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 8th 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
