It’s a no-brainer that high denomination notes are bad for the system because it makes hoarding easier. Then why did prime minister Narendra Modi think of replacing 1,000 notes with a higher denomination rather than choosing a lower denomination?
India had denominations starting from 5 paise coins to 10,000 notes before the latter was abolished in 1978. Rs 1,000 notes were introduced in 2010 without any official reason, but one can argue it was the new inflation-adjusted denomination. On similar grounds, one can argue in favour of 2,000 too.
But it beats the purpose of moving in a direction that would reduce the black economy. Here was a golden opportunity to lead a large part of the cash economy into the legal framework by replacing the high denomination with smaller denomination. A 200 note would have been ideal to replace the two demonetized notes would have been ideal. With 1, 2, 5, 10, 20, 50, 100 and 200 you can cover all denominations – so it’s good math.
Now think about it – doctors, beauticians, restaurants and several other purchases in the 2,000-5,000 bracket are almost always in cash. The probability is high that we won’t pay cash at the petrol pump if we are forced to carry wads of 100. For 5,000, you would have to carry 25 notes of 200 or 50 notes of 100, which is obviously cumbersome.
That said, the ultimate goal would be to move towards a digital economy, but that would still take some time considering where we are in terms of digital payment proliferation. Yet, already there are 25 million credit card users, 600 million debit cards users & about 130 million mobile wallets. The penetration is increasing by the day.
The only argument against this move to lower-denomination notes is why allow card-issuers and digital-wallet providers to make a cut when you can pay by cash and avoid the transaction charge. That’s minor and could have been tackled through a RBI directive because even for the wallet providers and banks, it’s not the transaction but the money you hold in their wallet that is the real revenue-earner.
While all honest tax-paying citizens loath tax-evaders, we do not feel as bad about the roadside panipuriwala or dosawala not paying tax because they are forced to pay more than their fair share to corrupt policemen and municipality officials. But that’s not the case with so many other service providers like doctors, beauticians, and even merchants selling wares where we know the net margins are pretty decent.
Leaving aside corruption, one big segment that still is stubbornly tax-defiant is the service industry. Why did Modi not seize this opportunity? Is this a thought Modi and his advisors genuinely did not think of? Or is that in the offing?