This is not an out of blue, groundbreaking step by Government.
It is not right to view this announcement in isolation. A complete framework was created over a period of last 2.5 years for this final step.
1) Aadhar was implemented and linked with bank accounts
2) Opening of zero balance bank accounts under Jan Dhan Yojana to cover those families who were not under banking system at that time. DBT was then linked with Aadhar and these bank accounts are used to deposit all sort of subsidies and MNREGS payments.
Above two steps ensures that no one is left out from banking system and crackdown on parallel economy won't hurt them.
3) A window was given to hoarders before this final crackdown in form of Voluntary Disclosure of Income scheme. Till 30th Sep 2016, more than ?65000 crores of black money was disclosed and converted into legal mullahs by paying taxes and penalties. Warning was given by Fin Min in all newspapers and TV channels that it is last chance for everyone to disclose their unaccounted income.
And only after establishing this robust framework and giving sufficient chance to everyone, this step of demonitization of currency notes is taken.
Takeaway:
1) Modi government is not here to make shallow promises and populist statements. They mean business and they know how to do it most effectively. Whether it was '?? ?? ????? ?? ???' warning to Pakistan or his campaign time promise of curbing black money, PM mean his each and every word.
2) Backbone of Hawala economy which is as high as 7% of GDP as per some estimates is broken. No doubt it will resurrect again, but as a highly trimmed and non-convenient version.
3) A significant portion of long term financial requirements of Government will be paid now by earlier non-paid taxes. This along with GST will make our taxation system completely transparent.
4) All breaking India forces like Dubai based Mafias, ISI backed terrorism promoters of J&K and Naxalites are left with significantly less economic worth. They will now find hard to regroup their finances again.
5) Cash, which is significant chunk of wealth amassed by politicians is now useless. We can expect cleaner election campaigns in coming elections.
6) Media will cry at its loudest. Political parties can not openly oppose this move so they will use their media dummies to create a negative environment against this decision. Yes there will be some minor problems to everyone in coming days, but these are insignificant in larger scheme of things.
