Scrap the 1000 rupee note

The government of India announced the Income Declaration Scheme (IDS) earlier this year.  The purpose of IDS is to unearth black money in the country. It is an amnesty scheme, and allows people to declare undisclosed income or assets. They will pay 45% tax on the disclosed income, and will not attract any further action. No criminal charges will be brought against them, and their information will be kept strictly confidential. The IDS ends on September 30.

After that deadline, it is possible that a massive crackdown will ensue, since the government has been capturing and collating financial data from various sources. Using that data, the tax authorities will hopefully pursue hoarders of black money. The Prime Minister himself has warned that after the deadline, harsh measures may follow. He also reminded us that one of his first decisions as the PM was to set up a Special Investigation Team to go after undisclosed assets in foreign banks. Attacking the scourge of black money was one of the key promises in the BJP manifesto prior to the national elections.

There are two aspects to black money. One is the existing stock, accumulated from the past. This could be sitting around in the form of cash or other assets like land and gold. The second aspect is the creation of new quantity. The amnesty and disclosure scheme addresses the first aspect, but does not have any impact on new creations in the future. To stop the generation of new black money, we need strict laws, stiff penalties and earnest implementation. Of course, the problem is connected to the larger issue of corruption.

Amnesty schemes like IDS have been offered from time to time, with limited success. That is because the people at whom they are directed are not convinced that they will get complete immunity from further harassment or penal action in the future.  Hence they hesitate to come forward. Amnesty schemes also illustrate a perverse incentive. Honest taxpayers feel cheated, when tax dodgers are offered amnesty.  It is as if law-abiding citizens are witnessing lawbreakers being rewarded.

Ordinary Indians rarely have to use this high value note in their daily affairs.  High denomination notes are used in all sorts of illegal activities – like drug deals, terrorist financing or financial crimes. Criminals prefer cash because it gives them anonymity and leaves no trail.

Tackling the scourge of black money requires a multi-pronged approach. For instance, it is well known that three sectors are particularly prone to usage and creation of black money. These are elections, real estate and education (capitation fees).  Election spending in India is far in excess of official prescribed limits.  All that excess expenditure is illegal, and is made with black money by definition. In real estate transactions, a significant portion of the payment is made in “cash”, hidden from tax authorities, which is black money.  That “cash” component represents owner’s equity, and cannot be financed by banks. Because of this “cash” component that the owner invests in his property, mortgage defaults are relatively rare in India.  The owner cannot afford to lose his property that contains a big part of his “hidden” equity. Hence the owner usually does not default on bank loans.

The prevalence of “cash” in black money dealings gives us a clue to one effective way of dealing with black money.  This is to abolish high value notes. Why not start by withdrawing the 1000-rupee note from circulation?  Ordinary Indians rarely have to use this high value note in their daily affairs.  High denomination notes are used in all sorts of illegal activities – like drug deals, terrorist financing or financial crimes. Criminals prefer cash because it gives them anonymity and leaves no trail. Since the crime involves large payments, the large denomination like thousand rupees is very handy. If that same payment has to be made in say 10 rupee notes, it would be very inconvenient.  Abolishing the large note would not bring inconvenience to more than 95% of Indians who hardly deal in large sums of cash.

As such, we are moving to a less-cash society. Debit and credit cards, digital wallets and mobile payments are proliferating. The recently launched Unified Payments Interface will enable payment directly between any two mobiles, persons or bank accounts. The Jan Dhan Yojana has covered more than 240 million new bank accounts. The Direct Benefit Transfer scheme puts money electronically directly into people’s bank account. Almost all, income tax payments are made online now. All large transactions happen electronically.  As we build our digital economy as part of Digital India, we will have fewer cash transactions.  Hence to fight black money and illicit transactions we need to withdraw high denomination notes.

A new book by Harvard University Professor Kenneth Rogoff called “The Curse of Cash” strongly advocates the removal of the 100 dollar bill from circulation in the US. Ordinary Americans rarely use 100 or even a 50-dollar bill. In fact, almost 90 per cent of the 15 billion high value dollar notes are circulating outside the borders of United States of America. Clearly, a lot of them are simply financing illegal activity or money laundering. The Europeans too are mulling the idea of discontinuing the 500 Euro note.  The fact is that the highest note in USA is 100 dollars and even that is rarely used. The 100 dollar bill represents 0.25% of the US per capita income. By comparison, in India, the 1000-rupee note is 1% of our per capita income. So relatively speaking it is 4 times bigger. So if the 100 dollar note can go, surely the 1000 rupee note too can be retired.

The suggestion to retire high value notes was made by Baba Ramdev, and also strongly advocated by ‘Arthakranti’, a group based in Nashik and Pune. The high value note can be withdrawn gradually over a period of two years so as to cause minimal inconvenience to legitimate users. In any case, during this period we will also see an explosion of digital transactions, making it easier to retire the big note. 

(The writer is a senior economist based in Mumbai)