Here's A Simple Idea To Fix India's Black Money Problem Once And For All

New Currency FTW!

18/07/2016 7:09 PM IST | Updated 18/07/2016 9:49 PM IST

The issue of uprooting, finding and bringing back black money has been debated with great intensity, passion and vehemence during the elections of 2014. And 1989, 1991, 1996, 1998, 1999, 2004 and 2009. An interesting common point in such debates has been the supposed near monopoly of Switzerland as a villain, and funds stashed abroad as the root of the evil.

It is misleading rhetoric because it wilfully misses a huge component of the domestic black money -- closer home, easier to retrieve, with no global or Swiss bank rules acting as a barrier to its end. Since it has never been debated with equal passion, we are almost tempted to question the intent of all political claims to ending the menace. Shouldn't a government seeking to tackle black money not begin where it is the easiest--at home--rather where it is hardest, the Swiss Alps?

The often-discussed routes to curbing domestic black money are conventional, timid, ineffective and glaringly and obviously inadequate, with the size of domestic Indian black money estimated to be between 23% and 26% of the national GDP (approximately and possibly erroneously).

Imagine if the Central government declared every Indian rupee and paisa as null and void from 1 January, 2017 as legal tender.

Here is a simple idea to wipe the black money slate clean in one stroke. It's spiced with some details and numbers which are random suggestions. They will hopefully not distract the discussion from the core concept.

How About A Total Currency Swap, With A Deadline?

Imagine if the Central government of India, led by Mr. Narendra Modi, declared every Indian rupee and paisa as null and void from 1 January, 2017 as legal tender.

What would all of us do if it was declared that all our money would soon be invalid?

We would ask the government (or rather the governor of the Reserve Bank of India) to swap our existing money with the new currency.

The government agrees and issues an order that within a certain time period--say 1 September to 31 December 2016--all of us can come to a bank, deposit the old money and exchange it with new money in a new currency altogether.

Three simple tricks are built in.

  • Every Indian comes into the banking fold because you are not allowed to exchange cash for cash across the counter.
  • Deposit the Indian Rupee into your account, and from 1 September, 2016, the ATMs no longer dispense the rupee but the new currency.
  • If you do not have an account, they would be happy to give you a zero-balance account.

Peg Up The Value Of Indian Money

We can begin with calling the new currency by the ancient name of "rupayya" or "rupiya". Or, with due apologies to the dude who designed the rupee symbol, we could call it the Indian dollar--IND. It sounds quite nice, rather cool and posh too, besides the global bit and all. But rupiya too works fine.

The government should and must give absolute immunity to all black money declarations forced by the swap/complete demonetization...

Not only should we try to get rid of the rupee in toto, but peg up the line of value. Let us argue that 1 Indian rupiya equals 10 Indian rupees.

So, for every ₹10 you deposit into the bank, you get a brand new Indian rupiya. And let us push it--each rupiya would comprise 100 new Indian cents.

Get Some New Faces On Board

While we are at it, we may as well add a few more faces to notes of various denominations. Yes, a bit like the Americans. For one, I want to have Babasaheb Bhimrao Ramji Ambedkar on our currency. I would love it if the government could have Gurudev Rabindranath Tagore and Sardar Vallabhbhai Patel, too.

The government can provide a list of names and we can all vote to decide which luminaries get to feature on the new money. But name, value and design are not core to the idea, so let us move along.

So, What Happens To The Black Money?

What would you do from the midnight of 31 August, 2016 if you had lots (or little) of black money in the form of cash? You would go to the bank and deposit it, giving your Aadhaar card and PAN number.

The government should and must give absolute immunity to all such black money declarations forced by the swap/complete demonetization during this time period, and all unaccounted money could be income taxed at 35% percent.

[The swap] would force most people to convert black money to white legally and save 65% of their money that would otherwise become tissue paper...

The entire tax netted during this period is the first major fiscal gain for the government in the easiest manner--no income tax raids, no voluntary public declarations. It would force most people to convert black money to white legally and save 65% of their money that would otherwise become worthless tissue paper in the next 120 days. They would bring the black money to the banks, and the government can laugh its way from there.

But black money isn't always about tax evasion. It could include money from bribes and criminal offences--money which is mostly in the hands of those who cannot expose themselves even to save their 65% money. Money which confesses to other crimes. They just let the money die.

But this doesn't mean the money in circulation will reduce. For the government, which knows the RBI's exact amount of rupee money in circulation, will print money against money--exactly the same value of the old money. This could possibly be at the enhanced value suggested--if there was a total of ₹100 in the Indian economy, 10 rupiya would be printed.

As the government starts collecting old money and gives out new money at this fixed rate, it would be left with lots of new money (for money which has not been produced for exchange). That is the black money the government would have recovered automatically.

Imagine that for ₹100, the govt had printed 10 Indian rupiyas. Only ₹70 was collected by Indians who'd deposited their money. The remaining ₹30... is the black money recovered.

Imagine that for ₹100, the government had printed 10 Indian rupiyas. Only ₹70 was collected by Indians who'd deposited their money in banks. The remaining ₹30 that was never produced is the black money recovered. You can call this the first installment of black money unearthed from within the country by the Modi government, and it can even be distributed equally to all citizens (who more or less now have an account).

Political Payoff

Besides the obvious benefit of having recovered so much money, and making every single cent accountable, and bankable, the government would have a huge database of tax avoiders for future reference. Despite the anonymity promise, the government will have a sense of how much politicians and businessmen have--it's always helpful to know. Besides, the credibility of this government would skyrocket and the BJP would be seen as making serious headway in delivering one of its major promises.

Even if we could get an approximate ₹10 lakh crore as forced tax collected or forfeited tax by default, Modi could technically put ₹10,000 (sorry, new Indian rupiya 1000) into every citizen's account.

On 2 January, 2017 -- acchhe din!


  • A partial demonetization of currency was last carried out in India in 1977 by Prime Minister Morarji Desai. All notes with a denomination of more than ₹100 were demonetized.
  • Writing in Mint, economist Ajit Ranade made a case for scrapping ₹1000 and ₹500 notes. He argued that large denomination notes are highly likely to be used for illegal activities and not so much for ordinary transactions.
  • The European Central Bank (ECB) announced considering demonetization of the €500 note.
  • Former US treasury secretary Lawrence Summers asked for an end to further issuance of the $100 note.
  • Harsha Jethmalani reported in a piece in Mint that growth in currency holdings with the public continues to remain high--15.78% in June 2016.
  • The Reserve Bank of India in January 2014 announced the withdrawal of all banknotes printed before 2005 at end of 31 March. But it did not freeze the prior currency (or demonetize it) nor set a deadline for withdrawal.

Sriram Karri is the author of the bestselling novel Autobiography of a Mad Nation and lives in Hyderabad.

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