Unearthing black

The decision of the Reserve Bank of India to withdraw from circulation all currency notes of pre-2005 vintage within a time period will make a dent on the pile of black money in the country and help to minimise circulation of fake currency.

RBI governor Raghuram Rajan has presented it more as a measure to weed out fake currency, as notes issued after 2005 have better security features and are not easy to forge. It is known that counterfeit currency, a lot of which is printed outside the country and smuggled inside, is a serious threat to the  economy. It was estimated some time ago that about Rs 1,70,000 crore of fake currency is circulating in the country. Much of this will be neutralised with the RBI’s decision.

But the major and more beneficial consequence of the decision will be in the unearthing of unaccounted money and bringing it into circulation. It is estimated that the untaxed economy is worth 30 per cent of the GDP, or about Rs 30 lakh crore. A good part of it is held in hard currency or is circulating through illegal channels. Some of it would be in the form of currency notes issued before 2005 as, according to official data, the value of notes printed before that date and are in circulation is over 3.4 lakh crore, which is about a third of all money which is legal tender. If all that is not exchanged for notes printed after 2005  in ways laid down by the RBI  the currency will lose its value.  From April 1 to July 1 they can be exchanged in banks without any questions asked but beyond that  those who present more than 10 notes of Rs 500 or Rs 1,000 will have to furnish their identity.

The RBI’s action stops short of the usual process of demonetisation of currency but in effect amounts to that in some ways. The road map and procedure prescribed for exchange of currency ensures that ordinary people, who do not have unaccounted wealth in cash, will not be inconvenienced. Only those who have big hordes, which are usually in the form of notes of higher denominations, will find it difficult to sanitise them. The government will have to keep a watch if these are channelled into gold or real estate which are the usual havens of black money, during this period. The impact on elections, which are festivals of black money, is anybody’s guess.