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Relevance and use of the article in UPSC prelims and mains examination:Dear aspirants this article is about the recent decision of the government to withdraw high denomination currency.The sudden and dramatic announcement by the prime minister banning Rs 500 and Rs 1,000 notes issued by the Reserve Bank of India has a number of objectives. Among them are tackling counterfeit notes, curbing black money and restricting finance for subversive activities. While progress will be made by suddenly making the present high denomination currency illegal, we need many more steps before the desired objectives can be fully achieved.lets find in this article that what much more is needed to be done.
- Indians are among the most intensive users of cash. In terms of purchasing power, the supply of cash circulating through the economy is dominated by notes of high value. Data shows that the currency issue has been skewed towards notes of high denominations.
- The impact of the decision by the Narendra Modi government to strip the old Rs500 and Rs1,000 notes of their status as legal tender. They are being replaced with a new issue of Rs500, Rs1,000 and Rs2,000 notes.
Major objectives behind this move:
- One of the main objectives of replacing old currency notes by printing new notes is to tackle the problem of fake currency notes in circulation. In India, there is fear that counterfeit currency is being used for financing terror as well as other subversive activities.
- It should also be seen as part series of policies against tax evaders. The decision extinguishes some of the stock of illegal wealth in India rather than the flow of new black money, the cost of future illegal transactions has also been increased.
Reason behind availability of high denominations:
- Indians have grown increasingly dependent on high-value currency. First, the recent inflation has meant that higher value notes are needed for daily transactions.
Second, the growth of the black economy has increased demand for Rs 500 and Rs1,000 notes.
Impact on black money:
- The value of currency notes circulating in India is Rs.16.41 trillion, or about $240 billion. Let us assume that a quarter of this is being used to store illegal wealth—or around $60 billion. Most experts would agree that the size of the Indian underground economy is far bigger than that, though these are just guesstimates.
- The point is that the withdrawal of the old notes deals with only one part of the bigger problem of black money. But that does not reduce the importance of the decision.
- The Modi government has clearly signalled its intention to move against illegal wealth. The currency swap deals with the stock of black money held by tax evaders.
- The challenge now is to ensure that the creation of new black money is minimized. There is no magic wand to solve what is a deep problem in India, but a committed government plus tax reforms such as the new goods and services tax (GST)—which creates incentives for producers to seek bills from their input providers—will be part of the solution.
Features of new currency:
- If security features of the present notes are weak and there is rampant counterfeiting, there is a need to replace these with new notes that have better security features.
- Currency notes with better security features are certainly welcome, though it is not obvious that such a sudden move would make a big difference to this objective. It could have been done slowly with banks not giving out old notes until the last hour.
The objective of curbing black money.
- Black money is money that has not been declared as income to the income tax authorities. It is not necessarily obtained from crime or corruption. It may be acquired by not showing the output of a factory and not paying excise on it.
- All black income is not held in cash. For instance, it may be in foreign bank accounts. Similarly, all cash is not black income. Legitimate businesses deal with large amounts of cash. Petrol pumps, white goods dealers, textile merchants and jewelers often have large cash holdings by the end of the day with many consumers paying in cash.
- But the ban will certainly hit those who are holding black money in cash. Corrupt bureaucrats, politicians and many more with piles of cash must be wondering how to handle the situation and how long to wait before they try to solve it.
- Since the present high denomination notes are going to be replaced by new notes, it is not that cash will no longer be used for corruption and storing black money — though it is likely that dollars, gold or diamonds could become more popular for such illegal purposes due to the fear of such a ban recurring.
Extra issues need to be addressed:
- First, the Indian central bank should now reconsider the extent as well as the composition of its currency printing. Tight control over the issue of cash could push citizens to transact either through the traditional banking system or newer forms of digital payments. The National Payments Corporation of India’s Unified Payments Interface—which is still facing some teething troubles—could have a profoundly important role in this context.
- Most of the increase in cash in recent years comes from notes with high denominations. RBI should now consider switching the composition of currency towards Rs100 notes rather than Rs500, Rs1,000 and the new Rs2,000 ones.
- In other words, a majority of the value of cash in the Indian economy should be accounted for by Rs100 notes, backed by a greater use of mobile payments to avoid unnecessarily bulky wallets.
- This view discounts the possibility that the rapid transformation of the Indian economy has changed the political dynamics. Is the ruling party now reflecting the interests of the national middle class and the rising neo-middle class that is harried by widespread corruption?
- It is widely accepted that Modi has strangled corruption at the highest levels of government. The currency swap should hurt those who have been involved in retail corruption. Other policy initiatives such as the move to GST should also bring more producers into the indirect tax net.
- Some see this move as a way of pushing the country forward towards a cashless economy. There are two problems with this perspective. First, it is not that high denomination currency notes will go away.
- Second, the cashless ecosystem is not ready to support a whole range of new users; this push is premature. Those who move from the denotification of the Rs 500/1,000 notes will not take to electronic payments. Their quest could instead take them to new notes, gold, US dollars and the bitcoin.