Demonetization…Nation in big Queue : Vanam Jwala Narasimha Rao

Demonetization…Nation in big Queue

Vanam Jwala Narasimha Rao

People are hardly in a position to understand as to what exactly happened when the Prime Minister of India Narendra Modi on 8^th November at 8 PM announced demonetization resulting in stripping the Rs 500 and Rs 1000 currency units of its status as legal tender. Prime Minister, obviously on the advice of one or two close aids of him, unaware of the consequences, might have thought that his decision would make him a Great person and history will record so. The surprise decision of the Indian government to demonetize will certainly impose short term costs. Government described the decision as an act to eliminate black money “which casts a long shadow of parallel economy on our real economy”.

Unfortunately, as a result of this, the whole India is in a big Queue! Millions of households are struggling to cope with the immediate situation. All streets and market places are empty and everyone whether he or she, young or old, possessing black or white money of Rs 500 and Rs 1000 are left with no option except to stand in long queues in front of banks. Money whether white or black, makes the nation dynamic. The money that is in circulation in whatever form is the wealth of the nation. Demonetizing means demonetizing the country and devaluing the country and money. In a poor economy where bulks of the last mile transactions are done in cash, a measure like this was bound to cause fear and panic, and also scarcity of legal currency as people hoard it for safety-net purposes.

This is a big blow to every ordinary common person of all categories. With no money in circulation and with markets having a desert look, it is like a Bharat Band….and that too for fifty days. Imagine the loss the nation incurs with this. The surgical strike on Pakistan about a month ago is better than this, in the sense, that it killed the targeted one once for all, where as demonetization makes the people suffer for long before they are actually killed. Between the announcement of demonetization and actual operations, everywhere an unexpected and unhealthy scenario prevailed.

Whom is the Prime Minister dealing with? Is it the people and the country at large or someone else? India is a big country with varied problems and through demonetization PM Modi has thoroughly gone wrong and created added problems. He pushed the country 30-35 years backwards….an irrevocable backwards. After late PM PV Narasimha Rao’s economic reforms enabling even the poorest of poor possess high denomination currency, this is the best example of digression.  

There are no reliable estimates of the black economy. It is however said that an estimated 17.5 lakh Crores of money is in circulation and whether in black or white 86% of this amount is in higher denominations either in Rs 500 or in Rs 1000 notes. It is also estimated that another Rs 3-to 4 lakh crores of counterfeit money is also in circulation. The remaining 14% is in small denominations. The demonetization literally pushed the 86% part of the total money in circulation out of market. While this is so, for Telangana state for exchange of notes though Rs 6000 crores was allocated it was only just Rs 110 crores that was actually released on the first day in which major portion is in the form of newly printed Rs 2000 note. At best each bank may be able to distribute a maximum of one crore rupees as every individual is restricted initially to Rs 4000 per day and later enhanced to Rs 4500. In any case the entire 86% of high denomination notes will not be deposited in the banks.

How much of this black money will now come out into the open because of this demonetization of high denomination currency remains a matter of assumption. Much of the black money is held in land, property, stocks, gold or foreign currency. Even if the entire black money is deposited in the banks, it will again flow back into the hands of the same people in a different path as the basic job of a bank is lending and the beneficiary is top industrialists. Global experience has been that demonetization remained a one-time measure, and the black economy started building up all over again once the government let its guard down. This has been our experience too with the 1978 episode when the Rs 10,000, Rs 5,000 and Rs 1,000 rupee notes were demonetized.

What is the actual value of Rs 2.5 lakhs which an individual is allowed to deposit in banks without any questions not requiring IT scrutiny? These days even a small agriculturist, a provisions vendor, a shepherd, an employee, a small hotel owner or to that matter almost all middle class people keep with them more than this amount which is purely white in nature. The cost of land these days is anywhere Rs 2.5 lakhs per quarter of an acre…the cost of a sheep is anywhere Rs 50, 000. This needs to be given thought. Disabling cash of an individual over and above 2.5 lakhs is a long term disaster on nation’s economy. This also amounts to devaluation of assets and its impact will be snowballing.

What has happened, what is happening and what is likely to happen is not understood by even some of the best of the bureaucrats at the helm of government business in general and that of finance in particular. Even the best of the economists seems to be not aware of the consequences.

Perhaps this might be the reason why, as reported in press, Chief Minister KCR took along with him the Chief Secretary, the Finance Secretary and his own Principal Secretary to the Governor-the Head of the state to apprise him the consequences of demonetization, the pros and cons and the effect on state finances in future. To quote a media report: “the Chief Minister is understood to have explained to the Governor with supporting statistics about the adverse impact the Centre’s demonetization decision would have on Telangana….The Chief Minister is also understood to have highlighted the problems to be faced by small traders, who would generally rely only on cash for their transactions, due to restrictions on exchange of currency….”.

The State Owned Revenue (SOR) of Telangana State during the first six months from April to September during the current financial year registered a growth of 16.1% (from Rs 40, 400 Crores during 2015-2016 to Rs 46, 932 Crores means about Rs 6500 Crores rise). In fact the State owned Tax Revenue (SOTR) itself too had a growth rate of 13.5% during the same period (from Rs 21, 390 Crores to Rs 24, 168 Crores). The GSDP growth rate during the same period is 21%. The expenditure during the same period accounts for Rs 49, 594 Crores and if we add the out of budget expenditure it would be much more. In this proportion both revenues and expenditure should register more in the second half of the financial year. Now, with demonetization the scenario would be totally different and will have a serious effect on the state economy.

In Telangana as in other states debt services are mandatory. There will be essential and inescapable and unavoidable expenditure. If there are no receipts due to market collapse where from the money will come to the treasury? For instance employees salary bill, payments for welfare measures like Aasara pensions, rice scheme, Kalyanalaxmi, shadimubarak, two bed room houses etc which accounts for almost Rs 5600 Crores per months. Will there be any cuts? Or deferring to a later date some of these? There are also developmental activities and expenditure for irrigation projects.

This may not be just the case with Telangana….perhaps in every state with minor changes and proportionate changes…and ultimately in the whole of the country including the central finances will adversely affect if not checked scientifically. The economy of every state collapses. The situation would be worse in states with rural economy and tribal economy base. Every state has to die. It is just like abruptly cutting the pipeline or switching off lights in a room suddenly and inviting darkness.

The world over natural phenomenon is nations undergo rapid changes. They undergo evolution due to various reasons. The experience however reveals that even in the worst of calamities wise men prevail and survive. One of this is in the form of black money circulation. Whether it is possible to cleanse this or not depends on lots of factors. It however requires a scientific process and an acceptable process. The way this is done now in our country is different and a deviation from this. India is shaping as one of the biggest economies in the world. Purchase power has gone up multi-fold. In the process of this development, whether accepted or not, those who have black money are also partners in a way. This is where we should think how best they may also be brought in to picture for a better clean-up process. Ours is a cash based economy and not cheque based or on-line based. Yes…it is agreed that the black money holders are to be disarmed. Once upon a time the scenario was that, common men were angry on black money holders. Today it is different and in the ever changing scenario everyone possesses the so called black money-may be in a different form. In a way this is their hard-earned savings. 

According to an expert who was associated with RBI in a very senior position and also with experience of working in central government’s ministry of finance, all currency issued by the Reserve Bank carries a promise by the Governor to pay the bearer a sum equivalent to the value of the currency which is a legal obligation. He says that, curiously, neither the government nor the Reserve Bank has actually used the term “demonetization”. The press release issued by the government talks only about “cancelling the legal tender character” of the high denomination notes, raising questions about whether they are drawing a fine distinction between delegalization and demonetization.

            According to him the extent the high denomination notes are destroyed as they were not returned to bank, the liability of the RBI should come down by that amount. The amount may be anywhere between 4-6 lakhs crores. Will the Reserve Bank treat “the promise to pay” as a continuing liability and transfer an amount equivalent to the wealth destroyed to a special reserve? Or will it treat this as an extinguished liability and account for it as “profit”?

Several questions arise here:

Can the Reserve Bank withdraw from its obligation to pay the bearer a sum equivalent to the value of the currency? Therefore, is there a subtle distinction between “cancelling the legal tender character of the currency”, the phrase used by the government and RBI, and demonetization? If the Reserve Bank decides on treating the liability as extinguished, what is the cut-off date when it will happen? How will the RBI treat the reduced liability – as a special reserve on which the government has no claim or as regular profit which lawfully has to be transferred to the government? If the existing law is unclear on this, will the government amend the law so as to establish its claim to this money? If indeed, the “profit” is to be transferred to the government, how will the transfer of such a large amount be managed? In particular, how will it be phased out so that it is non-inflationary? Is the government well prepared on this?

Against this background, there would be severe hardships to people for activities like marriages (particularly in this month), vegetable purchase, agricultural needs, construction labor wages needs etc. No one can buy even a bottle of liquor or a branded shirt. Then where from the tax come to the governments? Media already reported how the hotels and theaters are with an empty look.

It is almost chaos everywhere and as such it is high time that the Modi government initiates steps to come to the rescue of common people. Real estate sector in this country which is almost a professional activity has come to a grinding halt. The money for various real estate transactions that has been given as advance from Kashmir to Kanyakumari to a tune of thousands of crores with yesterday’s value is in doldrums. No agricultural land sales are reported and even if any they would be distress sales. Normal life is disturbed. Entire economic dynamics have changed. Small traders who buy in whole sale and sell in retail are badly affected. Industry is collapsing. State Governments might face paralyzing affect. A currency ration is seen and felt. The situation is explosive. There is every possibility of artificial scarcity of everything. This will have cascading affect.   

Why not these issues be addressed? Why did not the government prepare the common man for this? Where is the preparedness for an easy exchange of high denomination notes? Did the government make available in adequate quantities in the banks? The answer is no. Is there any estimate in advance as to how many normal people would be put to unavoidable trouble? Why should there be a panicky situation?

Perhaps one option could have been making yet another voluntary disclosure offer, say on 50-50 percent basis-an amnesty scheme with additional benefits. In which case, it might have been possible, for both the black money holder and government getting equal benefit, the former getting back in white form and the later increasing its income. The black money holders, in the alternate, should also have been offered a chance to invest in various infrastructure development programs of the government. That might have paved way for a vibrant India. There should have been a positive approach for cleaning black money instead of a negative one.

It is evident that majority of Chief Ministers are not in favor of Modi decision. Almost none of the CMs including from BJP ruled states have come out openly in support of Modi decision. Why? Almost all renowned economists, from India and abroad, are critical of Modi decision. Will all this lead to large scale dissent?

A person of Prime Minister’s stature should understand the country and its needs…the difficulties of common man when a decision is taken. There cannot be any place for self-righteous and complacent attitude. One cannot be angry on even a small section of populace not to speak of entire population. There cannot be an attitude of “point of no return” and “I am always right and others are always wrong”. Prime Minister Narendra Modi is visibly angry…angry on all those who did not pay attention to his earlier warning to deposit black money as voluntary disclosure.  Anger is no solution. Revenge on people is no answer. Comments like “even if I am burnt alive...” are also in bad taste.

Why Modi is antagonizing all sections? The question before PM is whether he would sustain the wealth of the country or destroy? No one is against demonetization but the timing, process and preparedness is debatable. End