This is the fourth part of the five-part series on demonetisation.

November 8, 2016

My dear citizens,

Greetings. I have an announcement to make. As you know, I stood on the plank of tackling corruption and you voted me to power. Today, I begin a war on black money, knowing that you, the citizens of this great nation, are with me.

Four months from now, on March 8, 2017, Rs 500 and 1000 denominations will cease to be legal tender.

I repeat, on March 8, 2017, Rs 500 and 1000 denominations will cease to be legal tender.

Citizens, the war on black money has begun.

As you may know, the currency in 500 and 1000 denominations constitutes Rs 15.45 lakh crores, or 86 per cent of total circulating currency of Rs 17.77 lakh crores. Let us assume that 20 per cent of Rs 15.45 lakh crores is black money stored in cash; this amounts to Rs 3.1 lakh crore. Remember that black money is stored largely the form of land, gold, dollars, and rupee. Out of these four mediums, the stored rupee depreciates most because of inflation, and so it is believed that not much of the black money is hoarded in Indian currency – we have assumed it is 20 per cent, but some say it is only six per cent. Still, it must be brought out for the good of the nation and also for the reason that demonetisation will act not only as a device to uncover black money, and purge the black cash, but also as a future deterrent.

I have taken this decision after extensive consultations with three wise men – Raghuram Rajan, Urjit Patel, and Bimal Jalan. All of them have been – one is at present – RBI governors. They know how finance works; they know how India works. Interestingly, when I told them I am going for demonetisation, all three suggested to me different plans.

Dr Raghuram Rajan was against Demonetisation. He said it will serve a limited purpose, given the fact that, in his opinion, very little of the black money is hoarded in Indian currency. To which I replied, every little helps, and besides, demonetisation will have a cascading effect, not only for the economy of the nation, but also for its security. So I rejected his advice.

Dr Urjit Patel, on the other hand, was for demonetisation. His plan, though, was to go for overnight demonetisation – that is, to make Rs 500 and 1000 notes illegal mere hours after the announcement. I rejected his advice for the following reasons:

We are ill-prepared to address the consequences of making 86 per cent of India’s circulating currency illegal overnight. As of present, we have a paltry sum of Rs 2 lakh crore in new, replacement currency. We have only 200,000 ATMs and more than half of them are not in working order. Those that are, have not been recalibrated for accepting new currency. Bihar has only 6,600 ATMs. In all of Rajasthan, there are fewer ATMs than in Delhi. Worse, we have only 100,000 bank branches to cater to 1.2 billion people. This is the neck of the hourglass through which we would be making Indians pass for a better tomorrow.

It would lead to a calamity hitherto unseen. Unimaginably long lines, hoarding of legal currency, severe cash crunch, ATMs and banks running dry, the poor losing their livelihood, the businesses shutting down, farmers losing hope, people dying. With no cash in circulation, how will rural India get working loans? Only 7.5 per cent of rural credit is through banks. How will rural India pay for medical treatment when 58 per cent get treated at private hospitals. I told Dr Patel that I cannot allow this to happen. For what he was suggesting, speed is essential. And we simply will not be able to manage it. Besides, those with black money will quickly find a way out, they always do. They will pay their employees in old currency, they will buy gold; but much more worryingly, they will use money mules and Jan Dhan accounts of the poor to launder their black money, with the result that we’d be left guessing as to how much black money there was to begin with.

No, I told Dr Patel, I am not going to allow myself to be declared a failure. I am not going to be called as someone leading a confederacy of dunces. And I am not going to see my countrymen and women undergo intolerable suffering just so a few lakh crores of black cash may come our way.

But Dr Patel was insistent. The suffering will be temporary, he said. We can handle it. You will have public support to cushion you.

Now it is true what he said, that no matter what I do, how I act, I always have people who support me. And so in this case, too, my supporters will ignore the suffering of others; they will rationalise it, think of it as something for the greater good. Suffering, after all, is elastic. So long as you are not suffering as bad as the next person, so long as you have a keyboard and a square meal, you are fine. But, citizens, is this how we want our people to behave? To become immune to the suffering of others just because you want to support your leader irrespective of the calamitous nature of his decision? No, I told Dr Patel. I do not want to be such a leader. I told him what Mahatma Gandhi – someone who I publicly admire – had once said: Recall the face of the poorest and the weakest man whom you may have seen, and ask yourself, if the step you contemplate is going to be of any use to him.

Recall, then, I said to Dr Patel, the face of the poor farmer, the daily-wager, the pregnant labourer, the differently-abled and elderly poor, standing in line for hours on end; recall the face of disappointment, of hunger, of joblessness, of misery and anxiety for tomorrow. Recall that I cried once reminiscing about my mother down on her haunches, scrubbing the dirty dishes of other families under a hand-pump, doing the rounds of the neighbourhood for a pittance. Can you see her face, I asked Dr Patel. Can you see her suffering? Now imagine if she was without cash, standing in a line, her mind anxious, her tears dried up.

Dr Patel lowered his head. To him this was an academic exercise, an experiment in finance and economics, detached as experiments usually are from human emotions and corollaries. His disappointment was real. But my resolve was real, too. I rejected his advice.

Finally, citizens, to Dr Bimal Jalan. I consider him as an objective voice, and further a voice that would not go against my decision because of malice or hate. Remember that he was made the RBI governor not once but twice by Shri Atal Bihari Vajpayee.

Dr Jalan was also for demonetisation, but his plan was a little different from that of Dr Urjit Patel. Dr Jalan advised me to carry it out not overnight, but over an extended period of time. There is no need for secrecy, he said; give people four months till you make Rs 500 and 1000 notes illegal. This surprised me. It is, after all, natural to think that in cornering black currency hoarders one has to have an element of surprise if it is to work. I acted as a devil’s advocate and asked him many questions. He answered all of them.

Citizens, I have decided to act on Dr Bimal Jalan’s advice. I am now going to elaborate on our demonetisation plan. This is how we will do it:

We would complete the printing of Rs 12 lakh crores worth of new currency to replace the demonetised currency in three months’ time. We have already been busy printing new currency for the past two months. Consequently, Rs 2 lakh crore of new currency in the form of 500 and 1000 denominations is ready. It was suggested to me to introduce 2000 rupee denomination but I rejected the idea for it would make hoarding that much easier in the next black money cycle. By November-end we would make available a further 4 lakh crore worth of replacement currency; by December-end new currency would total up to 10 lakh crore.

Four months from today, on the midnight of March 8, 2017, 15.45 lakh crores worth of old 500 and 1000 denominations will become illegal.

From tomorrow on, citizens can exchange old Rs 500 and 1000 notes for new Rs 500 and 1000 notes at all banks and post-offices. The new 500 and 1000 notes are markedly different in colour and design from their old counterparts to aid easy distinction. Banks and ATMs will no longer disburse old Rs 500 and 1000 notes but rather newly-printed denominations of the same order. To avoid excess liquidity, an occurrence that would lead to inflation, the new currency will be injected through close monitoring of the exchange process and the swap would be as equitable as is possible.

There is no need to panic. You have four months to exchange. Importantly, you can continue to use the old 500 and 1000 denominations for the next four months, in addition to the new 500 and 1000 denominations that, of course, can be used indefinitely.

Now to the issue of Rs 3.1 lakh crore of black currency believed to be hoarded in the form of Rs 500 and 1000 notes, addressing which in the context of a four month-long planned demonetisation instead of an overnight one is important. These are the many possibilities that we foresee in the coming four months:

1. Some black currency will be used to buy gold: This will increase the demand for gold and increase its market price. Increase in legal gold purchase will bring it under the tax ambit which is good for us. Increase in illegal gold purchase will lead to increase in legal gold imports and gold smuggling. We have already increased gold import duty to 10 per cent – we are now increasing it to 15 per cent for the duration of the next four months, till March 8, 2017. After March 8, 2017, the import duty will return to 10 per cent. Additionally, we are going to take stringent steps to curb gold smuggling – the home minister will hold a press conference tomorrow in this regard. Remember that India is one of the largest importers of gold – 1,000 tons a year – and a third of it is reportedly used to hoard black money. Let me also add an important point here. If, assuming, all black money was to be brought out in the open through the scheme suggested by Dr Urjit Patel, after the new cycle of black money hoarding commences like it naturally will, hoarders will be careful not to hoard black money as cash. They will, instead, hoard in, say, gold. This would bring us back to square one, wherein demand for gold would increase and so would its import and smuggling. For this reason, one of the accepted aftermaths of war on black money is an increase in gold hoarding. One cannot escape this even if one were to make 500 and 1000 notes illegal tender overnight as suggested by Dr Urjit Patel.
2. Some black currency will be used to buy land and property: This will lead to growth in the realty sector, as well as an increase in government tax collections through circle-rate defined property purchase tax (PPT). Remember that, had we opted for overnight demonetisation, black cash hoarders would anyway have laundered their money into white using money mules and proxy Jan dhan accounts. Then, after a fall of 30-40 per cent in realty prices as a result of overnight demonetisation, the same hoarders would have bought properties through their now laundered cash, laughing all the way to their new homes.
3. Some black currency will be used to buy American dollars: This might weaken the rupee a little, as more and more Indian currency is exchanged for dollars. In fact, this is what happened during the introduction of the Euro in 2002. Between January 1, 1999 when the Euro (cashless) came into being, and January 1, 2002 when it materialised, some 32-40 billion worth of Deutschemarks that were hoarded as black money across Europe and especially Eastern Europe, were exchanged for American dollars. Many believe this weakened the Euro from 0.75 to a dollar to 1.15, but then after the introduction of the Euro in 2002, the Euro strengthened back to 0.7 to a dollar. Citizens, this currency exchange cannot be prevented. But two things are to be noted here. One, that a weak rupee will help in the export-led sectors of our economy, and two, this exchange would anyway have taken place at a later stage when a new cycle of black money hoarding commenced. Remember that hoarders would be wary and scared of hoarding in rupee for fear of another demonetisation, and therefore they would rather hoard their black money in gold or land or dollars.
4. Some black currency will enter our banks: Citizens, starting today, we are offering a generous VDS for those who have hoarded black currency. They would have to incur a tax penalty of 50 per cent, and 25 per cent of their returned money would be locked for a period of 2 years. Remember that a VDS in the context of demonetisation is very different from a VDS under normal circumstances. In the latter case, hoarders are under no obligation to come forward and declare their black currency, they can continue to hoard it albeit under the risk of getting raided. In the present circumstance, if the hoarder doesn’t come forward and declare the black currency, it would become useless in four months’ time. The hoarder has therefore no option but to buy gold, land, dollars, or opt for the VDS.
5. Some black currency will be used for terrorism: Citizens, there is no way this can be prevented, even if we were to carry out overnight demonetisation. Terror organisations will always find means to use black money for funding terror acts. For example, in the scenario of overnight demonetisation, terror outfits will ether purchase guns on credit or launder their black currency into white using money mules and then repay their “loan”. Second, the outfits that compensate the stone-pelters would continue to do so given that the stone-pelters would have a set period of time to exchange demonetised currency even under the overnight demonetisation scheme.
6. Some black currency will be spent: This would spur economic growth. Remember that 25 per cent of our gross domestic product is parallel or black economy. Economic growth would in turn create jobs and increase our tax collections. A hoarder, for example, may panic and buy 1000 iPhones. Good. This means that money otherwise lying unused has entered the economy and, second, because it has spurred consumption, it will lead to more money in the government coffers.

Citizens, now that the black money problem in the context of an advanced warning demonetisation has been addressed, let me turn your attention to the other, more obvious benefits of demonetisation:

1. Money will enter the banking sector: An increase in CASA deposits would make our banks breathe easier. It would allow them to boost providing of loans to small and medium enterprises or to the general public and, coaxed with a drop in interest rates, make financing of businesses easier.
2. Greater chance to prevent counterfeiting: A planned demonetisation such as what we are commencing on from tonight will allow us to not panic into printing currency. We have four months to replace the old Rs 500 and 1000 notes that will cease to be legal tender on March 8, 2017. We have already been printing new notes since September. We have time; there is no rush. The new currency will carry new features making it very hard to be counterfeited.  
3. Unused money will enter the economy: The black currency that has been hoarded will now have to enter the economy. Even if much of it enters the economy illegally, as explained earlier, this will only help the government collect more tax revenue and spur economic growth.
4. Increase in banking: Citizens, there are millions of Indians who do not have a bank account. A bank account today is as indispensable as home water and electricity. We are as of tonight starting new schemes to make India more banked, and more cashless. This will increase transparency and resist to a large extent future creation of black money. Our new schemes will incentivise the deposit in banks of peoples’ savings in the form of old 500 and 1000 rupee notes. The more such notes deposited in the bank, the more the bank can inject new notes equitably.

Citizens, as you can see, Dr Jalan’s advice of Planned Demonetisation address all concerns one may have notwithstanding its lack of secrecy and extended nature. Crucially, millions of Indians will not suffer, on any account, on any day, for any hour. I am recalling their faces right now, and I can tell you that our Demonetisation plan will not add or extend the lines of sorrow I see already on those faces.

Citizens, I have something else to say, something important. Yes, I want to tackle corruption – it is the mandate on which I became your Prime Minister. But would it not be hypocritical of me to trumpet my war against corruption when my own party encourages corruption? I would be a liar and a fraud if I ask you to become honest while I and my party continue to be dishonest. For this reason, effective from tomorrow, the Bharatiya Janata Party shall not accept any cash donations. None. Zero.

Second, the BJP, irrespective of whether the Congress party follows suit, will come under the ambit of the RTI.

Third, many of you, much to my embarrassment, continue to remind me of a declaration I had made repeatedly during the 2014 general elections – that a government has no business to be in business. This embarrassment has become more acute especially as I am declaring a war on corruption. How can I accept a huge financial windfall from demonetisation only to then go ahead and waste it on sick public sector units? With what face can I again ask you to believe in me? Therefore, starting tomorrow, I have decided to set in motion the privatisation of 29 public sector undertakings, beginning with Air India and Hotel Ashok.

My dear Citizens, we stand at a crossroad of history. This is not the first time we have done so. Except that on all previous occasions we managed to choose the wrong path. Today, with you, I have chosen the other road. In good faith and in all honesty. Let us see where it takes us. My dear citizens of this great nation, you put your trust in me two years ago. Today, I repay it in a small measure.

Jai Hind.

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Note: The author is grateful to the economist @bodhisatvaa for vetting the economic arguments in this article.

The author can be contacted at anand.icgeb@gmail.com and on Twitter @ARangarajan1972