Thoughts on economics and liberty

MG Devasahayam’s views on demonetisation – I agree with much of them

Mr Devasayaham has shared this article which I believe is worthwhile to record here, on my blog.


Dissecting ‘Demonetisation’

[M.G.Devasahayam, Student of Economics and former IAS Officer]

“Demonetisation 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% 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.
  • 80% of 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 spoken and written about this ‘reckless misuse’ almost in unison.

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…”

RBI followed it up with a Circular: “In terms of Gazette Notification No 2652 dated November 08, 2016 issued by Government of India, ₹500 and ₹1000 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% of the cash in circulation was declared as invalid thereby destabilising an economy of 125 crore people and virtually decimating the institutional credibility of RBI. 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 issues are before the Supreme Court which has set up a Constitution Bench for the purpose.

The moot question is whether the objectives of demonetisation as given in the Notification and declared by Prime Minister really genuine? As far as fake currency is concerned, at a mere 0.025% of currency in circulation, it is just a speck. On the elimination of unaccounted wealth i.e. black money government was counting its chickens by estimating that up to ₹ 3 lakh crore–out of a total of ₹ 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. 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 ₹1000 and 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 ₹1000 and 500 notes, over 95% 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 located and extinguished. This would mean failure of the ‘great crusade’. Sensing this Government hurriedly announced an amnesty scheme making itself a 50% partner with the black money hoarders!

That much for extinguishing black money! But this does not appear to be the real objective of demonetisation as one would learn if one listened to Reliance Chief Mukesh Ambani who is among the main drivers behind Government’s policy decisions. In his speech at the launch of his e-payment wallet Jio Money Mr. 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 ₹7000-crore mansion in Mumbai, few hundred/thousand Rupees kept by the poor and toiling masses to buy food for themselves and their children and pay for grocery, vegetable, hospital expenses, school fees, bus/train fare etc. are unproductive! Gauging from Ambani’s speech the intention of ‘demonetisation’ appear to be to make bad-debt/NPA infested 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 ₹500 note can be considered high value denomination. Yet this was declared invalid, while ₹2000 note was introduced replacing ₹1000 note. It is learnt that initially RBI wanted to bring ₹5000 notes to cater to the super-rich and black money hoarders! But some sane counsel prevailed.

₹2000 notes were printed well in advance and made available the very first day while RBI did not even start printing ₹500 notes. It is also learnt that ₹2000 notes were sent to cash-chests of banks across the country well ahead of the ‘demonetisation’ announcement with strict instructions not to open the bundles and make account entry. This appears to be tenable considering the large quantity of ₹2000 notes that have surfaced outside the banking system so soon after PM’s announcement! ATMs were shut down in the guise of recalibration and most of ₹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 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 Central Government-Prime Minister downwards, all departments, RBI and commercial banks are marketing ‘cashless business’ it looks 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 Unique Identification Authority of India. 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.

Given the poor telecom infrastructure, connectivity, poverty and illiteracy it will be virtually impossible for senior citizens, women, farmer/fisher-folk, small-traders and informal sector workers, who constitute over 75% of India’s population, to adopt digital-driven transactions. The real beneficiaries of this mad marketing drive by the government are companies in this business, most of them Multinationals or their subsidiaries who can earn 0.5 to 3.5 percent commission in each transaction. In today’s estimate this will be worth about ₹1.5 lakh crores. In a bizarre manner, Government owned NITI Ayog has even launched a brazen Rs. 340 crore lottery scheme to promote digital online payments that will mostly benefit these companies, while depriving vast majority of the population.

In its desperate bid to ‘digitalise India’ Prime Minister’s Office has decided to link all savings bank accounts with customers’ Aadhaar numbers to enable digital transactions and has tasked finance minister and information technology minister to work out details. This is to facilitate 30 crore people who do not own phone, to join the digital economy and make online payments!

Anyone implementing this decision or directive on ground will be defying the Supreme Court Order of 11 August 2015 in Writ Petition (civil) No.494 of 2012, which inter alia states:

“Having considered the matter, we are of the view that the balance of interest would be best served, till the matter is finally decided by a larger Bench if the Union of India or the UIDA proceed in the following manner:

  1. The Union of India shall give wide publicity in the electronic and print media including radio and television networks that it is not mandatory for a citizen to obtain an Aadhaar card;
  2. The production of an Aadhaar card will not be condition for obtaining any benefits otherwise due to a citizen;
  3. The Unique Identification Number or the Aadhaar card will not be used by the respondents for any purpose other than the PDS Scheme and in particular for the purpose of distribution of foodgrains, etc. and cooking fuel, such as kerosene. The Aadhaar card may also be used for the purpose of the LPG Distribution Scheme; (extended to Mahatma Gandhi National Rural Employment Guarantee Scheme, National Social Assistance Programme (Old Age Pensions, Widow Pensions, Disability Pensions) Prime Minister’s Jan Dhan Yojana and Employees’ Provident Fund Organisation vide SC order of 15 October 2015).
  4. The information about an individual obtained by the Unique Identification Authority of India while issuing an Aadhaar card shall not be used for any other purpose, save as above, except as may be directed by a Court for the purpose of criminal investigation.”

Since Banks are the ones to implement this Aadhaar-linking decision, large number of its senior functionaries and managers can be hauled up for contempt of court and could face jail terms resulting in near-collapse of the banking system which is already under severe strain.

Can this ‘notebandi’ be called ‘demonetisation’ to eliminate black money and end corruption? According to analysts calling it so is a fallacy. In this case, the Central government has coerced the RBI to renege from its “promise to pay the bearer the sum of 1000 and 500 Rupees.” This could violate Article 300A (right to property) and Articles 14, 19, 20 and 21 (fundamental rights) of the Constitution. This is also serious breach of trust. 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 as the cost of its owner. 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. 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.

Through this ‘act of expropriation’ government has in effect confiscated the wages of the poorer segment of the population; stolen much of the income of the farmer and imposed a phenomenal burden of loss of purchasing power. The income/working capital of the daily wage worker, the wholesaler and retailer of goods, the farmer and the service providers have been taken away. This action falls in the same category of the 1975 Emergency imposed by Indira Gandhi that extinguished the fundamental rights of the citizens.

That India is a land of ‘jugaad’ is 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 taking out 86% 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’. Informal sector, farming and MSMEs are already feeling the enervating loss of blood! Economy may be heading towards massive job-loss, hyper-inflation or stagflation. The signs are flashing!

Sanjeev Sabhlok

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