November 2016 will harbor memories of one of the most heated and debated US presidential elections. While America was enduring election related protests and debates, one of her close allies situated several thousand miles across the oceans, was going through a transformation seldom evident in the developed world.
“To break the grip of corruption and black money, we have decided that the 500 and 1,000 currency notes presently in use will no longer be legal tender from midnight tonight, that is Nov. 8 2016,” Indian Prime Minister Narendra Modi sharply remarked.
Such motives behind this sudden decision, which many have coined as a rash action lacking substantive planning, is is intertwined with India’s relation with black money. In a relatively recent statement, India’s Central Bureau of Investigation claimed that denizens of the country possess US $500 billion of illegal funds in foreign tax havens.
Politicians and other government officials illicitly acquired bribes from foreign companies, which were consequently invested in tax havens. Corporations frequently practice transfer pricing manipulations.
Subsidiary companies, operating under the supervision of a parent company, fiddle with the price of imports as evidence of low profits and reap the benefits of low taxes. Such illicit means to avoid taxes have pervaded the country for decades. PM Modi decided to turn the tables.
By negating the value of the Rs 500 and 1,000, PM Modi hoped that possessors of counterfeit currency would voluntarily succumb to the newly imposed mandate by failing to provide any legitimate justification for the ownership of their monetary assets. As it turned out, however, counterfeit currency only comprised 0.0007 % of the total money taken in.
PM Modi and his government were left in utter dismay, as black money possessors, within hours of the implementation of demonetization, astutely resorted to money laundering networks. Counterfeit money was sold to brokers, who then forced Indians of lesser financial status to battle through infinitely long lines to deposit or exchange them at banks.
Others undertook more desperate measures as they dumped and burnt their illicit cash in the pursuit of avoiding a confrontation with tax authorities. But the fact of the matter remains unchallenged. The burden of demonetization was inadvertently directed towards the lower income category.
Some categorize it as a promising idea without substantive planning. Others consider it as an unnecessary measure taken by the government to further disrupt the political scenario of India.
PM Modi definitely fought hard to provide a much anticipated answer to India’s black money dilemma. Time will tell whether he is deterred or motivated to pursue yet another plan to eradicate this issue for the betterment of Indian society.