Santosh Kumar Mohapatra
The withdrawal of currency of high denomination is a radical measure a government takes to counter counterfeiting and hoarding of money. Fake currency stimulates inflation, which affects the lower classes of society. Hence, it needs to be curbed. Demonetisation compels people to either deposit or exchange currency, which indirectly brings hoarded money back into circulation.
However, in the current context — following the November 8 announcement by Prime Minister Narendra Modi that notes for Rs500 and Rs1,000 have been demonetised — the rich and the influential will be able to use their relations and connections to get the hoarded money exchanged before the deadline of December 30.
Demonetisation, however, does not affect black money stashed abroad or invested in gold and real estate. Therefore, the hype the Modi government has created over demonetisation is unwarranted.
This is not the first time India has taken recourse to demonetisation. It has done so at least twice in the past. In January 1946, the government withdrew banknotes for Rs1,000 and Rs10,000. Notes of Rs1,000, Rs5,000 and Rs10,000 were reintroduced 1954, until they were demonetised again in January 1978.
Other countries, too, demonetise currency. For example, when nations of the European Monetary Union adopted the euro, authorities first fixed exchange rates for the varied national currencies into euros. When the euro was introduced, the old national currencies were demonetised.
However, the old currency remained convertible into euros for a while so that the transition could be smooth. Libya’s central bank withdrew old currency in early 2012 to restore liquidity after it found that the vast majority of funds were being kept outside banks. In the UK, calls to scrap the 50 pound note, its largest tender, are growing loud.
Former RBI governor I G Patel has made some valid observations regarding the impact of the recent demonetisation. In his book ‘Glimpses of Indian Economic Policy: An Insider’s View’, Patel has stated that when finance minister HM Patel informed him about the decision to withdraw high-denomination notes, he had pointed out that such exercises seldom produced striking results.
According to him, most people, who accept illegal gratification or are otherwise recipients of black money, rarely keep their ill-gotten earnings in the form of currency for long.
The most tragic thing is that common people pay the price of such moves. What awaits is the bureaucratic harassment of ordinary people who wish to exchange currency. In some instances people were seen accepting Rs450 or Rs460 in exchange for the 500 rupee notes they had.
A PIL has been filed before the Supreme Court claiming that people were not given adequate time to prepare for demonetisation. But such decisions have to be sudden, although care should be taken to not cause hardship to the common man. But the government has failed to do so.
But Narendra Modi had made a more popular and ostentatious promise during his election campaign in 2014. He said billions of dollars of “black money” (Rs 40 lakh crore) would be repatriated to India “within 100 days” of his coming to power. He also said every Indian would get Rs15 lakh in his/her account. But the government has failed to keep that promise.
Even the Income Declaration Scheme (IDS) 2016 of the government was not a big success. The NDA government has been under pressure to do something dramatic and that is why it decided to demonetise currency.
The question here is if the government is really pro-poor and serious about curbing corruption and black money, why is it not taking a bold step to recover NPAs amounting more than Rs8 lakh crore and tax arrears amounting more than Rs8 lakh crore? Why is it not ending the system of tax foregone that amounts to Rs6.11 lakh crore in 2015-16 alone?
Also, why is the government not taking action on those named in the Panama Papers? There is apprehension that demonetisation may stimulate demand for gold and dollars and boost e-wallets and credit cards. The growth of the automobile and real estate sectors, which flourish on black money and are key to India’s growth story, could be affected by the move. But black money cannot be encouraged for the sake of growth.
The introduction of new Rs500 and Rs2,000 notes can help growth of black money in the future as the rich and powerful know well how to break laws and hide ill-gotten wealth. In reality, Modi has tried to kill two birds with one stone.
He had put the finances of all political parties into disarray, particularly regional parties in Uttar Pradesh that might have stockepiled cash to fight elections in that state. Second, he has projected himself as a crusader against corruption while camouflaging his failure to tackle poverty, unemployment, and inequality.
The author is an Orissa-based financial columnist.
