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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First Published on: November 13, 2016 1:20 am
  1. P
    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
    Reply
    1. Z
      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.
      Reply
      1. A
        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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        1. R
          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.
          Reply
          1. R
            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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            1. L
              Lalit
              Nov 13, 2016 at 9:10 am
              Well Said.
              Reply
              1. B
                bmniac
                Nov 18, 2016 at 2:13 pm
                Finally a sensible article from Lord Desai
                Reply
                1. B
                  Birbal Verma
                  Nov 14, 2016 at 12:25 pm
                  Respected Prime Minister,lt;br/gt;lt;br/gt;ASK THE JEWELLERS , BULLION MERCHANTS, COMMERCIAL FIRMS AND TRUSTS TO DEPOSIT OLD CURRENCY NOTES IMMEDIATELY lt;br/gt;lt;br/gt;lt;br/gt;There are rumours that despite a ban on Old Currency Notes of Rs. 500 and Rs. 1000, the traders of Gold Jewellery and Bullion are accepting the demonetized currency notes and selling their stocks at the rates of Rs.55,000 or so per ten gram as compared to the actual rate of Rs.30,000.lt;br/gt;lt;br/gt;They are reported to be depositing these notes regularly in bank accounts as if sold earlier than 9th November,2016. Some of them are planning to hold these currency notes to deposit them at a later date in one batch, declaring that they could not do it earlier due to long queues at the Bank branches.lt;br/gt;lt;br/gt;I suggest The Prime Minister of India to direct all the concerned agencies to ask these traders who are holding the Cash of their s Proceeds of before 09 November in the form of old demonetized currency notes to deposit their cash immediately in ONE Batch and no further deposits in this form will be accepted by the banks. The same rules should apply to all commercial firms, companies and Charitable Trusts and Religious Places so as to save manitions of black money through these channels.lt;br/gt;lt;br/gt;However, the general public can continue to take liberty of depositing their personal funds until the declared deadlines of 30-12-2016 and 31-03-2017.lt;br/gt;lt;br/gt;The above steps are necessary for the success of demonetizing in the interest of our great Nation.lt;br/gt;lt;br/gt;Thanks and with my best regards,lt;br/gt;Birbal Verma
                  Reply
                  1. S
                    Subrata Chakraborty
                    Nov 13, 2016 at 4:09 pm
                    The problem is revolution should not like projecting 'Gujrat as a development model' where w.e.f. 1st April,2016 half the potion of Gujrat State covered with Food Security Act uring its poce to provide rice at Rs.3/- per kg and wheat at Rs.2/-per kg. besides movement led by upper cast people of the State demanding reservation for being economically backward.lt;br/gt;He has taken the risk to pave the way for fresh credit to be extended by banks from the new deposits now mobilised at low cost by compelling households and others to deposit all 500/- and 1000/- currencies in Indian banks. Bank will now be in a position to show improved balance sheet with lowered rate of NPA but the risk will rest as usual with all the banks about huge NPAs. Any risk aimed to target one end only without concentrating on the leakages or in entiriety may be a Gujrat like model only. lt;br/gt;Today it is not the question of 'risk' or 'risk taker' , the country needs reshaping and remodelings its functions,delivery system , administration and not to rely on 'bubbles' or 'bluffs' while projecting the country.
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                    1. A
                      A villager
                      Nov 13, 2016 at 5:24 am
                      By Modi haters, by Hindu Haters, By RSS haters, By
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                      1. N
                        Nabarun
                        Nov 13, 2016 at 2:39 am
                        Yes indeed ! He has invited wrath of a section of his core voters in trading community in the process. But the risk is worth taking. Rahul's suit-boot jibe is blunted for ever.
                        Reply
                        1. D
                          dipak
                          Nov 13, 2016 at 8:01 pm
                          No other state is compuarable with gujarat, not bengal at all. do not talk intelligent, lead with example chakramborty.
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                            PKR
                            Nov 13, 2016 at 9:27 am
                            Focus on shaming/punishment of the corrupt ,Modi was forced to take the drastic step because of the greed of the corrupt.
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                            1. I
                              imti
                              Nov 13, 2016 at 3:41 am
                              They should also ensure that politicians and bureaucrats who seek upfront bribe as their enlements for project approvals, including projects that do not get executed or even start-like in Karnataka, would hereafter start asking for their supposed enlements in GOLD. Hope the govt tracks all Gold purchases and s to the last 10 gms.
                              Reply
                              1. J
                                Jay
                                Nov 13, 2016 at 5:11 am
                                Mr. Parth Garg: what 125 crore are you talking about? Which of the extreme poor have Rs.500 and Rs.1,000 rupee notes to spare? They deal in small currency - 5, 10, 20. It would certainly affect the middle cl, but for a short period of time. I've spoken to a number of the lower middle cl and poor in Bangalore and I am yet to hear any criticisms, only praise for "sticking it into those politicians!".
                                Reply
                                1. A
                                  Ananth
                                  Nov 13, 2016 at 1:11 pm
                                  For a change Mr.Desai has got his thoughts right on lines and has summed up the demonetisation action, its aftermath, the possible effects of it in near future and in long run quite clear. A good article.
                                  Reply
                                  1. K
                                    Kalayata Maha
                                    Nov 13, 2016 at 4:14 am
                                    How uninformed! 3 :(
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                                      Mahender Goriganti
                                      Nov 14, 2016 at 9:12 am
                                      Distracting article. The aim was to eliminate big fish black money, especially the terrorists and their supporters, mafia, Hawala (mostly terror money) and ( collateral effect in fact is ;redistribution of some of that money to poor in desperation a good thing) . True to some extent the so called ordinary honest may be affected (but their money too is not that pious either) as corruption has become a norm. this has nothing to do with socialism or industrialists horiding as big ones don't if do, it is a different mechanism.
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                                        milka singh
                                        Nov 13, 2016 at 8:30 am
                                        going forward, that will is going to be more than impossible. Becuase, anything more than 20K transaction should be via DD, check, CC/debit cards or online payments only. So the person who keeps 10 Lakhs black money, he has can only buy milk and vegetables for some time. After 5 years, again banning currency is come back. so his money will be wasted
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                                          milka singh
                                          Nov 13, 2016 at 8:24 am
                                          that is the idea behind introduction of 2000 Rs currency. 2000 currency will be withdrawn the moment the are found that not all currencies printed are in circulation
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                                            Niladrinath Mohanty
                                            Nov 13, 2016 at 2:34 am
                                            I recommend this article for Mamata Banerjee. It will clear some fundamentals.
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