Demonitisation plans

Indian Prime Minister Narenda Modi’s announcement about the withdrawal of higher denomination notes seems to have found its admirers in Pakistan. A PPP senator last week submitted a resolution to the Senate asking for the withdrawal of Rs1,000 and Rs5,000 notes from circulation. The logic behind such a move seems to be curbing corruption, money laundering, tax evasion and other black market practices. While India and Pakistan both genuinely have a tax payment problem, forcing people to switch to smaller denomination notes may not necessarily lead to more tax payers. As shown in the case of India, it will lead to financial chaos and lots of unhappy citizens despite the praise that analysts seem to wish to lend to such a measure. The real impact of such a measure will be on consumers who will have to carry bulky amounts of cash or switch to cashless methods, which are still rarely available in the Subcontinent’s markets. The problem is that currency values in Pakistan and India are so low that a Pakistani Rs5,000 note or an Indian Rs1,000 note has barely any purchasing power attached to it. Coming at under $50 value and $25 value, anyone wanting to use either currency to launder money or evade taxes already has to keep a substantial stack of cash in storage.

It should not be difficult to understand the relative insignificance of such amounts. After the Pakistani government announced a withholding tax on bank transactions, prize bonds became much more popular for black market trading. Modi’s decision to withdraw the Rs500 and Rs1,000 notes in India cannot be understood as a victory against tax evasion and corruption. Instead, it is another desperate move by a government that is unable to fulfill the big election promises it made, including the promise of a crackdown on black money transactions. Moreover, such measures also fundamentally misunderstand the nature of corruption. The most serious types of corruption occur at the higher echelons of government, not in the hands of the petty bureaucrat. Taking out a certain denomination of currency notes from the market is merely a cosmetic move. It is certainly not one that should be followed by Pakistan. Clamping down on corruption requires much more serious efforts. It is unlikely that the huge amounts stashed in offshore bank accounts were moved via petty cash. If the Indian or Pakistani governments are serious about clamping down on corruption and tax evasion, they need to do that through strengthening taxation and anti-corruption authorities. This is something neither government seems to be serious about.