Demonetisation: A historic decision with far-reaching approach to curb Black Money and Corruption

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Demonetisation: A historic decision with far-reaching approach to curb Black Money and Corruption

Padmapani Bora | December 08, 2017 20:57 hrs

“India remains the fastest growing economy in the world - economic fundamentals are strong, and reform momentum continues”-The World Bank’s Report dated 29th May, 2017.

It was perhaps the boldest decision taken by any government in the 21st century India to announce transformational demonetisation of 500 and 1000 rupees notes circulated in the market on November 8, 2016. The decision was mainly taken to curb black money and corruption, to make fake currencies ineffective and to destabilise terror-funding. To quote Hon’ble Prime Minister, Sh. Narendra Modi while announcing demonetisation,  “To break the grip of corruption and black money, we have decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016. This means that these notes will not be acceptable for transactions from midnight onwards. The five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. The rights and the interests of honest, hard-working people will be fully protected”.

As we know that black money is that part of income on which taxes are not paid. The increasing amount of black money has been able to establish a parallel economy which serves its own interest in contradiction to the national interest of the country. It is a serious threat to the growth and stability of the economy. It is also the contributor of economic and social inequalities in the society. The root sources of black money are mainly concealment of income from tax and corruption in the public system. India is rapidly increasing in terms of growth but we are ranked 76 in Global Corruption Perception ranking by the Transparency International.

The demonetisation has brought back around 95% of the cash in circulation in the market. It has greatly increased the number of persons using active bank accounts. This information will be useful in identifying the number of people having high value transactions. Those who have deposited unaccounted money in banks are liable to pay additional tax and are under the scanner of the government. Post-demonetisation has witnessed substantial amount of revenue growth with greater tax compliance. Deposits in banks will boost GDP growth and help in cut in lending rates of loan by banks and other financial institutions. Due to the collection of additional taxes fiscal deficit will certainly come down and formalisation of the economy will result in greater financial inclusion. The crackdown on black money will also prevent people from parking their unaccounted income in physical assets such as real estate and will bring down real-estate pricing to help genuine buyers. 

Economist Arvind Virmani reportedly said that demonetisation is a useful method of flushing out black money, given that a large percentage of cash holding is in these two denominations. The manner in which it was implemented is not surprising - such actions are always secret till announced, so that insiders do not take advantage of the information at the cost of the outsiders.

Studies say the demonetisation has paralysed the terror funding through hawala channels in Kashmir, North-East and naxal affected areas of the country to a great extent. It has also made ineffective Pakistan’s strategy to destabilise Indian economy by circulating counterfeited currencies as old high denomination notes became useless.


The World Bank has rightly said in its May, 2017 report that in the long-term, demonetization has the potential to accelerate the formalization of the economy, leading to higher tax collections, and greater digital financial inclusion provided measures such as increased use of property taxes is taken in the areas of tax policy and administration, and share of the population with access to the internet and digital means of payments are increased.

The government has launched “Operation Clean Money”, an e-platform to analyse large cash deposits soon after the announcement of demonetisation. The basic aim of this mission is identification of cases with large cash deposits/purchases during the period and to bring such cases to the tax net by detecting black money generation. The drive of “Operation Clean Money” aims at reducing the compliance cost for the taxpayers while optimising the resources of the revenue department. Such initiative will certainly help in eliminating black money and widen the tax base in the country.
The advantages of demonetisation are far reaching and they are in the long term interest of the country. The positive impacts of the demonetisation are quite visible and for India to emerge as global economic super power in near future such impacts and advantages will work as a drive engine. Finally, to achieve such status, every true Indian needs to take the following oath that.

“I’ll file my Income Tax Return on time, 
I’ll show correct income in my Income Tax Return,
I’ll pay all due taxes on time.”

(The views of the author are personal and not in any way represent the government) 

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