Question

War on black money in india in 150 words

Answer 1

Explanation:

On November 8 Prime Minister Narendra Modi delivered a surprise reform to the nation: the government declared that the high-denomination 500 and 1000 rupee notes, which constituted more than 85% of currency outstanding in value, would be invalid as legal tender and could only be deposited into bank accounts until the end of the year.

This is a courageous and substantive economic reform that, despite the significant transition costs, has the potential to generate large future benefits.

India is largely a cash-driven economy, though a rapidly growing percentage of the population is becoming tech savvy. A shadow economy reliant on cash transactions and evading taxes, especially on high value transactions such as real estate purchases, gold, and intrinsically illegal activity, has taken deep and highly persistent root. Counterfeiting of Indian rupee notes and their subsequent use in funding of terrorist activities has also been an important concern.

While the pernicious effects of a large black economy and tax avoidance have been well recognised, no tangible policy action has been taken until now. Modi’s radical move to invalidate the high denomination notes, in which the black economy primarily transacts, is a daring step.

Economically and politically powerful constituencies with considerable stake in the shadow economy have been upended. Undertaking this reform has required the political courage to impose predictable transition costs on the economy to lay the foundation for sustained future benefits – the converse of what one normally expects from one’s politicians.

Some economists have advanced a criticism that this initiative is an abrogation of contract and trust in the currency. This is incorrect, as the policy allows for the exchange of old notes for new notes. Although the process is inconvenient, and subjects many households to hardships, it forces the cash from the black economy to be deposited into the banking system, potentially increasing transparency and expanding the tax base and revenues to the government from taxes and surcharges.