Demonetisation: A legal money laundering scheme

Mitron, it is with dread that Indians recall those three words — My Dear Citizens — with which Prime Minister Narendra Modi addressed the nation after banking hours on November 8, 2016. A year after the cataclysmic action, the people are yet to recover fully from the shock and ordeal it presaged.

His speech, peppered with endearing salutations like “my dear sisters and brothers”, gave the impression that he had everything sewed up and things would be back to normal in less than 50 days. The fact is that nearly 365 days later, normalcy is yet to return.

Modi told the nation that the decision was taken in utmost secrecy, though reports suggest that some political leaders knew about it in advance and took action to save their ill-gotten money. However, there was an element of truth in what he said in that even the Reserve Bank was not privy to the decision which was foisted on it.

He listed three main aims for banning the 500 and 1000-rupee notes — end corruption, extinguish black money and fight terrorism. It was assumed that the corrupt had mountains of high-denomination currency notes. No, they had other ways of keeping such money, real estate being one.

If the corrupt found keeping their money in 1000-rupee notes easy, the government made their task easier by introducing 2000-rupee notes. The sharks among the black money hoarders keep their money safe in banks abroad or in investments in gold, land and buildings.

The demonetisation did not hit them at all. There is no evidence that it affected terrorism, for terrorist incidents have not been on the wane. What the nation witnessed was chaos everywhere, police having to cane people who queued up in front of banks to withdraw their own hard-earned money. Many died while waiting in the queue.

Tens of thousands of people lost their jobs as business establishments could not transact business. This forced Modi to make an appeal to the people for 50 more days to bring normalcy. He also mentioned that the people could burn him to death if he failed in honouring his promise.

He should have known that burning people alive was not in India’s tradition though many were burnt alive as at the Best Bakery in Baroda during the Gujarat riots when he was the Chief Minister of the state.

In one speech he claimed that currency notes were floating in the Ganga and in the sea. He was under the impression that at least one-third, if not more, of the 15.44 lakh crore worth of the banned notes would not return to the banks. Far from that, 99 per cent of the notes have returned to the banking system. It would not at all be surprising if more than 100 per cent return to the banks.

That means demonetisation allowed those holding even counterfeit notes, forget black money, to get new notes. The banks are now saddled with lakhs of crores of rupees against which they have to pay interest.

In short, demonetisation helped the holders of black money and counterfeit notes to legitimise their wealth. Not a single note became worthless, except in the case of those small sums the NRIs, the elderly and the poor kept with them.

When Modi realised that demonetisation had gone awry, he came up with the strange theory that it was meant to usher in a cashless economy. Of course, he did not take into account the fact that even the US, whose economy is the largest in the world, has a powerful currency system.

There are more counterfeit dollar bills than rupee bills. Yet, it never contemplated banning currency notes, the highest denomination of which is $100.

At the time of writing in the last week of October, the RBI has checked only 71 per cent of the notes received by banks to identify the counterfeit ones among them.

There are no data on the number of people who lost their jobs because of demonetisation but there is incontrovertible evidence that it hurt the economy.

In fact, a few weeks after the demonetisation, former Prime Minister Manmohan Singh predicted that the GDP growth rate would come down by about 2 per cent. He has been proved right.

While some companies like PayTM have gained a foothold in the country, despite the common man not knowing who all are behind them, even those who began using such services have reverted to the use of cash.

Now everybody admits that demonetisation was an unmitigated economic disaster, although not in so many words, but the Prime Minister and the finance minister still defend it as a bold action to tone up the economy.

In his November 8 speech, Modi had mentioned right at the beginning that in terms of economic growth rate, India had overtaken China. He did not know that he was inflicting a severe damage on the economy so much so that a year later, China’s growth rate is more than India’s.

Demonetisation was attempted in countries like Russia which are authoritarian. Even in India it was attempted in the past but at no point of time did it face such Himalayan problems. Only a foolish person could think of cancelling currency notes and introducing new ones which necessitated recalibration of thousands of ATMs.

Small wonder that demonetisation was compared to the shifting of the Capital by a ruler called Mohammed Tughlaq. Unlike the Moghul King who realised that his decision was a blunder and shifted the Capital back to Delhi, Modi is not prepared to admit that it was a failure or take appropriate remedial action. He has compounded the problem with the hasty implementation of the Goods and Services Tax (GST) which has displeased both the buyer and the seller.

Here is an account of the currency before demonetisation and after

Currency in Circulation on November 4, 2016: ₹17.975 lakh Crore

Demonetised on November 8, 2016: ₹15.44 lakh Crore

Fake Indian Currency Notes in 2014-15: ₹400 Crore (0.02%)

Collection from Income Disclosure Scheme, 2016: ₹65,250 Crore

Pradhan Mantri Garib Kalyan Yojana, 2016: ₹5000 Crore

(Second black money disclosure programme in 2016)

II. Growth of Direct Tax Revenue

2012-13: 13.6%

2013-14: 14.24%

2014-15: 8.96%

2015-16: 6.63%

2016-17: 14.54%

III. Digital Payments

Target set by the Government by march, 2018: 25 billion digital transactions

Mobile Wallet transactions in September,2017: 87.5 million

Debit/Credit Card transactions in September, 2017: 229.2 million

IV. A disastrous misadventure

• 5 million people thrown out of employment
• Growth slowed, investment stalled
• Agriculture prices crashed
• Working capital locked