Governance

Dissecting ‘Demonetisation’

Withdrawal of 86 per cent of cash in circulation has thrown the economy into a tailspin.

cashless-payment-through-machineDEMONETISATION is not the end but the beginning of a ‘long, deep and constant’ battle against black money and corruption and will benefit the poor and the common man.” This is what Prime Minister Narendra Modi told his Parliamentary party colleagues soon after pulling 86 per cent of cash out of circulation through this draconian measure putting India’s labourers, small-traders and farmers to immense misery resulting in over 100 deaths so far. The loyalists hailed it and passed a resolution endorsing his “great crusade!”
Let us take a reality check on the state-of-our-nation:

• We are World No. 1 in absolute poverty far ahead of sub-Saharan Africa.
• We are World No. 1 in farmer suicides. (if there is a global standard for this)
• We are World No. 1 in human trafficking. If we add bonded labour, we will be World No. 1 in slavery.
• We are close to the top in malnutrition and illiteracy. Half of India’s children are malnourished and underweight.
• Eighty per cent our graduates are unemployable. Our unemployment figures are mind boggling with post-graduates and engineers queuing for menial posts.
• Corruption is not only acceptable at all levels of society but it is aspirational. Our politicians and civil servants are mostly corrupt and judges are trying to catch up.
• We have zero tolerance, not for corruption and falsehood, but for those who dare to speak the truth.
• Our politicians are elected to power through a humonguously corrupt electoral practice. Most of them are either mafia themselves or mafia-sponsored.
• Human life has no value. From 2005 to 2015, over 300,000 farmers have committed suicide.
• Our rape, murder and plunder statistics would do credit to a war zone.
• In terms of productivity, quality and industry we are among the lowest in the world.

This is India’s socio-economic milieu. Without addressing any of these critical issues, Modi has launched this demonetisation crusade which The Economist (London) describes as “reckless misuse of one of the most potent of policy tools: control over an economy’s money.” Eminent economists have also spoken and written about this ‘reckless misuse’ almost in unison.

Why was demonetisation done in such a hurry through an executive order that has no authority to place restrictions on drawing of own money from the banks? All these cannot be considered ‘implementation failures’ but a deliberate attempt to spread panic among the public forcing them to stand in serpentine queues and surrender their cash to the stateas fast as possible

Notification of demonetisation was issued by the Union Ministry of Finance under Section 26(2) of the Reserve Bank of India Act, 1934: “Whereas, the Central Board of Directors of the Reserve Bank of India has recommended that bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees shall be ceased to be legal tender;…And whereas, it has been found that fake currency notes have been largely in circulation causing adverse effect to the economy;…And whereas, it has been found that high denomination bank notes are used for storage of unaccounted wealth;…And whereas, it has also been found that fake currency is being used for financing subversive activities such as drug trafficking and terrorism,…and the Central Government after due consideration has decided to implement the recommendations of the Board…”

The RBI followed it up with a circular: “In terms of Gazette Notification No 2652 dated November 08, 2016 issued by Government of India, Rs. 500 and Rs. 1,000 denominations of Bank Notes of the existing series issued by Reserve Bank of India shall cease to be legal tender with effect from November 09, 2016….”

With one fell-swoop, 86 per cent of the cash in circulation was declared as non-legal tender thereby destabilising an economy of 125 crore people. This raises several critical legal issues-excessive delegation, lack of legislation, ultra vires of the constitution, validity of RBI’s ‘recommendation’ and test of reasonableness. These are being agitated before the Supreme Court and various High Courts.

The moot question is whether the objectives of demonetisation as given in the Notification and declared by Prime Minister are really genuine? As far as fake currency is concerned, at a mere 0.02 per cent of currency in circulation, it is just a speck. On the elimination of unaccounted wealth, i.e. black money, the government was counting its chickens by estimating that up to Rs. 3 lakh crore-out of a total of Rs. 14.5 lakh crore of currency declared invalid-may not come back into the banking system, and therefore would get extinguished. This would automatically increase RBI’s surplus reserves by that amount. The Central Government was seeing this as an additional fiscal space and speculative plans are abuzz that these funds would be used as a social sector transfer to the poor in cash and kind to gain some brownie points.

THESE ‘castles-in-the-air’ could come crashing if banks end up receiving the bulk of the demonetised Rs. 1,000 and Rs. 500 notes in a ‘legitimate’ manner. Noted economist Arun Kumar, who has done extensive work on black money, feels that going by the present pace of deposit and replacement of Rs. 1,000 and Rs. 500 notes, over 95 per cent of the invalidated currency may come into the banking system. This effectively means that Modi’s “shock-and-awe” accompanied by so much pain and disruption in the lives of a billion people-long queues, deaths, no-cash-in-banks, long waits, lathi charges, road blocks, bank employees running for life-ends up with very little black money being actually located and extinguished. This would mean a failure of the ‘great crusade’. Sensing this, the Government hurriedly announced an amnesty scheme making itself a 50 per cent partner with the black money hoarders!

queue-outside-the-atm-machineThat much for extinguishing black money! But this does not appear to be the real objective of demonetisation if one listened to Reliance Chief Mukesh Ambani who is among the main drivers behind the Government’s policy decisions. In his speech at the launch of his e-payment wallet Jio Money, Ambani made two points: (1) With one single step, Narendra Modi has brought all the unproductive money into productive use. This will enhance credit flow in the economy and legitimate credit is the fuel that powers the engine of economic growth, and (2) So far, credit in our country has mostly been high value and low volume.Now we will have low value, high volume credit.

For this super-tycoon who lives in a Rs. 7,000-crore mansion in Mumbai, a few hundred rupees kept by millions of poor and toiling masses to buy food for themselves and their children and pay for grocery, vegetable, hospital expenses, school fees, bus/train fares, etc. are unproductive! Gauging from Ambani’s speech, the intention of ‘demonetisation’ appears to be to make bad-debt ridden banks liquid by forcibly sucking out lakh of crores of white money from the common people across the board thereby saving money-bags who are big defaulters from repaying their massive debts and instead giving them access to ‘low value, high volume credit’.

These will be evident from the bizarre manner in which the entire operation has been carried out. Let us see how. In today’s market by no stretch of imagination can the Rs. 500 note be considered high-value denomination. Yet this was declared invalid, while a Rs. 2,000 note was introduced replacing Rs. 1,000 note.

It is learnt that initially RBI wanted to bring Rs. 5,000 notes to cater only to the super-rich. But some sane counsel prevailed.

Rs. 2,000 notes were printed well in advance and made available the very first day while the RBI did not even start printing Rs. 500 notes. It is also learnt that Rs. 2,000 notes were sent to cash chests of banks across the country around the middle of October with strict instructions not to open the bundles and make account entry. This appears to be tenable considering the large quantity of Rs. 2,000 notes that have surfaced outside the banking system so soon after the demonetisation announcement! ATMs were shut down in the guise of recalibration and most of the Rs. 100 notes supplied were soiled and hence rejected by the counting machines. Why was demonetisation done in such a hurry through an executive order that has no authority to place restrictions on drawing of own money from the banks? All these cannot be considered ‘implementation failures’ but a deliberate attempt to spread panic among the public forcing them to stand in serpentine queues and surrender their cash to the state as fast as possible.

ANOTHER objective is to aggressively promote ‘Digital India’. From the way in which the Central Government, the Prime Minister downwards, all departments, RBI and commercial banks are marketing ‘cashless business’, it appears as if this is the real crusade. Already, companies in this business-big and small-have reaped windfalls. To consolidate this and to make the country cashless, a high-level Committee of Chief Ministers and senior Central Ministers has been formed with the mandate to implement measures to execute digital payment systems. The committee is to push for Aadhaar identification for cashless transactions, including linking of point of sale machines with the Unique Identification Authority of India. The committee will also identify measures for rapid expansion and adoption of the system of digital payments like cards (debit, credit and pre-paid), digital-wallets/e-wallets, internet banking, Unified Payments Interface, banking apps, etc., and shall broadly indicate the roadmap to be implemented in one year. Companies in this business, most of them multinationals, can earn 0.5 to 3.5 per cent commission in each transaction. In today’s estimate this will be worth about Rs. 1.5 lakh crore.

Do you still call it demonetisation to eliminate black money and end corruption? According to analysts calling it so is a fallacy. In this case, the Central government has said that the RBI will refuse to honour its promise to provide legal backing to Rs. 500 and Rs. 1,000 currency notes. They will effectively refuse to honour the property rights of those holding them. Every time the RBI issues a currency note, it adds a liability to its balance sheet. By refusing to honour these notes as legal tender, the RBI will extinguish its liability towards persons holding them, in effect enriching itself. In addition, substantial restrictions have been placed on exchanging old notes for new, withdrawal and exchange of money. This is a substantial interference in the rights of people from accessing their own money. This is expropriation, not demonetisation.

In its broadest sense, expropriation refers to taking over of certain items or goods by the government by refusing to honour the property rights of those holding such items or goods. Bank nationalisation was an act of expropriation. The Indian government refused to honour the property rights of the owners of banks and transferred the ownership of the banks to itself. In land acquisition also, the government expropriates the property rights of individuals.

Restrictions have been placed on exchanging old notes for new, withdrawal and exchange of money. This is a substantial interference in the rights of people from accessing their own money. This is expropriation, not demonetisation

EXPROPRIATION need not be an absolute taking or extinguishment of property rights in all cases. Even a high degree of restriction or interference with property rights has been held to be expropriatory in many jurisdictions worldwide. Therefore, the government and RBI’s decision to (a) withdraw legal tender status, and (b) impose severe restrictions on withdrawals from one’s own account is definitely an act of expropriation. It falls in the same category of the 1975 Emergency imposed by Indira Gandhi that extinguished the fundamental rights of the citizens. The difference is that while Emergency was promulgated by the President under the Constitution, demonetisation was notified by a Joint Secretary under a law, constitutional validity of which is under challenge.

That India is a land of ‘jugaad’ was once again proved by the innovative ways of converting black into white money and a flourishing ‘black-market’ that has sprung-up for the purpose. As far as corruption is concerned, the colour of the currency makes no difference. Neither is it a one-time activity to be put an end to through such one-time measure. The roots are much deeper, none of which are being addressed by this government including electoral corruption which is the grandmother of all corruption.

In the event, all that ‘demonetisation’ has done is to put a reasonably healthy and functioning economy through forcible dialysis by taking out 86 per cent of its blood and purifying it through ‘Digital India’ machines. As is said when a patient is put on dialysis, he is on ‘borrowed time’. God alone knows whether this will be the same with India’s economy.

For all we know, country may be staring at either hyper-inflation or stagflation. The jury is out.

VOL. 10 | ISSUE 9 | DEC 2016

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