First the surgical strike on terror camps on the other side of the Line of Control and next, this surgical strike against undeclared income, show that Prime Minister Narendra Modi is getting into his stride and is embracing bold measures wherever these are seen to be needed. The replacement of the present series of Rs 500 and Rs 1, 000 notes is the most important decision made by this government, but it must be remembered that the overall framework sculpted by the Prime Minister needs to get filled up by equally carefully thought out follow-up measures.
Should the currency surgical strike result in the financial cleansing and breakthrough planned by Modi, his party may win what may be called the “Congress 1984” Lok Sabha total of over 400 seats. Conversely, should the measure be deficient in its implementation, the consequences for the BJP will be push that party into “Congress 2014”, or a double digit seat tally in the 2019 Lok Sabha polls. That replacing the Rs 500 and Rs 1, 000 notes was desirable is true. Not only from Pakistan but from some other countries as well, “mules” have carried state-produced counterfeit currency into India. The minimal security features on the existing notes present an invitation even for certain governments to get involved in the mass production of counterfeit Indian currency. In view of this, it may be desirable to enquire into the company that had been supplying the security thread for Rs 500 and Rs 1, 000 notes, as questions have been raised about both the safety of the product as well as the price paid. The Prime Minister deserves the thanks of citizens for facing up to the security risks faced by the now withdrawn currency notes. However, our colonial bureaucracy ought not to be given a licence to derail the measure through vexatious procedures and poor logistical planning, as indeed by the security features of the new notes being as weak as for the old.
The task is huge. Rs 850,000 crore is the estimate of the value of the withdrawn currency, and less than 5% of this was disbursed through ATMs. Ensuring that currency notes sufficient to fill this gap get printed and distributed throughout the country is key to ensuring the success of the measure. Glitches in this will cause dislocations in economic activity that would be personally ruinous for hundreds of millions of citizens who have spent a lifetime using only currency notes and do not wish to change. Should Modi’s currency swap go sour, much of the service economy of India may begin to nosedive, with severe implications on employment and economic growth. Making India’s economy cashless is the work not of 48 hours or even 48 months, but an entire generation. Hopefully, the Reserve Bank of India has printed and made ready for distribution sufficient currency notes to satisfy the vastly expanded demand for such paper. If not, the period ahead may witness flare ups at banks and acts of dacoity targeting cash vans. Most of the economy depends on easy access to cash, and as RBI Governor Urjit Patel and his predecessors have personally guaranteed each of the withdrawn notes, the new appointee will, hopefully, make sure that currency shortages get overcome in a couple of weeks, or before the overall economy gets seriously disrupted.
Judging from media reports, the colonial reflex of our hyper-expensive bureaucracy appears to have kicked in once again where some operating features of the PM’s bold measure are concerned, with the result that illogically punitive measures have gotten incorporated into the currency switch policy. If it is true that the excessive provisions of the black money law and the present replacement of currency notes is the brainchild of the SIT, that body needs some more sittings so as to understand that lower tax rates and leniency towards citizens generate far more revenues than the harsh steps the SIT apparently favours. At least a third of the SIT ought to have comprised of taxpayers from the private sector, which is the milch cow of the tax system.
Hyper-punitive rules invariably result not in desired outcomes but in more bribes to the officials into whose hands excessive powers have been placed together, which is why the bureaucracy favours them. An example of counter-productive methods is the penalty of 200% to be levied on undeclared cash over Rs 10 lakh. As a consequence, those having such hoards will flock to hawala operators who will pay them 50% of the withdrawn currency. Huge amounts of revenue would result were the government to adopt an “accept as it is” attitude towards cash deposits of any amount, levying a flat tax of 45% on the total for sums in excess of Rs 10 lakh and 30% for sums between Rs 10 lakh and Rs 2.5 lakh. These should be accepted without the Kafkaesque questionnaire prepared by the RBI for banks to unleash on each citizen seeking to exchange old rupees for new. Neither the Revenue Secretary nor the RBI Governor will be standing for election in 2019, but the BJP MPs will. Leaving in place measures that only increase the illegal revenues of hawaladars and corrupt officials and slow down the lawful substitution of currency notes to snail speed makes sense only to a colonial mind far removed from the needs of ordinary citizens. Prime Minister Modi needs to intervene so as to ensure that the process of substitution be made people-friendly rather than bribe-friendly.
A surging economy is an excellent defence against terror. Armed Wahhabi groups in Kashmir have around Rs 120 crore with them at most, while Maoists have about Rs 300 crore and of course, extremist groups in the Northeast usually deposit their takings in banks! These are big sums, but nowhere close to even a percent of a percent of the total of currency used in the country. The currency conversion announced on 8 November by Prime Minister Modi needs to be implemented in a manner that (a) trusts the citizen rather than sees him as a crook, (b) ensures through low rates and citizen-friendly rules that tax revenue rather than bribes get paid, and (c) ensures fast and easy substitution of old currency for new within two weeks. Should PM Modi ensure that these conditions be met, the BJP will get a rich harvest in 2019.