Demonetisation : Past, Present & Future

Bibekananda Ray

8th November will, from next year, be a red-letter day in India' s almanac, like 15th August and 26th January, because on this day in 2016 the Indian economy and society suffered a severe trauma. The Union government in New Delhi construes the trauma as temporary, which it deems as the 'birth pang' of an economically glorious future. Eight weeks after the day the trauma is hurting less but the crimson dawn of a 'glorious' economic future is still not seen on the horizon. Meanwhile, while common people continue to bear the cross, believing in the government's promise of a new society, free of corruption and 'black' money, almost all opposition parties are agitating in and outside Parliament, demanding rollback of the demonetisation move which caused enormous woes and hassles for depositing and exchanging two banned paper currencies of 500 and 1000 rupees in their bank accounts and for drawing and depositing cash through ATMs with credit and debit cards. Raids by the income tax authorities and enforcement directorate are under way and sensational seizures of currencies, gold etc. from hitherto unsuspected private professionals and high government officers are occurring every day. It is now revealed that on 8th November after Prime Minister Modi's terse announcement of demonetisation there was a race for depositing huge number of banned notes in banks up to midnight (00 hrs), which the IT officials are now questioning. The RBI has issued a plethora of directives to banks, some transient and contradictory, which are driving people crazy. A month-long Lok Shabha session could not carry out any scheduled business except a bit on the last day, as opposition MPs made uproar, demanding a discussion and a vote on demonetisation as well as the Prime Minister's presence in the two houses to reply to their questions. Among the States, most critical has been West Bengal whose Chief Minister, Mamata Bannerjee has been questioning the move, right from Day One, demanding its rollback to diminish people's woes and save the economy from her perceived disaster, calling Mr Modi names, orchestrating like-minded parties and demanding his ouster. Most other States and UTs are mute, except Bihar, whose Chief Minister, Nitish Kumar supports the move and refused to ally with Ms Bannerjee to orchestrate a national protest and a demand for Mr Modi's ouster, though the next Lok Sabha poll is still three years away. Like her, Congress Vice-President, Rahul Gandhi is alleging that Mr Modi took bribes amounting to 40 crore rupees from two big corporate houses, when he was the Chief Minister of Gujarat (2001-2014), citing secret IT records that Delhi Chief Minister, Arvind Kejriwal first cited. Mr Modi is silent on the charge but is continuing with the refrain that he would free India of black money and end 'parallel economy' and that his demonetisation move has unleashed a war between the honourable and the dishonourable. Economic growth has somewhat slowed; exports have declined and the banks are in a mess for virtual closure of ATMs and splurge of RBI directives. When replacement currencies were much less in volume than the banned, Mr Modi launched another new move of 'cashless economy' where credit and debit cards will gradually replace paper currencies and coins. Already a part of urban population is used to online purchases with credit and debit cards, the government is aiming to train a more sizeable population in cashless transactions which will ultimately cut government expenditures on printing paper money and minting coins. New 500 and 2000 rupee notes are in circulation through banks; but are much less in volume than the scrapped currencies; existing legitimate notes of 1, 2, 5, 10, 50 and 100 are, and will be, in short supply until reprint. On the whole, a kind of currency draught is prevailing in India, which the government is indirectly admitting by encouraging cashless transactions.

Demonetisation has been done in India before too but never in such a large scale. In January, 1946 and in 1978, Rs 1000 and Rs 10,000 denomination notes, printed by the RBI in 1938 and 1954, respectively, were first demonetised. Rs 1000 notes were re-circulated in 1954 but demonetised again in January 1978. Rs 500 notes came into circulation in October 1987 and the 1000 rupee notes returned in November 2000. In 2015, the RBI outlawed 500 and 1000 notes, printed before 2005 but it was not strictly enforced by banks. It is the first time that 2000 rupee currency note has been introduced in November 2016. Although not unprecedented, 8th November's demonetisation has dislocated people's lives like never before. About a hundred persons died of sudden strokes while queuing to exchange and deposit scrapped notes before banks. Many Hindu marriages have been deferred, or had to be solemnised with promises of payments, or by registration only. Not having adequate paper notes, housewives broke earthen coin boxes for daily shopping. Tea leaf-pickers were forced to accept wages in scrapped notes, or none at all; their refusal led to temporary closure of some gardens. Banks and cooperatives refused farm loans for the rabi season for currency shortage; while banks forced new 2000 rupee notes, they could not be changed in the market for short supply of 100 and lower-denomination notes. The RBl's coffer is overflowing with banned currencies which have to be burnt, or recycled to produce new currencies, the raw materials being the same for the old and the new notes.

While common people generally supported the move for the PM's avowedly 'noble' aim of weeding out black money, fake currencies and paralysing terrorists, economists are not unanimous about its efficacy. They allege that the RBI and the Union Finance Ministry did not make adequate preparations to absorb the shock. The RBI should have printed and circulated additional tranches of currencies in Rs100 and lesser denominations to cope with the sudden vacuum. India's two renowned economists—Dr Manmohan Singh (former Prime Minister) and Nobel laureate Amartya Sen—lambasted the move as 'organised plunder' and 'despotic', respectively. The society has been churned by it with everybody discussing it in homes and markets; economists doubt, if the government's assurance that the situation will normalise by 2017 February-end.

The phrase 'black money' (although no currency or coin is really black) came into circulation in India during the World War-II to mean funds earned by black-marketers who did not pay income and other government taxes as well as ill-gotten money earned in bribes, kickbacks and other corrupt practices. The total amount of tax-evaded money deposited by Indians in Swiss banks alone is deemed to be about two billion to 1.6 trillion US dollars, i.e. about 14.33 thousand crore to 1.6 lakh crore rupees; deposits in other foreign banks are additional; in July 2011, the Union Finance Ministry told the Supreme Court that the tax-evaded money, deposited by Indians in foreign tax-havens amount to 500 billion US dollars, i.e., 35.8 lakh crore rupees ($=Rs 71.64), the highest among depositing countries. In last five years, the amount must have escalated.

The future of current demonetisation is a guess; no big country ever did it. The President of the North South American country, Venezuela (91200O sq km), Nicolas Maduro announced demonetisation of 100 boliver notes on 11th December, to be effective within 72 hours but recanted it on public protest. On 20th December, this year, Pakistan announced gradual withdrawal of Rs 5000 notes after taking the Senate's approval and warning people that these note would be devalued. Demonetisation in Pakistan would be staggered over three to five years; thus, its move was less severe, less messy and better planned than India's. Seven other countries demonetised their currencies in the past—Nigeria, Ghana, Zimbabwe, North Korea, Soviet Union, Australia and Myanmar but in none, people's woes were as much as of Indians in November-December 2016.

Mr Modi is unmoved by criticism; he thinks, people broadly support him and the country would be rid of black money by this and other moves in the offing. The NDA-II government got an amendment of benami transactions Act passed in November, this year; Mr Modi has announced that next on his agenda is identification and outlawing of benami property after the demonetisation fires were doused. No economy can be wholly cashless; only digital-savvy young people can quickly learn to use it. Certain transactions will succeed only with cash. The opposition leaders' shrill demand for scrapping or rolling back the move in and outside Parliament looks more like a camouflage of its hoarded largesse in scrapped currencies, or could be in genuine sympathy with common people who were indeed hurt by the move but their woes are diminishing.

No utopia has ever been real. If all hidden outlawed currencies are pulled out and destroyed, new currencies will be hoarded to evade tax net, already new 2000 rupee notes, hoarded in lakhs with complicity of bank officials, have been seized. New note-printing machines will come up near and beyond the borders with Bangladesh and Pakistan. Unless the money hoarded in foreign tax-free banks are seized and turned white too, 'black money' will persist and benami assets acquired with it will multiply and India, as it is said, will return to 'square one', further widening the 'rich-poor divide', presently second widest in the world, after Russia.

Frontier
Vol. 49, No.29, Jan 22 - 28, 2017