surely be intimated to Income Tax authorities.

Large, unexplained deposits will surely attract swift attention of the income tax authorities with severe penalties, hopefully expropriation to follow. Parallel economy operators would now rue not having taken the prime minister’s warnings more seriously that penal action awaits those who fail to declare their unaccounted wealth under the IDS, which lapsed on 30 September.

Also Read: Brilliant or Unwise? Economists’ Take on Rs 500 & 1,000 Scrapping

Impact on Real Estate Sector

The measure will directly affect real estate and land markets where cash transactions are rampant. Potential buyers will simply not be able to produce the required volumes of cash in new notes in the foreseeable future.

If it is true, as reported that Rs 2,000 notes will embody nano-technology to make them electronically detectable, it will make it extremely risky to transfer large volumes of cash in future.

Real estate will finally cease to be the conduit for money laundering by unscrupulous politicians and businessmen. This should result in a marked softening of house prices, which will benefit first time ‘real buyers’ as opposed to ‘investors’ who thrive in real estate speculation. Ostentatious consumption will also be curbed, thereby encouraging savings and capital formation.

Trouble for Political Class

Financing of political campaigns will change dramatically. It is well-known that thousand of crores of black money is spent by all major political parties in fighting elections. Political leaders are known to collect thousand of crores in cash, collected in individual contributions of less than Rs 25,000 as that is the official limit for cash donations. Lo and behold, all these cash hoards, primed for the upcoming provincial elections are now worthless.

Not surprising therefore, that the Trinamool Congress, has immediately denounced the step as being draconian and demanded its withdrawal. The cynics will of course argue that the ruling party will receive unfair advantage but this would be seen as sheer petty mindedness on the face of it with the government having taken the axe to the black economy.

Also Read: RIP Rs 500, Rs 1,000? Twitter Goes Nuts With What to Do With Notes

Reward for Honest Taxpayers

I am convinced that henceforth, direct tax collections will increase significantly. Professionals, brokers and builders will be warier of being paid in cash. The move will reward those who have been honest taxpayers and stayed away from the parallel economy. This will encourage better tax compliance and help India improve its rather abysmal direct tax to GDP ratio. A solid beginning of Achhe Din has now been surely made.

(The writer is Senior Fellow at Centre for Policy Research and Founder Director Pahle India Foundation. He can be reached @RajivKumar1 .This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)