Demonetization of High Value Currency Notes – Short Term Pain but Long Term Gain


This article was written by Avni Sharma, a student of GGSIP University, New Delhi.

In a welcome move, the Prime Minister has rightly decided for ₹500 and ₹1000 currency notes of the Mahatma Gandhi Series issued by the RBI to cease to be legal tender from November 9, 2016. Indian accountancy profession supports this decision for it will go a long way in rooting out and nullifying black money hoarded in cash, corruption, terror financing and fake currency. Despite some temporary hiccups in the very short term, the move will provide a big boost to national economy and discourage parallel economy. Our PM said this was being done to tackle the menace of black money in the country, which has sapped the economy. The Indian Accountancy profession agrees with the the PM when he said in his address to the nation to the nation that “We are among the fastest-growing economies, but we also rank high in global corruption rankings… Black money and corruption has taken roots in the country, these are the obstacles in eradicating poverty. India’s common citizens live their life honestly. But black money, make the nation hollow from inside”.

Short term pain

It is a fact that large-scale cash-based economy runs parallel to formal economy in India. Despite some initial short term disruptions, Indian national economy is set to reap to long-term gains in view of demonetization of high value currency. Assuming that a significant amount of a black money held as cash will come into the banking system to be replaced, government has an opportunity to utilize the resultant trail to boost its tax collections in the longer run. The impact of the move could lead to lower interest rates. Once the size of the economy shrinks, the tax base will automatically widen. This will allow government to reduce rates and boost consumption.

Temporary Downside: some economists, however, pointed out to some short-term risks. If money supply declines temporarily because of the demonetization, then assuming no immediate change in velocity and circulation, we would either see some deflationary tendencies or lowering of real demand. The demonetization could rewrite some macro parameters.

Finance Minister Arun Jaitley has said the demonetization of high value currency notes will change social culture – in how people keep and spend money and boost the economy, although it may cause some inconvenience in the immediate term. “This is a big reform as it expands the GDP and makes it cleaner. It pushes revenues, pushes money into banking systems… the parallel economy has been running and impacting the economy. Tax non- compliance was a key impact… This is an effective way to make this country cashless. It does not nudge the economy but pushes the economy in that direction… Tax collections would increase, deposits will increase in banks and their capacity to support the economy will increase”, he added.

A Big Blow To Counterfeit Currency

As per a study, the demonetisation of high value currency will be a big blow to this fake currency racket, which was largely used to fund terror and related activities in India.

Government Keeping an Eye

The old currency notes of ₹500 and ₹1000 denominations can be deposited in one’s bank or post office accounts.

The Finance Minister recently said that “the honest person has the satisfaction to be honest and the not so honest should worry”, adding the government was monitoring transactions to ensure that there is no laundering of demonetised notes. “The Government iskeeping an eye on conversions. The revenue department is also keeping a watch. Those who indulge in this trade run a high risk,” he warned adding that “It should be clear that this is no immunity scheme. This does not provide any relief from taxation. The law of the land will apply (on source of funds)

… If the money is legitimate which had been previously withdrawn from banks or earned legally and saved and had been disclosed, there is nothing to worry about,” he said.

Measures to curb black money likely

It seems that government has concrete action plan to bring in control the parallel economy. It is worth noting that the SC-appointed Special Investigation Team had recently recommended that curbs be imposed on cash deposits of over ₹3 lakh. The limit is aimed to ensure that transactions are made using credit or debit cards, cheques or drafts which can be tracked.

In the past too, the government has taken several measures as part of its drive against black money. The measures include setting up a Special Investigation Team (SIT) and accepting some of its recommendations, Black money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, Income Declaration Scheme 2016, Benami Transactions (Prohibition) Act 1988, imposition on excise duty on gold, amending the Double Taxation Avoidance Agreement between India and Mauritius and India and Cyprus; reaching an understanding with Switzerland for getting information on Bank accounts held by Indians with HSBC. The upcoming GST regime is also set to become a major hindrance to generation of money in view of better transaction trails offered by it.

Scenario of the courts

A Delhi HC bench on 25 November dismissed a plea filed by a businessman seeking direction to the Centre to remove the cap on daily withdrawal of cash. “Even assuming that the restriction so imposed on cash withdrawal from a bank account has resulted in some inconvenience or prejudice to the petitioner, we are unable to hold that the same runs contrary to Section 5(b) of the Banking Regulation Act,” the court said in its order.The two-judge bench comprising chief justice G. Rohini and justice V. Kameswar Rao also noted that as there was no restriction on non-cash method of accessing a person’s bank account, like “cheques, demand drafts, credit or debit cards, mobile wallets and electronic fund transfer mechanisms”, there was no infringement of the right of the petitioner to withdraw from his bank account on demand.The high court did not deal with the issue of validity of the 8 November notification on demonetisation of Rs500 and Rs1,000 notes. The Supreme Court is considering that issue.

The Delhi High Court fixed December 8 for hearing the plea against demonetisation which questioned the government allowing certain public utilities including hospitals and petrol pumps to use the old notes.A bench of Chief Justice G Rohini and Justice VK Rao said that it will take up the matter in December as the Supreme Court is seized with the petition of Centre seeking a stay on proceedings before various high courts.

A slew of petitions against demonetisation of Rs. 1,000 and Rs. 500 notes have been filed in various courts including in the Supreme Court where the Centre on Thursday filed a caveat that it be heard before any order is passed.

The top court indicated that it may hear on November 15 the plea challenging the government decision while a PIL in this regard was dismissed by the Madras High Court.

The Madurai Bench of the High Court while dismissing the PIL seeking scrapping the ban of the high denomination currency on the ground it cannot interfere in policies related to monetary system observed that the government decision is fit for the country’s security and development.

A vacation bench of the Bombay High Court refused to entertain the petition on demonetisation, saying the petitioners should move a regular bench after November 15 as it involved questions of law.

The Centre filed a caveat in the apex court registry, saying that it be heard if the court entertains and passes some directions on petitions against demonetisation.

“Let it be listed on Tuesday if the petition gets numbered by the registry,” a three-judge top court bench headed by Justice A R Dave said when a lawyer today sought urgent hearing of his plea on the ground that demonetisation is causing a lot of problem to the common citizens.The plea was mentioned by advocate Sangam Lal Pandey who has filed a PIL. The PIL has also sought a direction to the Centre that sufficient time be given to the citizens for exchanging the demonetised currency notes.

Besides this petition, another plea was filed in the apex court seeking quashing of the decision to demonetise Rs. 1,000 and Rs. 500 currency notes, contending it infringed on citizens’ right to life and to trade, among others.

The PIL filed by Delhi-based lawyer Vivek Narayan Sharma, which could be listed for hearing during the week, has termed the notification of DEA as “dictatorial”, claiming it did not grant reasonable time to citizens for exchanging the specified bank notes to legitimate notes.

The Madras High Court while dismissing another PIL observed that big currency notes were used to fund terror activities and that black money was harming the economy of the country.

The action of the government is fit for the country’s security and development, it said.

Though the government’s action caused some inconvenience to people, it had been taken for the welfare of the country and was being implemented with the cooperation of various sections of people, the bench said.

The court rejected the PIL by petitioner M. Seeni Ahamed, state General Secretary of the Indian National league, on the ground that it cannot interfere in the policies of the government related to monetary system.

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