Demon of Demonetization Unleashed on Common Man

Demon of Demonetization Unleashed on Common Man

Ultimate object was to dictate public for keeping maximum cash in banks to be utilized by corporates

Om Prakash Saraf


Prime Minister Narendra Modi’s sudden televised address to the nation at the fall of night on November 8 announcing that from very midnight 500 and 1000 rupee notes would cease to be legal tenders, sent entire opposition, barring a few, into a panic. He proclaimed that his government’s purpose was to fight against corruption and this decision would hit the “black money” and virtually toss the fake currency used by “terrorists” to the garbage bins. He further stated that the government is replacing the demonetized currency with a new Rs 2000 note. Concluding his speech, Modi appealed to the people to cooperate in his endeavor.
The smart move reminded people of the Indira Gandhi era when she raised the Garibi Hatao slogan during 1971. With this Modi seemed to be overnight championing the cause of the poor. The common man felt as if Prime Minister has come out with an answer to all the country’s problems from his magic bag. They spared no effort to put their share in his so-called yagnya against corruption and black money and stood in long queues for exchange of cancelled notes at the banks and withdrawal of amount up to Rs 2,500 at the ATMs.

Common Man Badly Hit by the
Sudden Loss of his Purchasing Power

But as the days passed by, the common man began to understand it as the chaos created by the arbitrary decision of demonetization that will not have an early end. As new currency was not made available in enough quantity, cash machines remained empty and most of the banks were stretched beyond their capacity. People received small amounts of cash that were not sufficient for their normal daily activity.
Interestingly, the rich—who were supposedly targeted for having a lot of “black money” and also more likely to be “cashless”—remained relatively unscathed in this whole exercise. It was mainly the poor and wage earners, 80 per cent of whom are paid in cash, and the middle classes, dependent immensely on currency for their daily activities, who were badly hit by the overnight loss of their purchasing power. A huge number of daily wage workers could not find employers with the cash to pay them. Local industries suspended work for lack of money. Many workers in cities and towns were asked by their employers to go back to their villages.
Millions of working hours of these sections were wasted in the lengthy queues at banks. Still many people did not get the new cash in time as it was in short supply. The physically weak and senior citizens had to go through a risky exercise to get new currency notes. A number of deaths were reported not only during the serpentine queues but also due to the helplessness of some people to purchase medicines.
The majority of peasants along with rural labourers and artisans dependent entirely for their food on purchase from the market, were in most trouble since they could not buy basic necessities for their families with their existing money. Their attempts to change the old notes to new ones were partially successful since those were not sufficiently available with the banks. Moreover, they had to walk several kilometers since there were no banking facilities in and around most of the villages.
Farm producers were in awful situation. Those who had freshly reaped their kharif crops could not sell owing to the shortage of new money. Some others were offered significantly lesser prices for their produce which ran the risk of damage in coming days. Those who had already marketed their produce and had new currency in their hand could not buy seed and fertilizers for sowing rabi since there was no lower denomination or substitute money available in their nearest banks.
Even in a relatively organised sector like tea plantations, daily wages in the new money were meagerly paid to workers who were very hard-pressed to meet their subsistence needs.
Sufferings and inconveniences were not the only troubles. Cash shortage shrank consumption and demand, which had disrupted the supply chain of goods and services. It would have a direct impact on production soon. Traders and retailers without cash were finding difficult to carry on their business. Since customers did not have money to buy and retailers could make goods available on credit to them only up to a point, therefore traders were also constrained to supply them further.
With the severe loss of purchasing power, the country was being driven into an artificially created recession and the level of economic activity was declining.

Massive Futile Exercise with
Hollow and Deceptive Approach

Now the people started to identify another similarity of demonetization with Indira Gandhi’s Garibi Hatao campaign: it was just as hollow and deceptive. Indeed, government’s words and deeds did not match during the current campaign. It said one thing but did another and by and large misled the people.
While proscribing the high currency notes, the government declared that the demonetization would unearth black money and destroy counterfeit currency used in funding of the terror networks. It was also imagined that a large part of the piled up cash would not be deposited and would be destroyed. Word was spread through well-oiled rumor mills that old money was being thrown into the Ganges or the nearest river or dumped in roadside bins.
But after it became apparent that till November end over Rs 11 lakh crore demonetized notes have returned into the banking system, doubts began to be raised about the success of this massive futile exercise. It was being increasingly expected that over 95 per cent of the invalidated currency would come back into the banks. This would give the government only 5 per cent of the old currency or nearly Rs 70,000 crore.
Thus it seemed to affirm the wide belief that cash comprises only a minute part of black assets. The data from tax raids from 2012-13 onwards shows that cash recovery had been only 6 per cent of the undisclosed income seized from income tax evaders. It was because persons holding black money, firstly, prefer to open easily initiated foreign accounts anonymously, and secondly, think it better to invest in gold and property. Thus, illegitimate cash may just be the tip of the iceberg.
Similar was the case with counterfeit currency. Contrary to common assessment, the value of counterfeit currency is quite insignificant. Government’s own figures tell, 250 of every one million notes released may be counterfeit currency. According to a study done by the Indian Statistical Institute, Kolkata, in 2015, the only reliable and comprehensive exploration of the subject, at any given point of time Rs 400 crore worth of fake notes were in circulation in the Indian economy. This is merely 0.025% of the total budget outlay of Rs 19.7 lakh crore as announced this fiscal. In comparison, just the printing cost of notes being taken out of circulation is approximately Rs 12,000 crore. Would it be sensible to spend Rs 12,000 crore to purportedly remove about Rs 400 crore of fake currency?
However, the demonetization exercise could only be considered worth if the government was able to unearth unaccounted cash worth at least the transaction cost which had been projected to be about Rs 1.28 lakh crore during the 50-day window till December 30, 2016, according to Centre for Monitoring Indian Economy (CMIE) estimates. It included loss of business or sales (Rs 61,500 crore), cost to households (Rs 15,000 crore), the expenses for printing fresh currency notes to the government and the RBI (Rs 16,800 crore) besides for banks.
By now the government might have understood itself, so it introduced a revised form of voluntary disclosure scheme for laundering the so-called black money. Under this scheme, the penalty was just five per cent more (and an added 4 year lock-in period) than the 45 per cent in the scheme that ended in September. Thus, it was clear that the motive of the so-called demonetization was not to strike at black money.

Intentions Out in the Open—
You have to be Cashless

Soon, the secret revealed itself. That is why these days Modi sermonizes less about black money but lays more stress on cashless India. Obviously, the government wants every citizen to keep least of the cash with him and do monetary transactions through cheque or digital way. It wants the people to deposit all their money in the banks so that it would be easy for corporate capitalists to utilize it whenever they liked for their benefits.
True, in the process of development of technology the new and old technologies pass through a relationship of unity and struggle. The future certainly belongs to the new, but in society the time for departure of the old and arrival of the new is not determined by one's whims and fancies. For this whilst society needs to be prepared, an infrastructure for the new to survive has also to be created. If done through a diktat, it could be harmful.
So to develop India as cashless, it is, on the one hand, necessary to prepare the masses psychologically, and, on the other, formulate a superstructure too for the digital technology to stay alive. With low level of digital literacy in the country and only 46% banking penetration, only 22% internet connectivity, 19% of population without electricity connection (and others with unreliable connection) and only 1.2 million of 14 million merchants having point of sale devices, India simply does not have the infrastructure for a cashless economy. Moreover, some experts believe the cost of going cashless for a backward economy like India would be too large. It could hurt many innocent people. But it does not require misleading the people of the land, as the government did now and created a wholesale chaos.

Corporate Capitalists’ Interests were
the Key for Demonetization Eagerness

Everybody knows, the BJP-led NDA Government was short of capital without which it had been becoming difficult for them to run their normal business, while facing liquidity crisis the banks were incapable of providing loans to the corporate capitalists. The public sector banks (PSU banks) were on the verge of bankruptcy.
According to the RBI figures, there was Rs 16.24 lakh crore currency notes in circulation on March 31, 2016. Nearly 86.4 per cent or about Rs 14.03 lakh crore of them were in Rs 500 and Rs 1000 denominations.  Financial experts believe about 30 per cent of the currency was with the government and the banks. In other words, the government and the banks had only 5 lakh crore in their kitty. The rest was with private establishments and individuals. And this was the primary target of demonetization exercise.
The situation of banks was very bad. In the first week of May, Pawan Verma, a member of the JD(U), contended in the Rajya Sabha that PSU banks are influenced to give loan to the people who are not able to repay them. As such corporate houses owe about Rs 5 lakh crore to PSBs. Roughly Rs 1.4 lakh crore are owed by just five companies, which  includes Lanco, GVK, Suzlon Energy, Hindustan Construction Company and the Adani Group.
At the end of October, a bench led by the Chief Justice of India T.S. Thakur had, after going through a list of defaulters submitted by the RBI, disclosed that there are 87 individuals who owe Rs 500 crore or more to the banks and bad loans on account of their default to repay totaled Rs 85,000 crore. The apex court said that if they had asked for details of those who owe Rs 100 crore, this could be another Rs 1 lakh crore.
The earnings figures of all 38 banks (23 public and 15 private) in their reports declared for July to December 2016 presented a dismal picture. As per non-performing assets (NPAs) ratio, the NPA level of India was the worst among world's biggest economies. The Daily Business Standard in its Editorial on November 13, 2016 utterly exposed these banks. It wrote, “Their net profit fell by 26 per cent on an annual basis, while interest income rose marginally, and non-interest income grew by 58 per cent. The gross NPAs rose by 98 per cent to Rs 6.5 lakh crore, which had been 3.3 lakh crore in the same period last year. The bad debt not covered under provisions or the net NPAs grew by 106 per cent on an annual basis to total Rs 3.76 lakh crore.
“With 5 per cent increase in the net NPAs as compared to the previous quarter, provisions too had a tremendous upward trend. Today gross NPAs were 8.9 per cent and net NPAs 5 per cent, which stand higher than the initial estimates of the central bank. Other assets, such as restructured loans under stress came to 3.5 per cent. Worse, Credit Suisse estimates that at least 3.3 lakh crore bad debts have yet to be marked. Overall, total stressed assets are more than 15 per cent, which is the worst ratio in a large emerging market.
“Even among them, the PSU banks are the worst sufferers, weighed down by 73 per cent of total advances and about 90 per cent of NPAs. Their total advances constitute nearly 11 per cent of gross NPAs and 6.4 percent of net NPAs. All PSU banks are on the verge of bankruptcy.”
In mid November, the State Bank of India crossed all limits by writing off whole of loans worth about Rs 7,016 crore owed to it by 63 corporate houses of its top 100 wilful defaulters. It has partially written off the loans owed by 31 wilful defaulters and has shown six others as NPAs. Thus, as on June 30, 2016, it has written off Rs 48,000 crore worth bad loans.
Similar was the case with other banks. Their Rs 6.5 lakh crore gross NPAs though not declared but practically were written off loan. Clearly, the government and the banks did not have the money. Before this, the decrepit banks were suggested to merge among themselves but that strategy did not work. Then some economists advised the government to get money lying with the people deposited in banks. For this, the government first made vast preparations by getting millions of accounts opened in banks under Jan Dhan Yojana.

Long-Term and Short-Term
Objects of Demonetization

Finally, the government decided to go for demonetization. Its long-term objective was to create such conditions in the country so that maximum cash is deposited in banks and many restrictions imposed on its withdrawal with the result that it would have money for its own expenditure as well as the corporate capitalists could be granted loans easily.   
Along with it was appended the short-term objective of BJP top brass which had positions in the government. Under demonetization excuse, they made advance preparations for the next year's assembly polls in some states. In many states, the ruling party invested its funds in real estate worth billions of rupees. Not only this, many of its state units started crediting in their accounts in the banks 2-3 months ago the cash lying with them. The West Bengal unit deposited such cash just hours before the demonetization announcement. Now the strategists of the party that had grown rich with currency notes thought that people will commit Modi ji with plenty of votes for his fight against black money.
Also, the ruling party did not provide the opposition any chance to recover. The object was to obstruct opposition to get exchanged its old currency in large amounts to the new one. It would have made the opposition undersupplied of money in the states going for assembly polls while the position of BJP and its allies remained strong.

Conclusion

However, the source of the origin of black money in India is a trio of political leaders, corporate capitalists and corrupt top government officials. Every year this trio has been accumulating black money into black wealth. These two constitute what we call as black economy whose size in India has been estimated approximately at 90 lakh crore (see next article). The differentiation between the two is that the black money is only a small part of the accumulated black wealth.
Demonetization may, at the most, demobilize a part of black wealth but it will not stop the flow. For that black income generation has to be stopped. Essentially, uncovering black money requires hunting down undeclared economic activities in every sphere and that includes political sphere too. But until the trio of political leaders, corporate capitalists and corrupt top government officials continues, it is almost impossible. 13.12.2016