It needs to be stopped at the root.
One of the root causes is the huge and easy availability of cash in our monetary system. This is one of the reasons why black money finds an easy outlet that encourages huge transactions taking place in cash. Hence, one of the approaches to curbing Black Money transaction is to restrict this easy flow of cash or making it as difficult as possible.
There is a very simple way to do this - withdraw Rs. 1000/- currency notes from circulation. Please note that I am not, at this stage, suggesting demonetisation because it leads to huge administrative load in implementing it and a lot of honest people are subject to a lot of unnecessary harassment and hardship.
My proposal is simply this : effective immediately, the government should stop printing Rs. 1000/- notes. Simultaneously, banks should be instructed to stop issuing any Rs. 1000/- notes lying with them, which should be returned to the Reserve Bank for destruction. Whenever any customer deposits any Rs. 1000/- note in the banks, that too should be returned to Reserve Bank for destruction.
After one year of such exercise, de-monetisation of these notes should be announced, so that it is only the big fish, who are storing huge amounts of illegal cash, that have to cough up that amount and explain where they got it from.
The net effect of this will be that people will now have to use Rs. 500/- notes for making high cash payments which will be doubly difficult as compared to when they could use Rs. 1000/- notes.
One year after the above exercise starts for Rs. 1000/- currency notes, it should be extended to Rs. 500/- notes also & similarly Rs. 500/- note demonetisation should be announced after 1 year of quiet withdrawal of the same from circulation, as proposed for Rs. 1000/- notes.
When this is accomplished, handling black money in cash will become five times tougher because the highest denomination note now available will only be the Rs. 100/- note.
While this may appear difficult, it is not impossible, and certainly highly desirable.
From a practical point of view, what may help is that with the government's huge thrust on making banks accessible to all, a large number of people from the lower economic strata who are used to "cash dealings only" will probably begin using the banking system and cheques for payments and thus reducing their dependence on and recourse to cash. Secondly with the growth in Credit Cards and internet commerce, the need for cash amongst the relatively well off will also drop considerably.
Therefore, the only ones who will face difficulties will be those that want to do clandestine deals in cash to avoid paying tax and clearly life must made difficult for such people.
At this stage it will be interesting to see what are the currency denominations in some of the major economies of the world. I did a small study and this is what I found :
Denomination of Currency Notes in some major economies
US has the following : 1, 5, 10, 20, 50 & 100 USD
UK has the following : UKP 5, 10, 20 & 50 UKP
Euro (for all Europe other than UK) 5, 10, 20, 50, 100, 200, 500 Euro (covering France, Germany, Italy and several others, totalling 27)
Canada has the following : 5, 10, 20, 50 & 100 Canadian Dollars
Australia has the following : 5, 10, 20, 50 and 100 AUD
China has the following : 1, 5, 10, 20, 50, 100 and 1000 Yuan
One can see, therefore, that out of 5 nations listed above (excluding EU) only one, i.e. China has a 1000 denomination note - all others have only 100 or 50.
As for the Euro, which covers approx 27 nations (excluding UK) the highest denomination is 500.
Japanese Yen has not been considered above because traditionally the Yen has been an extremely small value currency unit and they therefore tend to have high value notes - currently it is 1000, 5000 & 10000.
It is clear therefore that the proposed move to have only Rs. 100/- as the highest denomination note will be in sync with the rest of the major economies of the world. As can be visualised, it will be a major step towards curbing black money generation and circulation, right at the root.
