Currency Compression : An economic riposte to Black money

Currency compression as a way to impact the parallel economy?

The Mafia had taken control. Most transactions in the USA was in cash with 500, 1000, 5000, 10000 and even one lakh dollar notes. Black economy was thriving as the easy cash transaction was untraceable. In 1969, President Richard Nixon, in one bold stroke, withdrew all notes above $100. Life became tough for the Mafia and the corrupt. That was the turning point in the black economy of the USA. Coupled with the rise of plastic money in terms of credit cards and debit cards and extensive use of the banking system, black money started reducing from the USA economy.

Now, let us look at the Indian milieu

  • While the per capita income of US, UK and Japan is 40000$, 20000£ and 40,00,000¥, their highest currency denominator is 100$, 50£ and 10,000¥ respectively. That means that their ratio of per capita income to highest denominator currency is 400.
  • The per capita income of India is Rs 33000, while its highest denominator is Rs 1000, leading to a ratio of per capita income to highest currency denominator of 33.
  • 23% of the total currency in India is in Rs 100 notes, 44% in Rs 500 notes and 24% in Rs 1000 notes, thus 91% of the currency in circulation is in notes of Rs 100 or more.
  • 70% of the population of India spend less than Rs 20 per day.

Let us join the dots now, and look at some of the startling impact of the above reality on corruption and black money.

The ratio of the highest denominator to the per capita is abysmally low. Thus the Indian economy has a disproportional amount of higher denomination notes, more than 15 times of other developed economies. This anomaly is evident in our everyday life, as everyone’s wallets are bursting with rustling 100, 500 and 1000 Rupee notes. This easy access to high denomination leads to ease of untraceable cash transaction. The high denomination notes allows for ease of usage and storage, thus management of black money is simple and prevalent.

Most of the black money is used in land deals, property purchase, gold purchase and corruption. It is common knowledge that in a MP election, while the official spending is Rs 25 lakhs per candidate, no serious candidate spends anything less than Rs 10 crores. The money spent above the official limit will necessarily in high currency notes utilized to purchase votes. Therefore ease of cash transaction through high denominator notes is the fountainhead of the deteriorating political governance system. The acquisition and usage of corruption money by candidate leads to the complete incestual relationship between politicians, bureaucrats, media, contractors and thugs.

Thousands of crores of fake currency notes of Rs 500 and Rs 1000 denomination is coming into India from across the border every year. This inflow is perverting the economy and the internal security of India. It is the source of funding for almost all the anti-national activities in India. Each of this note takes around Rs 39 to produce.

Over 80% of the population is outside the formal economy, with very few having access to the banking system. The poor, due to variety of reasons including the hierarchical caste system, the lack of education and the receipts of their wages through cash – is kept out of the banking system. Thus they have no credibility in the economy – no bank or government scheme would find them credit worthy. Therefore in times of medical emergencies, crop failure, family functions and other eventualities, they have no option but to turn to the unregulated and exploitative informal sector like moneylender, chit funds etc.

Therefore, should we think about Arthakranti’s proposal for curbing the high denomination notes? Is there a necessity of using a mixture of incentive and disincentive mechanism to drive the large population towards using of the formal banking system?

Note: This article was published in Economic Times : 28-March-2011.

Mayank Gandhi

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