Amid the brouhaha and sheer panic that greeted the government's shock decision to outlaw the Rs 500 and 1,000 currency notes from midnight on Wednesday, it is easy to lose sight of the meticulous planning that went behind the move. Much as it would seem that PM Narendra Modi woke up on Tuesday morning and decided to play teen patti with the Indian financial system, the fact is that withdrawal of the notes is just one part of a concerted, calibrated and intensive war against black money and corruption.
It is pertinent to remember, before I delve into the spokes of the wheel, that Modi's 2014 mandate was based on his promise to bust the shadow economy of black money that forms nearly 25 percent of India's GDP. When a war is to be launched against such a well-oiled, entrenched system that has been working seamlessly for decades, the modalities of the battle must be chalked out in great detail and implemented gradually because the size of Indian economy and a population of 1.25 billion prevent any easy, instantaneous solution.
Consider the mayhem and alarm that the withdrawal of higher denomination notes has generated even though the inconvenience is short-term and the negative effect will ultimately make way for a stronger economy. The decommissioning was neither sudden nor ill-thought out. It cannot be, because given the magnitude of our economy any such sweeping scheme will fail unless backed by a massive upscaling of logistics.
It wasn't surprising to note, therefore, that apart from Union Finance Minister Arun Jaitley, a couple of other senior officials from his ministry and the top guys in RBI were kept in the loop throughout and the central bank had been printing Rs 50 and Rs 100 currency notes for the last six months. As The Times of India points out, "the six months were used not just to print enough Rs 50 and Rs 100 currency notes, but also to plan the operations meticulously." The report also details how RBI calibrated its steps. The apex bank's board "met around 6 pm and recommended the withdrawal. Soon the government, which was ready with the notification, moved the Cabinet which met at 6.30 pm on Tuesday."
And despite this meticulous synchronisation of effort, we expected and witnessed long queues and massive chaos on Wednesday, which is understandable given the multiple layers of bureaucratic and administrative machinery through which the government interacts with the public and the lack of trust these arms suffer from.
The point I'm trying to make is that for any step against black money to succeed, the moves needed to be swift, yet meticulously planned over a period of time and well executed. In light of this statement, let us now see what the Modi government has been doing since assuming power in 2014.
One of the first steps that the Prime Minister did was to bring as many people into the banking network as possible through a financial inclusion plan. His Jan Dhan scheme, under which 22-crore new bank accounts were opened in one-and-a-half years (May 2016), was the first truly game-changing move. Why? Because most of these accounts brought those people into the network who were outside the ambit. As the poor in hamlets or the dispossessed in cities got access to banking services, they not only became able to receive subsidies directly into their bank accounts but also used the power to avail of loan facilities, insurance and even make deposits.
How does this aid Modi's larger war against corruption and black money? When the middlemen are taken out of the equation and those on the fringes are financially empowered, corruption automatically comes down.
As a Livemint report points out, "routing subsidies and welfare payments through the Jan Dhan scheme has helped plug leakages in subsidy transfer. According to the Economic Survey for 2015-16 released in February this year, leakages in LPG subsidy transfers fell 24 percent and the exclusion of beneficiaries had been greatly reduced, thanks to the infrastructure created by Jan Dhan accounts, Aadhaar and mobile networks, or the JAM trinity."
Financial inclusion of the poor through JAM trinity was the first move. The next step was to bring back black money stashed away in tax havens or foreign banks abroad and here, despite running into a thousand legal and tax treaty hurdles, the government still managed to unearth the highest number of undisclosed income from foreign assets abroad than at any point in time.
Quoting from an I-T assessment report, The Times of India detailed how an unprecedented Rs 13,000 crore was recovered from offshore accounts. "In at least 400 cases of Indians with deposits in HSBC, Geneva, the I-T authorities unearthed undisclosed income of Rs 8,186 crore and raised a tax demand of about Rs 5,377 crore against such account-holders till 31 March, 2016," said the report.
Then came the Income Declaration Scheme. By 30 September, all illegal asset holders had the chance to declare their holdings and pay 45 percent tax and a penalty in exchange for anonymity and immunity from criminal proceedings. At the Narendra Modi government's black money declaration scheme, reported Firstpost, the tax department has reported Rs 65,250 crore worth of black money from 64,275 declarations. This means about Rs 30,000 crore will flow into the government’s tax kitty.
The crackdown on high denomination notes, therefore, forms just a part of the larger war against black money and corruption. The Modi government should receive credit for mounting a sustained challenge to the parallel economy.