Demonetisation and its Discontents
The Disastrous Socio-economic Impact
BY the end of 2016, a steady stream of data corroborating the lived experience of the suffering millions hit by Note Ban presented a dismal picture of economic slowdown across agriculture, manufacture, services, infrastructure, real estate, trade and export. To take just one example, the All India Manufacturers’ Organisation (AIMO) sent the government as many as three survey reports stating that micro-small scale industries suffered 35 per cent jobs losses and a 50 per cent dip in revenue in the first 34 days since Demonetisation. Banks were flush with funds, but credit uptake by business had dipped to the lowest level since 1960s.
Adding to the embarrassment of the government, India's former and incumbent Official Statisticians, the RBI, practically all Indian (and many foreign) economists, the World Bank and International rating agencies – all revised downwards the estimated growth rate of our GDP, putting the blame squarely on Demonetisation. Shortly after Modi’s 8 November announcement, Kenneth Rogoff, author of the highly influential book The Curse of Cash (see below) wrote an article titled “India’s Currency Exchange Gamble and the Curse of Cash”, pointing out where he differed from the Indian approach:
“I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges. … India has given people 50 days…
Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes. …” (The Wire 21.11.2016)
A more hard-hitting denouncement came from Steve Forbes. The Editor-in-Chief of Forbes magazine (of Forbes 500 fame) wrote:
What India Has Done to its Money is Sickening and Immoral
Dec 22, 2016
"…What India has done is commit a massive theft of people's property without even the pretence of due process -- a shocking move for a democratically elected government.
“…Not since India's short-lived forced-sterilization programme in the 1970s -- this bout of Nazi-like eugenics was instituted to deal with the country's 'overpopulation' -- has the government engaged in something so immoral.
"India is the most extreme and destructive example of the anti-cash fad currently sweeping governments and the economics profession.
"Countries are moving to ban high-denomination bills, citing the rationales trotted out by New Delhi. But there's no misunderstanding what this is truly about: attacking your privacy and inflicting more government control over your life.
"By stealing property, further impoverishing the least fortunate among its population and undermining social trust, thereby poisoning politics and hurting future investment, India has immorally and unnecessarily harmed its people, while setting a dreadful example for the rest of the world. … As for the digitisation of money, it will happen in its own good time if free markets are permitted."
As opposed to what the Prime Minister promised, it is now evident that the 'pain' is not short-term. But how about the promised 'long-term gain' in terms of getting rid of black money?
Where Has All the Black Money Gone?
Black money is essentially a flow, a process that generates unaccounted (not necessarily illegal) income hidden from the taxman, but we can also conceive of and try to measure its volume or stock at a particular point of time. Whichever way you may look at black money, Note Ban has produced only negligible and momentary (and in some ways counter-productive) results.
In the first burst of officially orchestrated euphoria about the 'bold move', Modi's drum-beaters in the government and in the media proclaimed that the best part of cancelled notes would go out of circulation. This would (a) destroy most of the black money (b) impose a huge loss, i.e., a punitive cost on hoarders of black money and economically annihilate them and (c) reduce the liabilities of the RBI and thus the national exchequer would earn a hefty dividend to be used for public welfare.
Now that solid data has been made available, let us examine these claims, starting with the first. A news analysis published in The Economic Times ("Demonetisation: RBI's own figures indicate return of 15 lakh crore of banned notes", 14 January 2017) points out that, at the very least, 96.5 per cent – and most probably much more – of banned notes had re-entered the banking system by the end of the last year. In other words, only about 3 percent (if not less) of these notes have been 'destroyed' in the economic sense. The calculations are based on figures available from the RBI; several other analysts too have independently arrived at the same conclusion.
The first claim thus falls to pieces. Moreover, one must not forget that black money in the form of cash constitutes only 3 percent (as estimated by former JNU Professor Arun Kumar) to 6 per cent (as estimated by the IT department) of the total amount of black money (including cash, gold, securities, real estate etc.). That means, Demonetisation had as its target only 3 to 6 percent of estimated black money stock. And what did it actually neutralise? At most three percent – only of that meagre cash component, while 97% was laundered white.
And how was this made possible? Obviously, both small tax evaders and big players proved smarter than the government and bypassed all the strict regulations, audits, etc. to unload their black money into the 'white' economy. Some of them might have suffered some losses and inconveniences, but they are far from finished. Barring a few (for example, the Pradhan Mantri Garib Kalyan Yojana, which was a shameless compromise with big black money holders and the advance tax payment scheme) most other methods used for the purpose were illegal. These included depositing money in benami accounts, accounts of friends and family members and Jan Dhan accounts, laundering black money through brokers for a commission, and so on. Such activities meant an expansion or proliferation of black business and the new black money generated in this process (e.g., the discounts earned by the broker who changed Rs 1000 notes for maybe Rs.800) actually pushed the old black money, across the extremely porous and largely arbitrary border, into the ‘white’ region. All this puts paid to the second claim.
The third claim was actually rendered meaningless because nearly all the cancelled currency quickly got back to the RBI's chests. What if most of it did not? Would that mean a windfall to the government to be passed onto the aamadmi? No, even in that case there would be no question of any special dividend to be paid by the RBI to the Government. This was clarified by the RBI Governor himself on 7 December last year. So the third claim also stands exposed as a deliberate lie at par with Modi's false promise of gifting Rs.15 lakh to every Indian out of the huge bounty he vowed to bring home, once elected Prime Minister, from the Swiss banking system.
Meanwhile, the real fight against black money was absolutely forgotten. Thus, just three days before Note Ban, the Treaty on Mauritius Route (notorious for “round tripping”, i.e., black money of Indians travelling overseas and coming back, legalized, as FDI) was extended.
The "drive against black money" thus turned out to be a deceptive slogan designed to exploit the people's earnest desire for an effective fight against corruption, to mobilise mass support for the project and most crucially, to market the 'chaiwala’s son' as a crusader against corruption, as a trustworthy leader of the honest poor in their struggle against the corrupt rich. With the falsehood getting exposed pretty soon, it was unceremoniously abandoned for a set of more high-sounding slogans: Cashless Society and Financial Inclusion.
The Hoax of Financial Inclusion and Digital Empowerment
Reduction of poverty, equitable growth, financial inclusion, access to formal credit networks – many are the sparkling packages in which digitalization is marketed around the world (we shall return to this in the next chapter). The specific content and thrust, of course, vary from country to country.
In our country, the high-decibel state-corporate propaganda machine seeks to divert the people's attention from basic problems like unemployment, aggravating agrarian and industrial crises, steadily declining real wages, rising inequality, landlessness and eviction and so on, and waxes eloquent about the supposed advantages of digital money over cash. It is conveniently forgotten that for the overwhelming majority of Indians who have little money to spend in the first place, the debate over form of money – digital or cash – is absolutely irrelevant and disgusting.
The government claims that digital transactions will lead to formalisation of the economy, and therefore, to transparency and an end to black money. This is sheer sophistry. Are the advanced, predominantly formal economies free from corruption and black money? UK tops the list of countries which stack money in the Swiss banking system, followed by the US. Has pre-eminence of digital transactions prevented this? Is not Nigeria, a poor country with an extremely low cash-to-GDP ratio, one of the most corrupt countries in the world?
In fact, there are cash-intensive countries with lower perceived corruption and less cash-intensive countries with higher perceived corruption. The “corruption perception index” of Transparency International represents the perceived level of public sector corruption on a scale of 0 (highly corrupt) to 100 (very clean). In 2015, the index was higher for many economies with higher currency-GDP ratios (75 for Japan and Hong Kong; 86 for Switzerland; 81 for Germany; 76 for Austria) and lower for many economies with lower currency-GDP ratios (44 for South Africa; 38 for Brazil; 35 for Mexico; 36 for Indonesia).
The problem with the official thesis on the panacean properties of digital money – that it automatically leads to formalisation of the economy and financial inclusion of the poor – is that it is impossibly simplistic and unrealistic. For the growth of a formal economy, formalisation of exchange alone is far from sufficient; what is more important are adequate development of productive forces (including technology and labour skills) as well as commensurate changes in production relations. Our tremendous backwardness in these areas cannot be overcome by, say, plastic money or BHIM or PayTm. So, even assuming a considerable progress of digitalization in spite of the hundred constraints, that would not by itself usher in a broad-based formal economy of mature capitalism.
Similarly, financial inclusion does not occur merely by large-scale opening of bank accounts or issuing debit/credit cards. Timely and easy credit must be made available to the needy people and they must be considered creditworthy by the lending institutions. If such conditions are not met and the practical problems of employment/production/regular income are not addressed properly, mere provisioning of banking facilities remains ineffectual. That was the experience even in the pre-reform years in the case of what was called priority sector lending from nationalised banks to farmers, small entrepreneurs etc. Today the situation is no better. According to the FII survey (Financial Inclusion Insights survey) conducted last year, 23% of the accounts under PMJDY remained as zero balance accounts (of course, some of these did serve one ‘important’ purpose – as conduits for laundering black money in the aftermath of Demonetisation). This shows that mere opening of accounts does not ensure the use of accounts to receive salaries/wages or undergo any form of transaction.
Shifting Goal Posts and Statistical Jugglery
In the middle of a hectic poll campaign in UP, BJP president Amit Shah was asked in a televised interview in a national channel: what did the common man gain from Note Ban? He replied that it injected sufficient liquidity into the system (meaning the cancelled notes which were deposited in the banks) and that has enabled the government to take up various pro-poor schemes in the budget. The interviewer, for reasons best known to him, did not call Shah's bluff. He did not point out that Modi's lieutenant was just telling a lie and deliberately misleading the nation. The money in the system are perfect legal tender belonging to the depositors – not revenue to the government to be used for the budgeted schemes.
Previously the BJP had claimed that the banks and therefore the government would be gifted with a windfall equal to the huge amount of the legalised currency that would not return to the system. And now that almost all those notes – including the alleged black money – have been lawfully deposited into the banks, the shameless second-in-command in the ruling party just shifts the goalposts to the opposite end and declares that the government can spend more precisely because the demonetized currency is back in the system!
Well, one might take this as yet another chunaavi jumla (empty election rhetoric) the BJP leaders, including the Prime Minister, have made themselves famous for. But even in their official statements, responsible ministers and government agencies are frequently coming up with doctored statistics and their own ‘alternative facts’. Thus in early January the Finance Minister, rather than acknowledging and acting upon the disturbing feedbacks pouring in from all corners of the country in the immediate aftermath of Demonetisation, chose to try and paint a rosy picture of the economy by citing selectively from stray figures of an apparent hike in the government's revenue collection. However, knowledgeable analysts were quick to demonstrate that he was suppressing the real causes behind the rise (e.g., a hike in payment of advance income tax as a method of using up cancelled notes) and other relevant data, thereby misleading the nation by half-truths.
To top it all, the Central Statistics Office (CSO) in its 28 February press release declared that in the third quarter (Q3) of the financial year, gross domestic product (GDP) in real terms grew at 7% along with an 11.2% rise in private final consumption expenditure over corresponding estimates in the previous year. In short, the Q3 growth rate was reportedly marginally lower than that in Q2, but consumption expenditure reportedly witnessed a robust growth. The Prime Minister freely used the growth ‘guesstimate’ in election speeches to claim that the adverse consequences of Demonetisation were unfounded. But acclaimed experts, including the incumbent Chief Statistician of India, expressed their doubts and explained the technical details of how this biased finding was arrived at.
Even this, perhaps, could be taken as something passé. After all, where is the government that does not lie to the electorate? Better take a look, then, at the most authentic documents indicating how the government actually proposes to handle the economy post Demonetisation.
The Economic Survey and Budget Proposals
Between them, these two documents lay bare the tensions inherent in the government's economic thinking. The former, prepared as usual by the Finance Ministry with some of the contributions coming from pro-government but at least nominally independent economists, recognised in part the 'temporary' damage done by Demonetisation and suggests few countervailing measures including a half-baked scheme of Universal Basic Income (UBI). The Budget Proposals, reportedly prepared this year mainly under the supervision of the Prime Minister's Office, blatantly rejected these concerns.
After loudly projecting Demonetisation as an anti-rich, pro-poor measure for nearly three months, the government eventually refused to tax the rich and expand welfare-oriented and employment-generating public expenditure that would (a) provide succour to the battered aamadmi and (b) rejuvenate the trounced economy. The much hyped UBI remained conspicuous by its absence. Even in these difficult times, the government stuck to the conservative tradition of consistently cutting down the Centre's expenditure as a share of GDP: from 14.9% at market prices in 2011-12 it had already fallen to 13.4% in 2016-17 and yet in the current year the share is budgeted to shrink further to 12.7%. Obviously the overriding concern remains fiscal discipline, because that is what the watchdogs of finance capital – the international rating agencies -- demand. Modi’s pro-poor pretensions thus stand fully exposed.