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Modi’s Demonetization Strike Carries Real Weight

Modi’s Demonetization Strike Carries Real Weight

By Andrew Teodorescu

On Nov. 8, Indian Prime Minister Narenda Modi announced that Indian banks would no longer accept 500 and 1,000 rupee banknotes. The move was a controversial one, and its intention was to serve as a quick strike against corruption and black money, or money that is illegally held. Indians have until Nov. 24 to either exchange their 500 and 1,000 rupee banknotes for other denominations of currency or to deposit the money into banks. However, since Modi also imposed a modest limit on the amount of money that can be exchanged per day, black money hoarders with significant amounts of money are not able to exchange all of their demonetized banknotes.

India currently faces a situation in which hundreds of billions of dollars of black money is unaccounted for by the nation’s financial system. Money unaccounted for causes distinct problems for the Indian government, which misses out on collecting billions of dollars in taxes from such hoarders. By removing the banknotes that comprise 86 percent of the value of Indian currency currently in circulation, Modi’s anti-corruption strike is guaranteed success. While causing financial havoc for the many citizens who pay taxes legitimately, Modi’s timely move was necessary for the start of a new, financially-accountable India.  

Earlier this year, Modi advanced the Income Declaration Scheme (IDS), a program in which Indian citizens who have not paid full taxes in previous years were given four months to declare their unaccounted income and assets without criminal penalty. After the completion of the declaration window on Sept. 30, the IDS was generally viewed as an important success for the Indian economy, with “nearly $10 billion (US) … declared under the scheme.” The IDS undoubtedly was crucial in bringing forth new taxpayers to the Indian financial system, but it did not bring with it the strong implications and the simple genius that Modi’s scrapping of 500 and 1,000 rupee banknotes does. The two moves, however, are surely complimentary. Indian black money hoarders who did not account for their black money in the IDS period were sufficiently warned of Modi’s foreshadowed demonetization.

The purpose of making the vast majority of Indian black money useless is not just a scheme to disenfranchise hoarders; it reaches much farther than that. In developing countries, like India, the amount of tax money collected affects the speed of the development of the country. In India, tax money is used in large part to reduce the disparities of wealth inequality, to pay for social welfare, to develop new infrastructure, and to control inflation. When Indian black money hoarders do not account for their income and assets in their tax returns, or do not pay taxes at all, they are directly limiting the efficacy of their government.

The economy that a nation with massive black money hoarding activity ultimate gravitates towards is one in which select private institutions thrive while public institutions fail disastrously. With the majority of Indians living on relatively low incomes, the use of private institutions—sending their children to private schools and being treated in private hospitals—is out of the question. As such, Indian citizens who do not disclose their true earnings and assets in order to evade taxes are doing a disservice to their fellow citizens by forcing them to use public institutions that are underfunded and over-capacity.

Black money hoarding does not only introduce unhealthy imbalances to private and public markets, it also “directs money to wasteful consumption rather than investment.” Without a government that strikes down on black money hoarding, people view cash hoarding as a somewhat safe and constant store of value. However, cash investment is rare, and almost legally impossible when that cash is black money, black money is often used for lavish purchases that contribute little to a country’s long-term growth.

While many of those well-versed with financial system and its many faults are prizing Modi’s demonetization as genius, many others criticize the move for wreaking havoc on the general Indian population. Citizens who pay full taxes are currently being forced to deposit or exchange all of their 500 and 1,000 rupee banknotes while banks are currently being overworked to the brim. Modi’s critics say that the demonetization was too swift and too damaging for tax-paying citizens.

However, the move was absolutely necessary in every respect. Tax-paying citizens are being inconvenienced by the move, and a general anxiety exists among all citizens to deposit and exchange all their demonetized banknotes, but no tax-paying citizen should be hoarding any absurd sum of money that is not able to be exchanged or deposited before the Nov. 24 deadline. The unexpectedness of Modi’s demonetization and its abruptness is exactly what is currently needed in India; it shows that a government leader is unwilling to concede to the corruption that has plagued India for decades.

India’s financial future is uncertain, and Modi’s demonetization measure surely has not removed all black money from the hands of hoarders. However, if the Indian government continues to follow Modi’s no-nonsense trend in dealing with corruption, legitimate tax inclusion for the vast majority of Indians is within view.

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