Why India won't forgive Modi for gambling on Indian economy with demonetisation
Demonetisation of November 8, 2016, was not only a major economic step but also very much a political gamble. In an impassioned speech in Goa in November 2016, while announcing the demonetisation of the Rs 1,000 and Rs 500 currency notes, Prime Minister Narendra Modi lauded it as the cleansing of black money and corruption which had accumulated in the country over 70 years.
However, the last 70 years of governance included Jan Sangh leaders like Shyama Prasad Mookerjee, the founder of the Jan Sangh, Deen Dayal Upadhyaya, Atal Bihari Vajpayee, LK Advani, Bhairon Singh Shekhawat, and many others. So PM Modi deliberately posed himself as the cleanser and most honest leader in the last 70 years (actually 69 years from 1947-2016).
Demonetisation was intended therefore not only has a huge economic restructuring, but also a new, completely honest and transparent mode of governance.
However, some critical requirements, including legal ones, were ignored by the NDA government and many critics of demonetisation. In the Reserve Bank of India Act, 1934, which was amended post demonetisation by the Finance Act, 2017 dated March 31, 2017, Section 24(2) states that “the central government may, on the recommendation of the Central Board (of the RBI), direct the non-issue or the discontinuance of issue of such denominational values as it may specify in this behalf.”
But the demonetisation of the extent of 86 per cent of the total currency was not passed by the Central Board of the RBI, as the discontinuance of the Rs 1,000 and Rs 500 currency notes was kept highly secret by the Modi government till midnight of November 8, 2016.
Further, the RBI Act in Section 9 on local boards clearly stated that, “a local board shall be constituted for each of the four areas specified in Schedule I and shall consist of five members to be appointed by the central government to represent, as far as possible, territorial and economic interests and the interests of co-operative and indigenous banks.”
Despite this, the agricultural cooperative banks were not allowed to take a major role in the demonetisation, despite the fact that the rural areas are substantially under-banked, and suffered most in the demonetisation process. These banks had the least bank outlets, relatively few bank branches/ATMs which were replenished after long intervals, causing severe distress in the rural areas, in particular, with long queues often continuing for days.
Though the Modi sarkar demonetised the high-value Rs 1,000 and Rs 500 currency notes on the grounds that it would unearth huge amounts of black money, deprive terrorists of Indian currency and stop counterfeiting of Indian currency, it went against its own logic by printing the Rs 2,000 currency note which was the most high value currency note till date.
The Rs 2,000 note was of little use to the bulk of the population, the poor and the lower middle strata. However, it was a boon for black marketeers. In this instance, the Modi government shot itself in the foot.
Of course, the government of India needed to increase the total value of the currency, which had been slashed by 86 per cent, thus the Rs 2,000 currency note. But it undercut a major issue in the demonetisation campaign itself.
Moreover, demonetisation also was a violation of a Constitutional right. Article 300A lays down, “No person shall be deprived of his property save by authority of law.” Indian currency notes clearly state that “I promise to pay the bearer the sum of two thousand rupees” signed by the Governor of the RBI. This promise has not been kept.
Further, as the demonetisation process was violative of the RBI Act, it cannot be considered to be based on an authoritative law.
These, and more issues were raised by some prominent senior advocates. But since these matters arose after demonetisation was in full swing, the courts declined to intervene.
Currently, the Modi government is on weak ground. Its members have given multiple estimates of how much the tax base has increased. But in a country of 1.2 billion, the demographic dividend will always increase the number of 18-year-olds who will add to the tax base. In any case, India is one of the least taxed countries in the world.
The most shocking revelation was the fact that 99 per cent of the demonetised currency had been deposited by the public into the banks. This was clearly indicated by the RBI bulletin of July 7, 2017. But the Modi sarkar took its time to make its announcement.
Earlier, RBI governor Urjit Patel repeatedly told a Parliamentary committee that because of a shortage of currency counting machines, the RBI was slowed down in making its calculations on the impact of demonetisation.
Counterfeit currency that was found was very low. Yet, almost all apprehended terrorists had the new currency notes. And the old currency notes were sold/exchanged at discounts. In the Delhi markets, the Rs 1,000 currency note was sold for Rs 700, and the Rs 500 note was sold for Rs 325-350. Friends, relatives, and the less well-off were made active in these transactions.
The Modi campaign in the Uttar Pradesh Assembly elections claimed that the rich would be deprived of black money, and this money would be given to the poor. However, there is no law permitting such a transfer.
In sum, the quasi-legal, highly-publicised demonetisation was a “Himalayan blunder.” The people have suffered greatly from this ideological and political stunt.
As the famous economist John Maynard Keynes once pointed out, the most dangerous threat to an economy was “to debauch the currency”. The people will not forget this gross misuse of the currency system for a long time.