Will Modi's War On Black Money Pay Off?

Demonetising high value currency will deal a body blow to the shadow economy—and everything connected to it.

- M.G. Arun with Shweta Punj, Uday Mahurkar and Kaushik Deka

The announcement was as dra­matic and unexpected as the military’s ‘surgical strike’ in late September. At 8.17 pm on November 8, Prime Minister Narendra Modi unleashed a massive attack on India’s shadow economy, leaving black money holders with less than four hours to deal with their stash of cash. Currency notes of Rs 500 and Rs 1,000 denominations, he said, would cease to be legal tender from mid­ night that day

He had reasons to do so. The black money menace has been gnawing at the roots of India’s economy, sowing the seeds of corruption in many sectors, stoking inflation, and driving up real est­ate prices. US­based Global Financial Integrity, a policy advocacy non­profit, in a report, ‘Illicit Financial Flows from Developing Countries 20042013’, estimates black money outflows from India at $505 billion (nearly Rs 33.3 lakh crore) between 2004 and 2013. Back in 2007, a World Bank estimate pegged India’s shadow economy at 23.7 per cent of the GDP.

This move has been in the works for some time. On June 27, during his Mann Ki Baat radio address, Modi hinted his gov­ernment would take strong steps if tax evaders did not disclose their income vol­untarily. On September 2, during a TV interview, he said, “Don’t blame me if I take tough decisions after September 30.” Modi stuck to his warning, and timed it to precision. As his administration neared the halfway mark of its five­year tenure, Modi needed a big­bang announcement to coun­ter the opposition’s oft­repeated barbs on the black money issue. And so, just ahead of the big election battle in UP, he launched his war. Even the usually abrasive Janata Dal­United (JD­U) seemed appreciative of the move. “The PM has fulfilled his poll promise with this step. We wel­come it,” says party spokesperson K.C. Tyagi.