Page 27 - Banking Finance JANUARY 2017

ARTICLE

the most affected as it meant a total wash out of their re- What were the consequences of this
serve strength or more specifically hidden wealth and it is
this section of the society which is vocal in its opposition to dualism in the economy?
the scheme.  It cannot be said that all economic activities which take
place in cash were only in the black economy. There is a
It should be said to the credit of the ordinary citizens that dominant section of the society which can be called the
they bore the brunt of the pain but did not complain about informal sector which contributes about 45% of the GDP
it for the reason that they were bearing the it in national of the country. It consists mostly of small traders and busi-
interest. This speaks volumes of the spirit of the ordinary nesses, street vendors, and daily wage earners. This
citizens. sector works 90% on cash only but their contribution to
the black economy may be nil or negligible. This sector is
Whatever the strata of society one belongs to one has to also the sector which is most vulnerable in terms of re-
see what will be the impact of the scheme to a vast major- serve strength and is also out of the digital space.
ity of the population in the medium and long term. To ap-  SBNs combined with the liberalization and globalization
preciate this one has to understand what were the trig- initiated in the 90's was indeed a big boon to big busi-
gers that made the scheme necessary. nesses. It was this sector which benefitted the most as
it could manage to generate enormous black money
The situation as prevailing on 8/11/16 and wealth or more specifically called incomes that

 A general culture of faith in cash than on non-cash in- were not taxed. The availability of SBNs made it easy
struments in a vast majority of the population. for them to store and transact with them. It was this
money that was fuelling the parallel economy that was
 The index of a mature economy is the quantum of cash
outside the mainstream economy and which was as big
to GDP. In advanced countries it is less than 5% but in
or even bigger than the mainstream economy.
India it is nearly 12%.
 SBNs provided an excellent nexus between big busi-
 90% of the transactions in the country are done in cash
nesses, politicians and the officials in the bureaucracy
only.
leading to large scale corruption. Crony capitalism was
the order of the day and there was no transparency in
What were the consequences of this ? the allocation scarce natural resources like coal, spec-
 Cash transactions do not leave behind any trail. trum, minerals to quote a few. Businesses that some-
 It promotes the parallel economy or more popularly how managed to capture scare natural resources by
whatever means possible could amass immense wealth.
called the black money or black economy. This section
of the economy is totally out of the mainstream  The high value currency notes which should have been
economy, under no kind of regulation and not contrib- used for genuine business activities was either hidden
uting anything to the national exchequer. In India this or used mostly in the least productive sectors of the
section is as big or even bigger than the mainstream economy ie real estate, jewellery and in institutions of
economy. This kind of dualism impacted adversely the higher learning in the private sector. Consequently all
people and the policy making mechanism. these things were beyond the reach of the common man
or the honest taxpaying citizens.
 It encouraged rampant corruption at all levels. Higher
the denomination of notes higher the scope for corrup-  The country's prosperity grew year after year with the
tion. GDP growing at an average rate of 7%-8% since 1991
 There was also a critical problem of fake notes in SBNs but the distribution was lopsided. The rich become
in circulation, whose number was increasing year after richer and the poor became poorer and this was very
year. It was difficult for even bankers to differentiate much aided by the presence of high denomination notes.
between a genuine and a fake note leave alone that of  Black money and corruption money were freely flow-
the ordinary public. ing into social evils like murder for gain, crimes, extor-

BANKING FINANCE | JANUARY | 2017 | 27

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