On November 8th 2016, Indian Prime Minister Narendra Modi, in a public announcement, declared that 500 and 1000 rupee denominations of the Indian currency would seize to be legal tender, pulling out 86% of the currency from circulation overnight. The object of the move and the high level of secrecy attached to it was explained as wanting to prevent terror financing, combat tax avoidance and prevent counterfeiting – basically to tackle the problems of India’s parallel black economy, which Bloomberg Quint reported as being 26% of the total GDP of the country as estimated by McKinsey & Company.
The impact of a move as sudden and grave as this would, needless to say, be big. Estimates came in from academics as well as financial analysts for the impact such a move would have on the Indian economy which is a largely cash based economy. The National Institute for Public Finance and Policy, in its report weighed in the positive as well as negative impacts of the move, dividing them into short and medium term impacts. Sectors which are mainly cash driven like Household, Agriculture, Transport Services etc. were expected to be worst hit while in the long run there was an expectation to boost tax revenues, increase formalisation of economy and reduce cash reliance.
India’s shadow economy problem is not a recent one, and it is important to mention that neither are the efforts to combat it, in the form of the latest demonetization, recent. Efforts to combat black money and corruption have been institutionalised even before. In 2015, a law was passed for the disclosure of all overseas black money. Agreements with many countries, including the United States have been signed to share banking information. A strict law came into force from August 2016 to curb benami transactions and the Prime Minister’s Jan Dhan Yojana, which aimed at financial inclusion of the masses added 250 million bank accounts through November 2016. That said, demonetization set itself apart from all other efforts in its suddenness and the large scale public inconvenience that it caused.
While a certain section of the masses appraised the move as being bold and revolutionary, many others have pointed out the inconsistencies in its effectiveness and the loopholes in its implementations. The former Reserve Bank of India governor Raghuram Rajan, while speaking at a lecture commented on the move, saying that focussing on tracking data and improving tax administration would be a more effective means to tackle the issue of black money. Economist Prabhat Patnaik, in an interview to The Wire explained the concept of black economy and how the black money is actually in circulation and the percentage of hoarded black money, which demonetization aims to tackle is a very small fraction of it. Many others came out to call the move authoritarian, imposing and inconsiderate of the convenience of the masses.