India is a land of plenty – we have plentiful natural and human resources to make ours one of the richest nations in the world. But at the same time our country abounds in those who dodge taxes, don’t pay their fair share towards the economic development of our nation, and indulge in fostering parallel economy.
Among all the advanced economies, India today holds the nefarious distinction of being the only country in the world, where only 1% of the population pays income tax [details: http://bit.ly/2eUOiTG].
Given this, there is rampant corruption and ‘black money’ abounds. Add to this, all the illegal trade in drugs, illegal entry of foreign goods, and scariest of the lot – terror financing from abroad, our country was literally sitting on an economic time bomb that could have gone off any day.
According to McKinsey and Co report of 2013, the volume of parallel economy in India stood at a staggering 26% of our GDP, which means for every ₹ 100 transaction in India, ₹ 26 was transacted illegally.
The parallel economy mostly relied on transactions in cash, and generally through high denomination currency notes viz ₹ 500 and ₹ 1000. The Reserve Bank of India’s annual report for 2016, indicated that counterfeit notes of ₹ 500 and ₹ 1000 accounted for more than 92% of all the fake currency detected by banks across the country.
By demonetizing high denomination currencies ₹ 500 and ₹ 1000, the government has effectively struck at the heart of the beast, and even though it may not end every form of illegal economy, this takes away large chunk of finance available to fund illegal activities in India.
More importantly, this gives the central government enough time (till illegal economy catches up) to push for more digitization of banking procedures and inclusion of marginalized sections of the society into the banking system through Jan Dhan yojana, as now more people will be forced to join the system, than stay out of it.
One of the easiest ways to cripple the economy of the enemy nation is to pump in ‘fake currency’ into that country, and the fact that India has very porous borders via Nepal and Bangladesh was a blessing for Pakistan.
A Catch News investigation into ‘fake currency’ racket in India found that Malda in West Bengal was the hub of all the fake currency entering India. Pakistan’s ISI would print fake currency, and ship it to Dubai using Dawood’s network, from where it was sent to Bangladesh and through Malda it would enter India [Details: http://bit.ly/2fDsmAc].
This was such a lucrative trade, each fake ₹ 1000 note was sold to middleman in Bangladesh for ₹ 13, and by the time Indians who traded in fake currency got hold of it, they would pay anywhere from ₹ 200 to ₹ 350. Thus everyone along this fake currency chain was making a bumper harvest. Imagine when a fake ₹ 1000 currency entered the economy, the last link in the chain was earning a net profit of ₹ 650.
According to an Indian Statistical Institute study, around ₹ 400 crores worth of fake currency had been circulating in India, and unsurprisingly West Bengal was the hub from where these fake notes where being pushed into the country.
By making all ₹ 500 and ₹ 1000 notes illegal, the government has ensured that all these fake currencies also became illegal, and what’s more important is that, Pakistan will take at least some years to get the racket going with new currency notes.
Majority of the funds pumped in by Pakistan to terrorist cells in India relies on cash. Majority of the drug and arms trade in India, which is reportedly controlled by Dawood Ibrahim gang also relies on cash. Thus cash transaction in HD notes had in turn made our country more vulnerable to terrorism and growing drug menace.
The funds for sustaining anti-India sentiments in Kashmir are also sent in by Pakistan in cash form.
In one sweep, the Govt of India has crippled this nexus, the terrorists and drug mafia cannot go to bank to get their existing cash changed into newer notes.
Curbing inflation and resetting the economy
This one initiative of banning HD notes, effectively puts to task those who have been indulging in corruption and hiding their illegal wealth – either in the form of cash or properties.
Let me give you an example of how corruption thrives.
Let us assume that a politician or a government servant takes bribe. S/he will be flush with cash, which they cannot deposit in their bank accounts. They take this cash, and end up buying properties. Now if the property dealer issues them proper paper, then the Income Tax department is bound to ask questions on how they managed to amass such a huge sum of money. Thus they show only a small portion as payment for the property. For a ₹ 1 crore worth of property, the sale price is shown as ₹ 5 Lakhs, while this will be entered, the rest ₹ 95 lakhs is paid in cash and under the table. This way the property dealer will also be forced to pay less taxes to the government. The property dealer then uses this illegal ₹ 95 Lakhs to transact further and with every passing transaction the illegal ₹ 95 lakh enters into the economy.
Imagine thousands of such transactions take place every day, this leads to excess cash flow in the economy, thus creating inflation, as people flush with illegal cash end up paying much more than the actual price of the product. Though, this serves the corrupt well, it is the general public with no disposable income who have to suffer due to high price of products.
By making such cash illegal, the government allows for the economy to reset. With excess cash sucked out, the economy turns to a more deflationary process, and eventually settles at the exact place where the price of the good matches the value of the goods.
This way, majority of the people with legal income are protected from the corruption induced inflationary tendencies of the economy.
But the most important effect of taking away HD notes is in curbing corruption at mid and low levels. It is well known that ultra rich won’t keep their ill gotten sums in India, but they keep it safe in off shore accounts. Thus it is more than unlikely that this ban on HD notes will effect corruption at that level. But think of those millions of individuals, political parties and organizations who have in fact kept their illegal money in liquid cash form, they must be panicking.
The government had given September 30th as the deadline for declaring illegal income. Pay a flat 45% tax and you can keep the rest 55% with no questions asked. This way around 65,000 crores had been declared, and government had netted the tax of around ₹ 31,000 crores.
At the end of the term, PM Modi had warned that, “when I take drastic measures after Sept 30, to curb corruption, don’t complain…”
With one master stroke, he has effectively taken away such ill gotten wealth.
The effect of this initiative has already started to show, some people are abandoning bag full of cash in dumpsters, some are burning it.
Today anyone depositing over ₹ 2.5 Lakhs will have to explain to the Income Tax department, where they got the money from. If you are a legitimate businessman or businesswoman, you won’t have to worry, as you can show your tax certificates…
But God forbid if you don’t have such papers to prove it’s your legal wealth… the government is planning to tax anywhere from 37% to 200% – which means for every illegal deposit over ₹ 2.5 Lakhs, you will be made to pay 2 times the amount you have deposited. If you have such wealth, you are probably better off donating ₹ 2 lakhs each to needy and poor people, at least you will get their blessings, else jail awaits.
While majority of the people in India have welcomed this historic decision, a handful of politicians are going bonkers over this announcement.
This makes it easy for us to see – the heart of which beast did the government strike the most.
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