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Modi has by fiat made hoards of cash valueless

The master stroke that Narendra Modi struck on the night of the American elections is that, by fiat, he made hoards of cash valueless.

Written by Meghnad Desai | Updated: November 13, 2016 9:11 am
demonetisation, notes demonetised, Maharashtra trader, maha trader madhya pradesh checkpoint, MP, madhya pradesh, 4 crores, Rs 4 crores, money siezed, black money siezed, black money held, india news, indian express Money is a means of payment. It can also be a store of value, but its value declines with time since it earns zero interest rate if hoarded; inflation erodes it further.

Radical means going to the roots. The black money problem has been troubling India since before Independence, when excess war-time profits were hoarded by a few in cash mountains. In a largely poor society, cash payments are the norm. The thin veneer of modern tax laws and revenue services further encouraged hoarding of cash. Socialists of all parties, whose economics is theoretical rather than practical, compounded the problem by introducing punitive rates of taxation, making hoarding more profitable.

The Indian economy has, as a result, become enmeshed in the black economy. Not all kala dhan is the same. Sending money abroad illegally to a foreign bank is criminal, but does not affect the daily running of the Indian economy. Routine income tax evasion is also small beer. The problem is with hoards of cash acquired in a variety of businesses. It is this money which not only circulates in clandestine activities — drugs, prostitution, gambling — but also enters legitimate sectors such as real estate, jewellery and luxury consumption. This sort of black cash has become not just a part of the economy but a dynamic part at that. Electoral politics has also been shaped by these hoards of money.

Money is a means of payment. It can also be a store of value, but its value declines with time since it earns zero interest rate if hoarded; inflation erodes it further. The advantage is of the tax evaded and the chance to invest in other ‘black’ activities. Yet money is just a piece of paper. Unlike gold, it has no intrinsic value. Its value depends on its legal acceptability.

The master stroke that Narendra Modi struck on the night of the American elections is that, by fiat, he made hoards of cash valueless. The government had tried amnesty and it yielded Rs 66,000 crore. The money abroad is being brought back. But the cancer is money at home. By demonetising the old currency, the value of those vast hoards of cash has been wiped out. It is the biggest redistributive policy move of the past 70 years. We will never know the full extent of the impoverishment of the cash hoarders, unless opposition parties march in support of the new poor! But we will see its impact on the slowdown in luxury consumption, jewellery and real estate sectors, where this money was being openly converted into real wealth.

The trouble is that black cash looks just like white cash. In striking at the big hoarders, surprise is of the essence. The sudden demonetising of the old currency and changing over to new currency causes teething problems. But these will last no more than a week or two. There will be hardship to some, but then as Lenin said, “You can’t make a revolution without breaking heads….”

In this revolution, there is no need to break heads, but important not to lose them. What is of essence is to stop the regeneration of the same cycle of black money accumulation. The answer lies in what has been done. The hoarders now know that any time the government wishes, it can demonetise the hoards of currency. This threat must be kept alive, making hoarding not just illegal but unprofitable.

Modi has shown that he is a risk taker where it matters.

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    Prashant
    Nov 13, 2016 at 6:11 am
    It's all about which is better,,,nd not abt who is perfect,,,,,I thnk instead of giving my vote to so called "mahagathbandhan of SP bsp rjd jdu ncp congres dmk" in 2019,,,,,I will prefer to die
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    1. zizek
      Nov 13, 2016 at 2:50 am
      Someone please just forward this article to Pee chew-dumb-maran. That chamcha should get it to his head.
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        Ataur Rahman
        Nov 13, 2016 at 3:35 am
        Unless this demonetisation drive benefits the common man, it will be considered as a political gimmick to divert attention of general public from dreaming about 'ache din'. Also it will be considered as political decision to help BJP in UP election.
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          Raj
          Nov 13, 2016 at 5:44 am
          I mean how do you address inconvenience of this bank note thing? By having a bank account.
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            Raj
            Nov 13, 2016 at 5:43 am
            India should change currency every 3 years, ask for old notes and provide new ones. De recognize older notes every 3-5 years, this will eliminate black money, ensure bank accounts for all and tackle criminal money simultaneously. Not to mention, stanis will basically give up - by the time they learn to copy one denomination, another changes... ideal scenario, change notes every 3-5 years. Dedicate a completely new bureaucracy for this purpose.
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