A STUDY ON #DEMONITISATION IN INDIA

          It is more than 100 days since #demonitisation of high value currency of Rs. 500 and 1000 was announced. Several opinions for and against, have been expressed, from macro/monitory economic perspectives and political angles. 

When the Prime Minister announced this decision, the main reason he stated for the move was the need to take out (1) black money and (2) fake currency from the economy.

In such a situation the Government ought to have had a rough estimate regarding the quantum of such black money and fake currency that had infiltrated the system, before embarking upon such a move to demonitise 86% of the entire currency in circulation, estimated to be around 15.5 Lakh crores.

But very strangely, in a reply to a question in the Parliament, the Finance Minister stated that neither before nor after the announcement of the demonitisation decision, the Government had any estimate regarding the quantum of black money and fake currency in the system. 

Then, who were the authorities involved in arriving at such a major decision affecting the entire economy and touching the lives of every citizen in this country, and on the basis of what data, is not known. 

Now with a cool head let us analysis the reasons and results so far.

#FAKE CURRENCY:

One article that appeared in The Hindu subsequent to the above announcement stated that during an inspection of the vaults of the RBI in 2010, it had been found that fake currencies were there in the RBI vaults.  It was also stated that these fake currencies had their origin in Pakistan and that they were used for terrorist funding by them on the Indian soil; that since Indian currency was being printed using paper procured from abroad, Pakistan had easy access to the same paper and were therefore able to print such fake currencies.

However, two aspects came out during the demonitisation exercise:

(1) There was no mechanism to ensure that fake currency does not get into the banks and get exchanged for new currencies in such a mammoth exercise and there were no provisions to track any such currencies which got into the banks, either due to lapse in detection, negligence – willful or due to pressure of work or even due to indulgence of the banking staff themselves, including at the RBI.  That such fake currencies had found their way into the vaults of the RBI even at normal times signaled that it was easy for such currency to get into the banks in a mad melee.

(2) Even during the process, there were reports that import of paper for printing of the new notes was being contemplated – which threw out the reason that use of imported paper was that which enabled Pakistan to print fake currencies.

Apart from the above two aspects, only time will tell whether the security features in the new currency notes are enough to put off future producers of fake currency. However, news already comes in that new 2000 Rs fake currency is getting injected into India via Bangladesh.

Again, there are no statistics regarding the percentage of such fake currency in circulation and why it would not have been possible to detect them in a demonitisation exercise over a larger period of time with specific year notes being withdrawn at a time, and simultaneous issue of new currency with enhanced security features. 

#BLACK MONEY:

          Though it was first stated that the intention was to kill black money, later, it was altered to killing the #black economy, because, it was found that money as such had no colour and it acquired such a status only depending upon whether the possessor had accounted for it or not.  The question of accounting for it however arises only in such cases where it was due to be subject to any tax and otherwise, accounting for it or not did not matter.

          Thus, if a particular person had generated black money by not accounting for it and not paying the tax due on the said amount, it remains black only as long as it remains in his possession, as currency.  The moment he invests that currency, or passes it on to someone else in any other method, it ceases to be black any more, unless the person who has received it also has to account for it and pay tax on the transaction and if he has not done so.

          In such a continuing transaction stream, to stop the transaction mid way and calculating the black money held in currency, is like taking a snap shot out of an entire film roll.  It has no actual effect on the actual illegal transactions. 

          And all those who indulge in such black economy transactions as a matter of routine, have mechanisms to account for them under wrong heads, most difficult to be investigated at a later point in time and thus legitimize the ill-gotten wealth.  That is the primary reason why, in spite of obvious accumulation of huge wealth in the hands of few individuals, during a short span of time, no action could be taken by any of the law enforcing agencies. There are so many loop holes to enable them escape.

          Difficulties will be faced only by such people who did not have avenues to utilize such areas of exemptions and who did not have scope for any such known source of income and were in the Income Tax bracket.  In such cases, the amount should have been so huge that they could not break them into smaller amounts to be deposited in the names of their kith and kin or benamies. Even in such cases, where generation of such un-taxed amounts are routine, they would have already settled the mechanism to bring them into their accounts by utilising some exemption or the other. Income Tax authorities already are on the job of verification of such declarations, to the extent possible. 

Now, without closing those avenues to avail exemptions under the categories where such accounting is not required or does not require to be taxed (like agricultural income and political donations) any requirement for getting the currencies into the books of accounts would have no meaning, in terms of detection of such ‘black’.

          People who have researched on the subject of black money in the Indian Economy are almost unanimous in their opinion that out of the 20% of black money generated in India, only 6% is within the country and only less than 3% is held in cash.  The rest of the amount is abroad or held as gold or in real estate. 

The question that had time and again been raised is whether for that 3% (which could be only in the hands of at best very few individuals), such a huge exercise, putting to difficulty the entire country was required.  Would not a strengthening of the anti-corruption and anti-evasion departments and their mechanisms itself, coupled with a robust judiciary not yielded results? For that matter, all the cash hauls unearthed during the demonitisation and the data on which action could later be taken, would also only depend upon these very fundamental organs of the Government.

          Apart from the above, the private banks, particularly the new generation private banks are not known to seriously follow the KYC protocols and address verification, due to the pressures to meet their internal targets.  Most of the industrial community is known to bank with the new generation private banks.  The minimum balance prescribed for each account is also prohibitive for common people to have accounts there. There the scope of multiple accounts increases.  This gaping loop hole came out during the demonitisation exercise itself, where large chunks of new currency was seen to have been distributed by such banks to single entities.

          The RBI also appears to have been supportive to these private banks by issue of more currency to them when compared to the other public sector banks, where the common man held accounts.  If the RBI could be so favourably disposed towards them in such an emergency, the position in ordinary times could very well be imagined.

          The entire banking sector, including the RBI have been kept out of the ambit of audit by the Constitutional Auditing authority, viz., The Comptroller and Auditor General of India (C&AG).  Right from the 80’s, senior Parliamentarians like Shri. #Era.Sezhian who was himself the Chairman of the PAC, had been highlighting that there were serious issues in the accounts of the banks requiring attention, which was proved by the fact that their total Debit and Credit sides were not tallying and that it called for the necessity for a statutory audit by the C&AG.  

          So the question that would naturally arise is as to how, in a democracy where the pillars of powers are controlled by mutual checks and balances, such unfettered and unaccountable powers to one institution alone, could be granted. 

          How can an organization deciding upon the life and fate of every citizen of the country, which has a say on their hard earned incomes, whether deposited in banks or held as currency, have such sky high powers, as to deny the fundamental right of the citizens, is the question that this demonitisation exercise has brought to the fore.

          And the ancillary question that would arise out of it is whether any exercise executed by such an unaccountable body could itself be expected to be beyond the arms of corruption and without it itself becoming a point of generation of black money or black economy.

#CASHLESSNESS:

          When the Prime Minister announced the decision, he stated that there will be an immediate 2-day bank holiday and thereafter the exchange process will start.  But it could not. 

          Then the Prime Minister asked for 50 days.  The reasons attributed were that the ATMs required re-calliberation due to the difference in size of the newly printed notes and that printing of new currency could take time.  It was stated that new currency could not have been printed in advance, due to the requirement to keep secrecy.

          People with knowledge of the printing capacity of the RBI had stated even at the outset that new currency to replace the demonitised ones could not be available within the 50 days time.

          Then came the insistence on cashless transactions.

          In a country where illiteracy is still rampant, where most of the parts of the country are untouched by banks, ATMs and POS, insistence for jumping into a cashless economy can easily be seen only as an excuse to get out of the obligation to replace the demonitised currency notes.

          It has repeatedly been pointed out that the cyber safety in India is far from the desired standards and that even a month prior to the demonitisation announcement, it was admitted that a large chunk of debit card data had been compromised.  With all sorts of hackings around, pushing an ill-equipped system to embrace such cash less transactions would be perilous. 

CONCLUSION:

          The #RBI is yet to release the data pertaining to the demonitisation exercise till date.  Those who defend the silence of the RBI stated that they were taking time to consolidate figures. So much for the computer preparedness of the country, even at the level of RBI ?  Then how are they going in for a computer based, e-transaction based economy?  Now the RBI has refused to divulge information on grounds that it will endanger security, safety, etc. Who believes these things?

          It is a #fundamental right of individuals to decide whether their money is to be held by them in cash or in bank.  The banks are required to offer proper rates of interest to attract deposits and also give incentives to make cash less transactions attractive.  On the contrary, the interest rates for savings accounts and even fixed deposits have steadily declined, putting to much difficulty that class of the majority of people of the country who do not invest in shares. 

          In the absence of the above said incentives, forcing the people to deposit their monies in the banks, would be obviously only to lend them at lesser rates of interests.  In a long term, it could be argued, that this would come back into the economy, in the form of job creation and salary to the people.  But while there is no certainty that a major chunk of this amount will not get siphoned off as NPAs, the cash crunch and disincentives for the forced depositors would be real – i.e., even assuming that a fool-proof e-system is put in place.

          If there is an estimated expenditure for the Government / RBI for printing currency, the amount involved in maintenance of the e-transactions would be recurring and multi-fold, as days go by and if the e-transactions themselves become the norm of the day.  The banks are bound to take advantage of that situation. Even if at initial stages the Government steps in to ensure that there are no service charges on cashless transactions, once it becomes the order of the day and people become dependent on the system, there is bound to be charges on the same.

          Thus it is evident that all the reasons stated for indulging in this mammoth exercise have been either false or misguided. 

          What has been a fact is that the people were put to unnecessary trouble and pain and the economy, particularly at the middle and lower middle levels has been very badly affected.  Saying these things openly invite accusations of being anti-Government or anti-national.

          #Prof U.R. Ananthamurthy in his last essay #‘HINDUTVA or HIND SWARAJ’, had this to say with a very heavy heart:

 “But there is another important fact we must pay heed to.  The middle classes, the Shudras, the Dlits and the Muslims have also been swayed by Modi’s oratory.  They seem to have given up leftist politics in the sway of Modi’s honeymoon period.  Perhaps it is only the Earth that will speak the leftilst language now, battered and infuriated as she is by Modi’s developmental agenda.  Perhaps she will unleash her fury through the weapons of storms, thunder, lightning, rain, floods and earthquakes.” 

          Let us pray that better sense develops; that elected governments do not take the people for a ride by selling falsehood in the name of panacea or ambrosia.

 Most importantly the Government has to keep this lesson of the burnt finger in mind while implementing the #GST, because an ill-prepared tax mechanism could  throw the economy into utter chaos and also affect the integrity of the country.