In 2016,when Prime Minister Narendra Modi demonetised high value currency notes of Rs. 1000 and Rs. 500, it shocked the nation as all the country men were caught unaware of. Mr. Modi explained that demonetization was necessary to curb the black money, bring more people into tax net and curb money circulation to a significant level. It was then explained that high level of money circulation in form of cash was the primary reason for accumulation of black money.
The demonetization measures created problems for people but , by and large, people appreciated the objective of demonetization and the need to eliminate black money and corruption and therefore, Mr. Modi’s steps were largely supported by the people who put up with the temporary hardships. As follow up measures of demonetization, several steps were initiated such as promotion of digitization, enactment of several laws that seek to formalize the economy and make it necessary to report economic transactions. These include The Central Goods and Services Tax Act, black money (undisclosed foreign income and assets) and imposition of tax Act 2015, Benami Transaction Prohibition Amendment Act and the Fugitive Economic Offenders Act, to name a few.
While the demonetization steps resulted in increased tax collection and rooting out the black money to a large extent, it has not given long standing benefits. At the time of announcement of demonetization measures, Mr. Modi himself said that it was a first step to root out black money and corruption and several follow up measures were needed.
The critics of demonetization said that the black money would come back again and demonetization step was not the be all and end all for rooting out black money. The critics seem to have been proved correct now.
While it was said that high level of money circulation was the root cause of black money generation , the disappointing fact is that the cash circulation has now, once again, increased several fold and with consequent generation of black money.
The currency notes in circulation stood at Rs. 21.71 lakh crore as of May end 2019, showing an increase of more than 22% over the pre demonetization level.
The notes in circulation as on Novermber,4, 2016 was 17.74 lakh crore, which have now increased to 21.71 lakh crore. The notes in circulation had grown at an average growth rate of 14.61% year on year since 2014.
It is difficult to understand as to why Government of India, which says it is committed to curb black money and promote digitization, has allowed the cash circulation to increase to such a high level.
This increase in note circulation has the effect of defeating the purpose of demonetization announced in 2016 and nullifying whatever benefits that were achieved by demonetization.
Now, it is clear that the black money circulation in India has increased once again almost to the pre demonetization level and consequently the corruption and tax evasion has also increased.
There is no satisfactory explanation from Modi government so far as to why the currency circulation has been allowed to increase to such high level.
In any case, it is high time that high value currency note of Rs. 2000 should be demonetized which would considerably help in curtailing money circulation. Further, there has to be a firm policy about the quantum of currency circulation and the mistake of allowing the money circulation to increase should not be repeated. Certainly, Modi government has erred in allowing cash circulation to increase and it has to take the remedial steps now by resorting to one more demonetization.