It has been three weeks since that Tuesday evening when 500 and 1000-rupee currency notes were effectively outlawed at four hours’ notice. The Honourable PM in making the announcement himself in his original Aaj Kuch Toofani Kartey Hai style, put in the shade Salman Khan, the King of Bollywood and archetypal Bad Boy. Step back, Chulbul Pandey – I will show you how to really hunt down black bucks!
Since then, India and the world have watched as this government has continued with its incontinent abandonment of legality, morality and economic principles. While a policy of removing black or untaxed money from circulation is undoubtedly in the public interest and deserves support, it is important that the question of whether the demonetisation announcement serves this noble purpose is discussed objectively. Without the black vs. white, with me or against the country, rhetoric of the Prime Minister and, more important, without the why-are-you-complaining-if-you-have-nothing-to-hide fallacy expounded at length by the propaganda machine comprising BJP spokespersons, sadhus-turned-part-time herbal tonic salesmen and the like.
First, the question of legality. The announcement to withdraw the currency denominations was made under Section 26 (2) of the RBI Act, 1934 which gives the government the power to declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender. Senior advocates of the Supreme Court have pointed out that if indeed this Act was intended to empower the government to withdraw the legal status of all bank notes of a particular denomination, as has been done in this case, the use of the words “any series” would be entirely superfluous and redundant.
Further, Article 300A of the Constitution clearly sets out that no person can be deprived of his property except by authority of law. Cash held in any denomination falls under the category of movable property belonging to citizens. Hence the legality of removal of this currency and depriving a person of his/her own money (whether for a period of one day or 50 days) can only be decided by parliament. The government needed to pass an ordinance and then a law in order to take this action, which it did not do.
Each currency note carries the words “I promise to pay the bearer” and is in effect a promissory note issued by the Reserve Bank of India. It is a guaranteed public debt. The Supreme Court in Jayantilal Shah Vs RBI AIR 1997 SC 370, while upholding the validity of the High Denomination Bank Notes (Demonetisation) Act, 1978, held that demonetisation results in extinguishment of a public debt which amounts to deprivation of property and therefore can be done only by law. Further, the RBI Act cannot, under any circumstances, be used to restrict citizens from withdrawing and accessing their own tax paid money from banks. This is completely outside the purview of an executive order or fiat.
Second, on the economics. It is important to analyse just what the motive behind this move, being sold as the ultimate Power Vita for the Indian economy, really was. Its claims are tall – one bitter swig and it will make us corruption-free, cashless, and free from terrorism and counterfeit currency. The past three weeks have seen numbers hurled like missiles in newspapers and on television debates taking us all to a point where even a child, when asked how much of black money is estimated to be in cash, will answer only six percent.
90 percent of black money is abroad, had declared the Prime Minister while going on to announce he would bring it all back within 18 months of assuming office. While his failure to do so is the subject of another debate altogether, it cannot be denied that over 90 percent of India’s untaxed money is indeed abroad, and in property and jewellery, leaving only 6-7 percent in cash, most of which the government assumes was in denominations of 500 and 1,000 since they comprised 86 percent by value (or roughly 14.5 lakh crores) of the total notes in circulation. While some statistics can be up for discussion, a few broad numbers sourced from the RBI and other government sources are assumed to be fairly robust: that 87% of all of India’s monetary transactions are in cash; only 4-5% of India uses plastic; over 50% of the population is unbanked; 68% of Indians live in rural areas most of whom depend on agriculture as their primary livelihood (agricultural income is not taxed in India, hence is not black); 80% of rural Indians do not have access to banking; of the 2 lakh ATM cards in India only about 37,000 are in rural areas. Counterfeit notes account for only 0.02% of the total money in circulation.
It will escape no one except the very intellectually challenged that to remove 86% of the total value of currency in circulation without any immediate mechanism to replace this liquidity in the short or medium term was a recipe for disaster. And disaster it has been. Rural India has stalled. Farmers are deprived of crop loans and money to buy seeds and fertilisers in Rabi sowing season. In Bengal alone, the past two weeks saw only 132 crores for crop loans being released by the RBI to the State Co-operative Banks against the requisitioned 400 crores. The withdrawal limit of the princely sum of Rs. 2.5 lakhs for wedding-related activities proved useless since no nationalised bank could disburse the amount in the absence of operational guidelines from the RBI which had not reached them even a week after the announcement. Our national Power Yogi, of course, put it down to a lot of BJP members being bachelors who could not be expected to have thought of the wedding season! The annual Pushkar fair was treated to the sight of groups of foreign tourists who took to singing and staging acrobatics on the street to raise money to return to Delhi to contact their embassies. Jute mill and tea garden workers remain unpaid for weeks. Construction sites are closed. Business in restaurants, movie theatres slipped between 70 and 80 percent. Estimates of the loss in GDP range between 2 and 2.2%.
Was this shock therapy really necessary? While most seem to believe that this was good policy poorly implemented, the theory and data backing the necessary evil argument are specious. Without structural changes to taxation, electoral funding and much stricter implementation of anti-corruption and money-laundering laws, little long-term change will be made towards reining in the 21% shadow economy to GDP ratio that India recorded in 2010 in a World Bank Study, where it ranked 15th among 88 developing countries (the average for the group was 34.2 percent).
And last, on the morality of a decision that has reduced honest hard-working citizens to a cohort of tax-avoiding thieves who are made to stand in queues for hours on end to access their own savings, only to be told the bank is out of funds. The world’s largest democracy has witnessed its ruling party – who came into government with a 31% mandate – tell an united opposition of 15 parties with a combined vote share of over 45%,that they were all just a lot of corrupt unpatriotic hate-mongers. We are all reminded ad nauseum that an app-based survey (requiring a smart phone that only 17% of all Indians possess) has clocked 5 lakh users and an approval rating of 95% for the Prime Minister’s decision. Much inspiration was no doubt gained from the oft-watched episode of “Yes, Prime Minister” where Sir Humphrey Appleby demonstrates the use of leading questions to skew an opinion poll to support or oppose just about anything.
Over 25 revisions to the original demonetisation announcement have been made, most notably the ruling on November 24, which said that old notes could no longer be exchanged in banks. This was in direct contravention to both the Prime Minister’s address on November 8, which assured Indians that “from 10th November till 24th November the limit for such exchange of old notes will be four thousand rupees. From 25th November till 30th December, the limit will be increased”, as well as the RBIs press release of November 11 which exhorted members of public to be patient and “urges them to exchange their old notes at their convenience, any time before December 30, 2016.”
This government has failed miserably on the most basic of all parameters – to safeguard the rights and livelihood of its citizens and the stability of its currency. A country’s currency is only as good as the sentiment backing it, Mr. Prime Minister. You don’t need to drink Power Vita to realise that.