PM Modi’s Surgical Strike on Black Money Mafia

It definitely, and rightly indeed, came as a surprise! The Government of India freezed transactions including currencies of 1000 and 500. Contrary to widely argued as a sudden and ridiculous policy, I can see this as a well thought and long planned move. I have enlisted my thoughts on this action.

Who are really targeted?

No, its not primarily aimed at couterfeit currencies. The real target would be the holders of back money. The recent schemes of income self declaration and its tentative end date also could be viewed under this context.

How does it really affect black money holders?

The government has freezed all the transactions including these high denomination currencies - Rs. 500 and Rs.1000, with effect from midnight.
  • Normal citizens usually does not carry signifcant amount of wealth as currencies. It is mostly the unaccounted black money, which is stored as currencies as resorting to electronic funds would enable close monitoring by the revenue officials.
  • The time of the announcement also would be cleverly devised - right after the banking hours of the day - and the banks would not be working tomorrow. This gives no space for significant amounts to be spend off.
  • The time allotted to get the money exchanged is very limited according to the details disclosed yet, i.e. around two months.
  • Within this period, the government would definitely mobilize the enforcement and all other availble legal and financial units to seize all illegal transportation of the currencies.
  • Banks have been declared not working on the following day. This could be seen as a time for issuing relevant circulars to the bank officials on how the source of the currencies being brought to exchange can be tracked.

What would be the impact of the move for common people?

The common people would definitely suffer a bit. A sudden declaration of bank holiday and the currency freezing along with it would definitely impact the country’s economy as a whole. Also, people who have been all set for significant financial transactions would suffer since the money held would render useless till it is exchanged a few days later.

How about the end result?

Since the illegal custodians of huge capitals would probably be not able to get the money exchanged before the dead line, the held (or missing in this context) money can be deemed as invalid, and subsequently added to the currency value. This can be illustrated with an example:- Suppose 100 notes of thousand rupee note has been released so far (and this data is available with the reserve bank), and only 60 were collected back within the allotted time frame. Hence, by the end of the dealine, the government could declare the remaining 40 notes as invalid. i.e. The value of the invalid notes (which is 40 x 1000) would be distributed additively to the 60 legaly exchanged.

Apart from all of these, there is a big advantage of nulling the circulation of counterfeit currencies as well, since most of the counterfeit currencies are also of 500 and 1000 denominations. However, from a broader perspective, PM Modi ji has indeed set a holocaust on the black money holders.