The Big Story: Back to black

From midnight, November 8, all your Rs 500 and Rs 1,000 notes became just pretty pieces of paper, Prime Minister Narendra Modi announced late on Tuesday evening. It meant that, within hours, notes that accounted for Rs 14 lakh crore or 86% of the value of Indian currency in circulation were to become useless. The move was necessary, Modi explained, to crack down on black money, corruption and terrorism. As the public scrambled to decode what it implied for their daily lives and for the economy, this much was clear: at a time when voices of discontent were threatening to drown out the government, the government had taken firm control of the narrative around itself.

So far as moves to crack down on black money go, pundits have been known to recommend a complete currency swap with a deadline to flush out illegal stocks of cash. Demonetising high value currency notes that account for the bulk of the money floating around, and replacing them with new notes within days, comes close. Indians with these notes will now have to go to the banks, presenting proof of identity. The money will either have to be deposited, bringing it on the record books and making it taxable, or a limited amount could be exchanged. Since the deadline for declaring undisclosed income expired in September, people with large amounts of such notes will have to be circumspect about the amounts deposited and answer tough questions on cash that seems unaccounted for. A vast sea of notes, it is presumed, will simply become mattress stuffing.

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But, apart from causing immediate distress to thousands of workers who are paid their weekly or monthly wages in cash and may have poor access to bank accounts, the move leaves some crucial gaps. First, it does not account for the section of the black economy which does not live in cash stored within the country. This colossal shadow economy is believed to be the size of about 20% of the gross domestic product. Part of this illegal money is parked in offshore accounts and physical assets such as real estate, jewellery or bullion. The official figures are not known, but as of 2011, the legal real estate sector made up 11% of the GDP. Its illegal counterpart could be as large. About 30% of the real estate sector is said to be funded by black money.

The exact amount of money stashed away in offshore accounts is not known either, but between 1947 and 2008, the value of illicit cross-border transfers was said to be $462 billion. The recently leaked Panama Papers revealed that a number of high net worth individuals in India had large sums squirrelled away abroad, taking advantages of legal loopholes outside the country. It is not known whether the government made a concerted effort to trace the sources of this money.

Second, flushing out illegal cash now does not ensure that the same process will not be repeated with the new notes. Though would-be offenders may be scared off for a while, the same combination of illegal transactions, tax evasions and gaps in enforcement could lead to the flowering of the black economy once more. The government needs to plug the systemic and structural flaws that enable it.

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But with this dramatic move, the government has changed the optics around it. The black economy in India is a fabled thing, the dark matter which absorbs the blame for many of our faults and woes. This government came to power promising to vanquish this economy and bring back illegal funds stashed away abroad. In two-and-a-half years, it has seemed anxious to be seen acting against it, setting up a special investigation team, teaming up with foreign governments to crack down on tax avoidance and evasion, enacting legislation such as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and introducing the Benami Transactions (Prohibition) Amendment Bill, 2015. But none of these measures had the visibility of a swift and sudden demonetisation of most of the country's currency.

Within hours of Modi's announcement, social media was lauding his "surgical strikes" on black money. By twinning the threat of black money with that other bugbear, terrorism, Modi created a perfect storm. The move follows a week where public discourse was dominated by discussion of whether India was seeing an unannounced Emergency, when a large constituency of discontent had opened up after the government tried to ban two news channels for a day on November 9. In the last few months, the government has had to battle charges of being anti-poor, anti-Dalit and anti-minorities, even as its old promises of economic growth and clean governance faded. But now, it has turned the conversation back to black money, with public discourse trying to keep up with the implications of a move that is generally acknowledged as bold and decisive. Well played.

The Big Scroll: Scroll.in on the day's big story

  • Rohan Venkataramakrishnan breaks down why Modi is taking away your Rs 1,000 and Rs 500 notes.
  • Scroll staff tells you what to do with the notes.
  • Priyanka Vora talks to people lining up at ATMs to stock up for the days ahead.

Political pickings

  1. Will it be President Hillary Clinton or President Donald Trump? The United States decides today.
  2. The Centre has decided to extend the Armed Forces (Special Powers) Act to three districts of Arunachal Pradesh to check Naga militant factions.
  3. A day after the NDTV ban was put on hold, the Centre indicates it wants to recast the inter-ministerial committee which reviewed violations in the broadcast media.
  4. In Kashmir, the separatist Hurriyat leadership met stakeholders from various walks of life, after which it said "it had been given the mandate to continue the ongoing movement for freedom". 

Punditry

  1. In the Indian Express, Sowmya Dechamma questions the government stand on the caste of the Dalit scholar, Rohith Vemula, whose death triggered protests across campuses.
  2. In the Hindu, Chandan Gowda on the politics of Tipu Sultan.
  3. In the Economic Times, Swaminathan S Anklesaria Aiyar on the obstacles to implementing the goods and services tax.

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