The currency is the centrepiece of a modern economy, the trust and credibility reposed in it being one of the most precious of national assets. It is not to be trifled with by ignorant tyrants.
And this is why fiscal and monetary powers are separated in any modern economy, and the autonomy of the central bank is sacrosanct.
This separation of powers is analogous to the political separation of powers between the executive, the legislature and the judiciary.
So, for the government to supersede the RBI and take direct charge of the currency is almost like the executive branch assuming, in addition, legislative and judicial powers.
Many economists, otherwise as divergent in their views as Larry Summers and Amartya Sen, have noted that there may be few parallels in the modern world to the sheer temerity with which the executive branch of the Indian state arrogated monetary authority to itself on 8 November.
It made a mockery of time-honoured norms of public trust and central bank autonomy, responsible in no small measure for the reputation for financial wisdom that the RBI had hitherto assiduously earned over the course of its eight decades of existence.
Now everybody will doubt the Reserve Bank and the reliability of the Rupee. (Over $6 billion in foreign funds have already left the country since 8 November, at least in some measure due to demonetisation).
Many are rightly asking questions of the legality of this extraordinary act of monetary default on the part of the State. Others have questioned the ‘sanity’ of the move.
Any competent undergraduate student of Economics from the University of Delhi could have forewarned the PM that a monetary contraction of 86% in liquid cash was bound to paralyse the economy for an indefinite period of time.
It is like an RBI announcement of a sudden, unsuspected hike in the rate of interest of 100-200 basis points. The business press would have been enraged.
WHAT IS REALLY THE END GAME?
To cleanse the only village well of pollutants, you cannot possibly think of draining it out completely and then reintroducing the water (especially when you live in a dry area without rain, lakes or rivers to replenish the water in the well).
If the pollutants become such a nuisance, you have to find intelligent ways of reducing them, without removing the water.
This wisdom deserted the PM, especially since the political temptation of busting the treasure-chests of political opponents (while pre-emptively guarding their own) in upcoming elections in UP, Punjab and Gujarat appears to have prevailed.
In the event, as the deflationary spiral deepens rapidly across vast swathes of India’s cash-dependent informal economy, ultimately impacting the formal sector too, what was seductively sold to the public as a “surgical strike” on black money may turn out to become the worst-ever carpet-bombing the country’s economy has ever experienced at the hands of its own government.
In any case, a militarised imagination is the last thing India needs to face its real problems today.
AN EXERCISE IN DESTRUCTIVE FUTILITY
The government’s hope has been that about Rs 3 to 4 lakh crore of the demonetised cash will not return to the banking system, implying that this would be the sum of isolated black money.
The RBI’s liabilities would go down by the same amount, yielding the government an equivalent dividend.
The government could then deposit Rs 10,000 into each of the 250 million Jan Dhan accounts, yielding people an election year bonanza (the mopped up black money), while still leaving a substantial sum for infrastructural spending to revive a sagging economy.
But what if it turns out by 30 December that all the Rs 15.5 lakh crore of demonetised currency has returned to the banking system?
If so, Modi’s gamble would have boomeranged. The government’s black money narrative would have failed altogether.
In order to somehow redeem demonetisation, the government has of late also been heard saying that new bank deposits may not necessarily be ‘white’.
Any unaccounted money that has been deposited into bank accounts during the last month will be taxed at 50%. At least some of the people who voted for Modi should also prepare for income tax raids – for the government’s moves on black money cannot be seen to have been an outright failure.
WHERE IS THE MONEY?
Meanwhile, given the massive gap between the daily volume of cash needed at the bank branches and each of the 2,00,000-odd ATMs across the country and the rate at which new currency is actually being produced at the country’s four mints (despite extra shifts), the queues in front of the ATMs are not vanishing any time soon.
Scores of people have died directly on account of the cash crunch and the marriage season has been rudely interrupted across the country.
The country’s vast informal economy is living from hand to mouth and facing the bitter winter cold.
Given the terrible timing of demonetisation – in the cusp between the Kharif harvest and the planting of the Rabi crop – agriculture has been thrown into complete disarray.
Sowing in large parts of rural India stands severely interrupted, because cash-dependent farmers have often not been able to sell the produce from the last harvest.
Migrant workers in areas like Punjab and Gujarat have returned to their home states, for the want of work. Prices of all perishable produce have fallen dismally low because of demand having vanished from the market.
At the next harvest, at the beginning of summer, the overall agricultural output is likely to be well below normal. Ironically, this will happen at a time when the days of cash rationing would be close to getting over and the greater access to cash will expectedly lead to a spurt in public demand.
Given the recent persistent context of uncertainty, there is likely to be plenty of hoarding on all sides. It is thus a safe bet that food prices will rise sharply over next summer.
Cash-driven urban wholesale markets for agricultural products, poultry and fisheries have all but collapsed. Small traders are in deep water. The millions engaged in the wholesale trade are out of work. Porters and cart-pullers at such markets are losing their daily wages.
Other areas of the informal economy are suffering badly as well. Micro, small and medium enterprises in the manufacturing sector – involved in textiles, leather goods, brassware, glass, and a whole range of other products – have all but collapsed.
Employers are unable to pay their workers, often on a daily wage contract. They are also not able to procure raw materials in many cases and sell their output. Towns like Coimbatore and Tirupur in the South and Surat, Agra, Moradabad and Ludhiana in the North have ground to a virtual standstill because of the cash crunch.
The cascading effects on the formal sector are also beginning to show, as the data com es in from the construction, automobile and two-wheeler industries.
The outlook for at least the next two quarters looks utterly bleak. It is still very early to estimate in monetary terms the damage to the economy over the medium term.
However, even the RBI has scaled down the GDP forecast for next year from 7.6% to 7.1%. Others expect a greater impact.
The only areas of the economy doing well at the moment are those directly involved in the vainglorious project to make India cashless. Paytm’s fortunes have touched a new high of over 5 million transactions a day, yielding it a record Rs 400 crores of revenue in a month.
Appropriately, Modi himself appears in one of the recent promotional ads for the company.
The overall picture at the moment appears to be that while demonetisation has had very high short-term costs, its putative long-term gains, if any, are utterly dubious.
Most of black money – much of it hiding in digital space – has remained outside its reach. The part of the black money circuit which uses the high denomination notes to grease its transactions is likely to resume once this fever settles down.
The new Rs 2000 currency note does not help matters. If it has quartered or halved the speed of replacement of the old notes of Rs 500 and Rs 1000 it has been replacing, it has also quartered or halved the storage space that large wads of vagrant cash consume.
Among other things, demonetisation is also being defended as a necessary step towards the formalisation of the economy.
The argument that the formalisation of the informal economy will necessarily be in the country’s long-term interest itself needs to be given a close scrutiny.
Elites typically misread their societies. Indian metropolitan elites have never had a very good recognition and understanding of the unmeasured/mismeasured wealth of rural India.
It is sobering to keep in view the fact that this is a country that routinely rewards its food critics on scale orders of magnitude above how it values its food producers – who is ever keen to sell down the river so that global agribusinesses can carve out their markets here.
It is often heard that formalisation will draw a greater volume of savings into the mainstream economy. This is touted as one of the merits of going cashless.
However, it is worth inquiring as to whether investment is being inhibited by a shortfall in savings, or whether the real cause lies in the growing inequality of incomes, which adversely affects effective demand in the macroeconomy.
In closing, one may recall the obvious and reflect upon the wisdom of seeking to eradicate cash from a country where most people have barely begun to learn how to operate a bank account and a smart phone, let alone acquire the requisite financial literacy and digital comfort with handling money in non-physical, abstract terms.
It is also important for an awakened citizenry of a democratic country to consider if good governance is equivalent to totalitarian control of the country’s currency by an ignorant leader who has exercised an ambition out of all proportion to legitimate, even practical, force.
We are in the hands of a digital-romancing political fantasist of extraordinary unrealism, gambling with the real lives of unsuspecting millions across the country. He makes the adventurous Tughlaq seem sane by comparison.
Will he survive the electoral test? Only coming months will tell.
Aseem Shrivastava is a Delhi-based ecological economist and writer. He is the author (with Ashish Kothari) of Churning the Earth: The Making of Global India (Penguin Viking, Delhi, 2012).
First published in Catch News
Read Part I of this article – http://www.countercurrents.org/2016/12/19/weapon-of-mass-digitisation-pm-modis-gambit-has-nothing-to-do-with-black-money/