Demonetization of the currencies will curb the fake currency and cripple terror financing.
According to a Delhi-based think tank, the decision of the government to demonetize the currency notes of Rs. 500 and Rs. 1000 will yield more than 20 billion dollars of black money to enter the formal banking system.
A press release of Imageindia Institute says, in addition to illegal cash getting into the formal banking system, the demonetization will also destroy illegitimate cash worth 50 billion dollars.
The immediate move of the government to demonetize two widely used currencies came just days after the deadline to file income tax through the voluntary Income Disclosure Scheme (IDS) ended on September 30.
According to the Washington Post, $19 billion was collected using the IDS and another $20 billion will be added into the formal banking system of India by December 31st, which is the deadline for de-monetized notes to be exchanged by the banks.
According to Reserve Bank of India (RBI), the total value of the outstanding currency in circulation in the Indian economy as on October 28 stood at Rs 17.77 lakh crore, or about USD 265 billion.
RBI data also shows that as on March 31, 2016, currency notes of Rs. 500 and Rs. 1000 comprised 86% of the total currency value in circulation. Thus, with India de-monetizing the 500 and 1000 currency notes, it means that now about 85% of the total currency value in circulation will have to be exchanged at the banks – or shredded as waste by its owners.
“Not all currency notes in circulation are illegally acquired cash. Our model to assess the impact of this step of the Indian government accounts for 70% of cash in currency notes of 500 and 1000 as legitimate, and 30% as illegitimate cash stowed away in bags and hiding places,†said Robinder Sachdev, president of Imagindia Institute.
This step by the government is a death blow to the cash component of black money in India – over USD 50 billion of illegitimate cash will be destroyed, and over USD 20 billion of legitimate cash will enter banking channels to become legal productive money”, Robinder added.
The report also states that the demonetization of the currencies will curb the fake currency and cripple terror financing and strengthen India’s financial and banking infrastructure, as well as bring almost all of India into the formal banking system.
The think tank also says that the current cash in circulation or that are in hide-outs is only a minor proportion of the black money that has been generated in India.
“It can easily be agreed that 20% of India’s GDP is un-reported, and in the black economy – at the very least. In past ten years, from 2006 – 2015, India’s accumulated GDP is 20,134 billion dollars, according to World Bank data. At 20% of illegal money, it means that 4,027 billion dollars have been created as black money in India in past ten years”, said Robinder Sachdev.
“Majority of black money generated in past ten years has been converted into legal bank deposits, land and property, gold, diamonds, silver, art, and other such items; plus portions of it have been sent abroad to safe havens and investments, or circled back as legal investments in Indian companies. Through this war on cash economy, the government will be able to destroy only 50 billion out of the 4,027 billion dollars that was generated. However, this is the maximum that can be done at this stage, and is a body-blow to the future of black money in India”, added Robinder Sachdev.