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White is the new black

A week into the demonetisation drive, we are in the midst of a painful transition. In a televised speech >on November 13 delivered in Goa, the Prime Minister sought 50 days’ reprieve, though he did not tell us what exactly we should expect. Perhaps we are en route to a better state but in the interim we are left to ponder an unedifying transition. Much of the evidence of what is taking place in the economy since the fateful night of November 8-9 is anecdotal, but no less valuable for that is all we have.

News from different parts of the country indicate two developments. On November 8 itself, there had been frenzied late-night shopping till midnight especially in the upmarket malls. This indicates that some sections of the populace had money hoarded from unaccounted activity and wanted to get rid of it while it was still legal tender. From the next day on, there has been a rush to the banks to exchange currency notes and to deposit money into savings accounts. The experience of those attempting the former has not been a happy one. Reports speak of long waits, scuffles, bank employees favouring relatives over fellow citizens and banks running out of cash. The mind is drawn to accounts of the life of the people of Delhi in the reign of Mohammad-bin-Tughlaq.

Accounting for oneself

The other development is the reported spurt in deposits in Jan Dhan accounts. As these accounts mostly belong to persons with low incomes, and often showed a near-zero balance, it suggests that these deposits may be black income being distributed among many agents. We have heard of benami titles to property, could we have just witnessed the emergence of benami deposits? Could the facility of allowing deposits of up to Rs.2.5 lakh without attracting income tax have unwittingly acted as a conduit to the laundering of black money?



Pulapre Balakrishnan
Accounts have also come of gold sales rising. How can this be possible when high-denomination notes, which as we shall see constitute the overwhelming part of total currency in circulation, are no longer legal tender? We are told that this is made possible by pre-dating sales. Of course, where stock movement is verifiable this would be difficult. But it does speak of many loopholes that have been suggested as means of sabotaging the intent of the demonetisation. Yet more exist. We have actual statements made by party bosses in Tamil Nadu that they have distributed old notes to their workers before a by-election to come. So, in Uttar Pradesh where elections are due only in 2017, there is no reason why money cannot be distributed right away, a form of advance payment. One would expect that the Rs.4,500 limit on the exchange of notes is just the right magnitude in the context.

A slowing of commerce

Demonetisation had targeted the stock of illegally accrued wealth held in the form of money. Where disgorging of it in the forms suggested above is not possible, demonetisation would be successful in punishing the guilty. This view of the role of money as a store of wealth is appropriate. But the demonetisation can also affect the flow of income in the future even when it is to be earned legally. If this happens, it also punishes the innocent. This it can do as money is also the medium of exchange without which the overwhelming majority of transactions cannot occur. It is not hard to imagine the impact on transactions when over 85 per cent of the country’s money stock — that is, the share of high-denomination notes in the total — is sucked out of circulation. The economy has responded predictably. The pre-midnight shopping spree of the day on which demonetisation was announced was followed by a slowing of commerce not only in the bazaars but also in the upmarket shopping malls themselves. Where transactions involving employment of persons cannot be undertaken, there is an irretrievable loss of output. It cannot be made up after the currency shortage has been ended. The national political leadership and the technocrats of the Reserve Bank of India (RBI) appear to have missed this possibility.

The Prime Minister has expressed his confidence that the people of India will bear the inconvenience of the transition for the sake of purifying the country. But engineering a loss of employment is not inconvenience, and this could hardly have gone unnoticed by those affected. The RBI’s stance is worthy of Marie Antoinette. It is quoted as exhorting Indians to turn to Internet banking as it would “also enhance the experience of living in the digital world”. This is somewhat brazen as the RBI has been granted the monopoly of note issue precisely so that it facilitates economic exchange. There are unlikely to be many takers for the government’s propaganda on public radio which has a kirana store owner say that he is not worried as his money is clean and he has till the end of the year to change it. This misses a trick as it ignores the many who cannot earn an income as the system does not have enough money to enable transactions to take place.

Thus views on the transition are likely to be influenced by how one is placed in relation to the income generation process. So, for instance in Kerala, where many live directly or indirectly on monthly remittances from West Asia and where undeclared income is rife, a relatively aware local population is likely to see the demonetisation as justified and hurting the rich. They may well see it as a ‘surgical strike’. However, in small-town northern India where households are dependent upon daily earnings from the local economy, the populace is likely to be energised less by schadenfreude at the discomfiture of the rich as much as the loss of their own livelihood, about which we presently read in the press. They are likely to see the demonetisation as a form of bloodletting.

What could have been done

Could this have been foreseen? Yes, absolutely, were the policy intelligently designed. The central bank could have started replacing the larger denomination notes with smaller denomination ones much earlier. This would have isolated those holding unaccounted income in the form of high denomination notes, the unspoken premise of the demonetisation. There is of course a case for secrecy, but the RBI has long shown itself to be unmindful of the need to facilitate transactions in any case. This is the only conclusion that one can draw from the fact that so large a part of the money stock was constituted by high denomination currency. It reflects a complete disregard for the low-value transactions that dominate the economy. It is not hard to see that a very large number of Indians must earn less than Rs.500 a day. Given this, it reveals a monumental lack of sensitivity to withdraw the Rs.1,000 note and bring in one of Rs.2,000. Given the average daily income of an Indian, and the average value of transactions, a move to a money stock far more balanced between the denominations is absolutely essential now. The issue of a shortage of small denomination notes in the economy was brought to the attention of the RBI some years ago.

Stemming the rot within

The Prime Minister has brought the issue of corruption centre stage. But it is important to recognise that there is more than one narrative on the issue. One is that a few rich entrepreneurs have evaded the rules laid down by the state and got ahead of the rest of the people. At one level, this cannot be denied and this line of argument can be whipped up to some political advantage. But there is a counter-narrative, and it is that the entrepreneur in India is forced to generate ‘black money’ to gratify the political class and the civil service who are the gatekeepers of all activity. This is hardly a novel argument. It is what underlay C. Rajagopalachari’s imagery of India being governed by the ‘licence-permit raj’. His only mistake was to see this as entirely due to Jawaharlal Nehru’s economic policy. Actually this is India’s inheritance from colonialism, zealously guarded by its beneficiaries, again ranging between the political class and the civil service.

So if Prime Minister Narendra Modi does go on to check all records going back to 1947, as he has said he is willing to do to root out corruption, he may also want to investigate the role of the government machinery in the process of generating unaccounted income. One should not be surprised if this role is quite substantial. Of course, one hopes he does not do this as it not only carries more than just a whiff of ‘retrospective taxation’, it can leave us mired in a transition longer than the one we are in now. We are told that our Prime Minister admires Lee Kuan Yew. We know that in building his country the late Singaporean statesman started with the civil service. He is known to have treated its members well, but is unlikely to have countenanced their being corrupt themselves.

Pulapre Balakrishnan teaches economics at Ashoka University, Sonipat, Haryana. The views expressed are personal.

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Printable version | Sep 23, 2020 2:10:37 AM | https://www.thehindu.com/opinion/lead/White-is-the-new-black/article16666857.ece

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