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Demonetization- A question of Answers

J. Shriyan

Two things happened on 8th Nov 2016, entirely unrelated, but completely unexpected, and can even be termed shocking game changer.

If United States of America elected a political greenhorn as its 45th President, Prime Minister Naredra Modi in India declared that ‘`500/- and `1000/- currency notes will cease to be legal tender’ from the midnight that day.

While the election of Mr. Donald Trump, as the 45th President of U.S has its relevance in the global context and the Indo-U.S relations, the relevance of the unprecedented and bold declaration by the Indian Prime Minister Modi, had its immediate relevance for both India and Indians.

In all probability, 8th Nov. 2016, will go down in the history of modern India, as red/brown/black letter day, depending upon how does one looks at the momentous decision of the central government of the day. In his broadcast to the nation, Prime Minister Narendra Modi had summarily stopped the use of currency notes of `500/- and `1000/- denominations, to be effective from the midnight of 8th Nov 2016.

Immediately thereafter, from 9th Nov. until this very moment, there have been relentless plethora of reactions and responses, in writing and in interviews, from a shocked populace, so also from those who received the news of demonetization with glee. People from across the national spectrum reacted on the abrupt removal of these paper currencies from circulation. That, it affected the length and breadth of the nation, is an understatement. It was a comprehensive disruption of the socio/economic life of the entire nation.

The declaration of demonetization also accompanied the announcement of restricted withdrawal of new currencies from banks, so also against the exchange of old `500/- and `1000/- notes. However, the maximum amount of personal cash withdrawal was pegged at `4000/- per person, then increased to `4,500/- then again reduced to `2000/-. However for current a/c holders, it was different, but way below the routine requirement. This restriction will be in place until 30th Dec. 2016, the announcement had further stated.

Thus there have been dozens of interventions, ostensibly to facilitate the ‘smooth’ management of available cash. Thus it was fairly clear, that proper home work was not done, either by the union government or the fiscal regulator, the Reserve Bank of India, before the sudden announcement of demonetization of these currency notes.

Initially there were problems galore with long Qs all over the country, both for cash withdrawal and to exchange old currencies, so also at ATM kiosks. With new currency notes of `2000/- and `500/-, being of different size, ATMs had to be recalibrated all over the country, which was wellnigh impossible in matter of hours. It took days and weeks for ATM to become functional. This problem alone contributed hugely for the large-scale inconvenience to the general public, added to the shortage of currencies, be it `100/- or `2000/-. The non-supply of new `500/- currency notes made life very difficult for all and sundry, since getting to change the new `2000/- note was extremely difficult for those who wanted to spend `100/- or `200/- at a time. For the first 4 days, it was chaos all over, with `500/- notes coming only on 13th Nov, that too in a very few centres. However `500/- notes were not available in all places across the country for fairly long time- even as late as 30th Nov. 2016. Non availability of `500/- new notes, were the biggest cause that aggravated the problem of cash crisis. Besides, the rationale of issuing the new `2000/- currency notes is being questioned, when the idea was to discontinue the currency notes of higher denominations. As was clearly noted, that these `2000/- notes soon found its way into the coffers of hoarders with the active connivance of bank staff. We are all privy to the fact that hundreds of crores worth of these notes were detected from influential wheeler-dealers during raids by Enforcement and Income Tax authorities.  

It was becoming more and more clear that enough deliberation and discussion did not take place on the possible impact of withdrawing some 86% of our legal tender out of circulation. The kind of enormous inconvenience caused to ordinary people, whether urban or rural, was humongous.

The large informal sector which depends overwhelmingly on cash transactions has been rendered financially immobile due to shortage of money supply. Demonetization had reduced economic activity so also reduced consumption. It has hurt those on margins more than those with access to formal, banked and digitalized sections.  

Dozens of deaths were reported of those standing in the Qs for either exchange of old currencies or withdrawing cash from bank. A print media report of 20th Nov. reported that, a 75-year-old man identified as Kanta Prasad was standing in a queue before Dhikauuni branch of Bank of India in Harodi in UP when he was taken ill and died on the spot, police sources informed.

In Aligarh, 50-year-old Babu Lal, died due to heart attack after apparently failing to exchange old currency notes despite making persistent efforts at different banks since the past three days, his family claimed. The victim was under tremendous pressure as his daughter’s wedding was slated a week later, they said.

In another incident, also in Aligarh, Mohammed Idrees (45), died of heart attack while he was on his way to a bank to exchange old currency, his family claimed.

They alleged that Idrees had no bank account, but he was making rounds of a local bank to exchange old notes since the past four days.

Local legislator Zameer Ullah Khan said the death of both Babulal and Idrees were connected with the “shock and frustration over failure to get currency notes exchanged” and demanded proper compensation for their families.

Meanwhile, in Bengalooru, a 70-year-old man, Siddappa, died allegedly after he suffered a heart attack while waiting in queue for nearly four hours to exchange old notes at the State Bank of Mysore branch in Cheluru village in Tumakuru district, about 105 km from Bengalooru, police said. 

Of course quite a few of them could have been, due to natural causes, but there can be no argument that, the difficulties generated by the demonetization has only exacerbated the dying pace.

It is also true that small scale livelihood and economic activities were greatly disrupted and poor lost their earnings due to lack of work, induced by cash crunch. No wonder former RBI governor, D. Subbarao, has reportedly stated “On Nov. 8, Prime Minister Modi and the RBI demonetized 86% of currency in circulation overnight which is, what is arguably, the most disruptive policy innovation in India since the 1991 reforms.”

The stated objectives of this demonetization of high value denominations of `500/- and `1000/- as per Gazette notification No 2652(Ministry of Finance 2016) are 1) to curb the menace of fake currencies; 2) to wipe out unaccounted and tax evaded money (read black money) stored in such high value notes; and 3) to prevent use of high denomination notes for terror funding. After 50 days time limit that ended on 30th December 2016, the questions are being asked, did it really serve the purpose for which the nation was made to suffer so enormously?

Coming to the avowed objectives, the issue of fake currency is a recurring menace and is estimated to be around `400 crores according to the NIA, which is roughly 0.027% of  `14.73 lakh crores worth currency demonetized. Was demonetization the only way to handle this?

With regard to black economy, it is fairly well known that cash component of black money is less than 10%. Informed public are privy to the fact that, there are many devious mechanism to launder or convert over 90% of the unaccounted wealth held in cash. “The wealthy typically hold assets disproportionate to legal sources of income as undervalued assets, including real estate, land, gold and jewelry. A large portion of the black money obtained through fudging of export invoices is not just stashed outside India, but is typically spent overseas.”

As far as terror funding is concerned, this too is not of a very significant sum, according to the available data in public space.

The public relation exercise by the government, through, the Prime Minister, cabinet ministers and spokespersons, conveyed to Indians at large that , the inconvenience of limited cash supply due to demonetization of `500/- and `1000/- notes is good for the country and to its people in the long run. The management strategy -short term pain for long term gain- has been fairly successful, since there has been hardly any law and order problem in a country of some 1300 million population. The capacity if Indians to suffer is amazing. As things were getting clearer that the result on the ground has not been as spectacular as expected, ‘increased forced banking, using electronic means of transaction, digitization of financial dealings are good for the financial health of the country’ became the newer approach to stem the criticism of the 8th Nov. move.

It was never in doubt that demonetization of these high denomination notes would certainly make some difference. And some difference it has done, although not exactly the way the government thought it would. It is also true that during the 50 days time and thereafter banking has seen upward trend, similarly using of credit cards, Paytms and other digital form of financial transactions have increased. Hopefully it will keep improving. Increasing formal transaction dealings via banking, cheques, electronic and digital means is a positive spin off of the 8th Nov. move, although they were not the planned objectives or rather an after thought. Of course the hype of India going completely cashless is a long shot.     

Yes, 50 days of time limit for the hardship that Indians were made to endure, is over. Prime Minister Narendra Modi had in his usual ebullient style had stated “Mujhe sirf 50 din deejiye, aur uske baad, kisee chauraahe par Mujhe khada karke, jo sajaa dena hai aap mujhe dey sakthe hein.” But after 50 days were over, he never reminded the nation to punish him for all the tribulations that citizens have suffered. Instead he gave some lollypops in his address to the nation on 31th Dec. As his wont, he did not even apologize for the trauma, millions of faceless Indians suffered, due to his demonetization gamble. However, the way he treated parliament by abstaining himself during the debate on demonetization has neither influenced people nor won him friends.   

Clearly he knew, there have been eminently avoidable problems, which could have been addressed prior to the announcement. He knew that the measure could have undergone positive changes before final order was promulgated to stop using these currencies. But as his usual self, he will not admit his probable error of judgement. If only he was graceful in acknowledging the shortcomings in the demonetization move of 8th Nov., Indians would have been equally graceful in accepting the nobility of his intentions, which would have truly helped his socio/political stock. But that was not to be.

Demonetisation- My Take

S.K Uchila

Certain disturbing facts remain unanswered about the Central Government which owes to unearth and control the black money. Even after two years in office, the Central Government not yet appointed Central Vigilance Commissioner. Adequate numbers of policemen are not appointed and utilised in judicious manner. Required numbers of judges are not appointed and workings of all the courts are unsatisfactory. Central Government controls roughly 70% of lendable funds through the ownership of the Public Sector banks etc. and bad debts are mounting. To garner votes, government’s poverty alleviation programmes are aimed at caste based communities (ST, SC, OBC, & minority communities) excluding the real unorganised poor in the country. 

The political parties which are at the helm of administration cushioned themselves with certain privileges. The RTI was not made applicable to political parties which survive on the public money and compulsory audit of their accounts are not in place. Even filing of their annual returns with Election Commission and Income Tax Department are not enforced. The ambiguity in total election expenditure per candidate was left undefined so that money spent by the party is left out of count. When meagre withdrawal limit were prescribed for the withdrawal of their own money from the bank accounts, the political party donations up to twenty thousand in cash was not touched. The Benami Property Control Act only deals with the investors and the rampant unaccounted money transactions within the real estate business were not controlled. 

The timing of the demonetisation is an important issue. The demonetisation was done without adequate preparation need not be elaborated. But, without preparation, for the political gain from the ensuing five state elections, the demonetisation was ordered in haste. Now, after almost three months later there are enough evidence to hold that not even preliminary preparations, such as, printing of adequate number of currency notes and procedure to be followed were out of place. With these remarks, the demonetisation scheme needs to be examined. 

 Finance Ministry vide Gazette Notification No.2652 dated 8th November, 2016 demonetised `500 and `1000 currency notes (H. D. notes) with effect from the same day. The said notification was issued after the approval of the Central Board of Directors of Reserve Bank of India u/s.26 (2) of the Reserve Bank of India Act, 1934. The purpose of demonetisation was to eliminate the circulation of fake H. D. notes, to prevent the unaccounted money stored in H. D. notes and to prevent H. D. notes being used in subversive activities, such as, drug trafficking, terrorism etc. which are harmful to the economy of the country. 

On the same day a clarificatory circular was also issued to all the financial institutions as a guidance note for implementing the demonetisation scheme. Apart from the circular, several executive orders were issued allowing the use of demonetised H. D. notes for certain mode of payments which were considered essential in the transitory period.

From the information available as on 4th November, 2016, the total currency circulation was `17.97 lakh crores out of which the above referred H. D. notes value was `15.44 lakh crores which roughly works out at 85% of total currency circulation. It means that other currencies in circulation were `2.53 lakh crores.

The Prime Minister, cabinet ministers, NDA spokespersons and Central Government officials advised the citizens of this country that there would be little difficulty during the implementation of the demonetisation scheme but overall benefit accruing out of this exercise will be immense in future. It appears, by and large, the people accepted the promises made at its face value and endured the transitory difficulties.  

In spite of the fact that large number of Jan Dhan Bank accounts were opened after the NDA government took office, rural India still cannot be said to have adequate banking facilities. Further, particularly, agriculture sector and rural artisans preferred to transact in cash. We must understand that at least 20% of our population still lives in villages which do not have access by road, electricity and banking facilities. The sudden shortage of cash circulation which is reduced to 15% of the total currency circulation was an impossible proposition to deal with. The marginal people of our society suffered most.

To add to the woes, the remonetisation process with new notes and depositing the demonetised H. D. notes were painfully cumbersome. Because of shortage of adequate cash available, the rationing of withdrawal of money from the bank for certain genuine expenditure was evident in front of banks and ATMs. In the beginning the withdrawal in two thousand rupee notes added only heart burning. 

Even at the end of the dead line on 30th December, 2016, the currency circulation was less than 55% of the total currency in circulation as on 8th November, 2016. Every person in this country was inconvenienced in one way or the other.  Unfortunately nearly hundred people were said to have died while trying to withdraw their own money in their bank accounts. Probably no compensation was paid to the families of these unfortunate people.

The hidden cost of implementing this scheme is borne by the RBI and implementing banks which cannot be ascertained and none would be compensated. The cash deposited because of demonetisation was said to have been impounded and taken away by the RBI which normally would not pay any interest on such deposits but the operating banks have to pay interest on the balances in the saving bank. Therefore, the cost of collection of deposits and interest payable will be on the operating banks. 

The proper information about the total deposit of H.D. notes in the bank account is not available. If this information is available one could find out how much fake H. D. notes and black money was unearthed in this exercise. On rough estimate, such unaccounted black money remained to be deposited in the bank account might be around one lakh crores subject to some adjustments which is not significant outcome. 

The Central Government has also modified certain provisions of Income-tax Act enabling the people who possess black money in the form of H. D. notes to declare their black money with concessional rate of tax plus penalty. It is still not known how the Jan Dhan Bank account deposits will be treated. The result of these schemes will be known only after all India figures are compiled. 

The Central Government’s decision to allow the H. D. note to be used for payment of government taxes and other dues enabled the state governments and local self government bodies to collect hefty sum which would not have been collected otherwise.  

Half way on the implementation of demonetisation scheme, the Central Government started urging the people to switch from cash payment system to digitalised mode of payments. The concessions for use of cheque payment, credit and debit card payments, Paytm etc. and introduced some new methods of digital payments, centred on ‘Aadhar Card’. The incentives given for transacting in digital form also cut into the revenue stream of the financial institutions. 

The Government now claims that it would not pump in all the currency withdrawn as it considers that currency circulation should be curtailed with reference to the national GDP comparable to the developed countries. 

 It is not possible to assess the effectiveness of demonetisation scheme with the available data. However, it can be definitely said that some of the professed objectives of the scheme were accomplished. At least a part of the fake currency was neutralised, hoarding of black money is checked and drug & terror funding were curbed. These subversive tendencies might once again rear their head but fear of God was put in place so that in future they may not be as rampant as it was. 

So far as unearthing black money is concerned, the desired effect may not be visible now. But, even if this scheme generates roughly two lakh crores on account of short deposits and additional Income-tax under the special provisions, it can be still said that the scheme is a success. Further, the accounted (banked) currency which can be counted as income, reasonably digitalised economy coupled with the implementation of GST will generate more revenue to the government compared to the predominantly cash economy with innumerable indirect taxes of the past. Revenue gain apart, it can definitely be said that the demonetisation as the first step towards containing corruption. 

Icing on the cake is that if the additional revenue generated by this scheme is used to  bridge the gap between the ‘haves’ and ‘have-nots’ particularly, bringing the under privileged people living without road, electricity, schools and health facilities which was promised to them sixty years back by the visionaries who framed our constitution.

(Author is an IRS & a former Asstt Commissioner of Income Tax)