Free Press Journal

Demonetisation: A new equilibrium may be found after 30 December

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An Indian vendor displays wallets made from replica prints of the demonetised 500 and 1000 INR currency notes prints for sale at a stall in Mumbai on November 22, 2016.
India's Prime Minister Narendra Modi announced on November 8 that that 500 and 1,000 rupee ($7.50, $15) bills -- 85 percent of the cash in circulation -- would cease to be legal tender in a crackdown on fraud and tax evasion. The move -- which saw the notes withdrawn from circulation just hours after the announcement -- was initially welcomed, but frustrations have mounted in the largely cash-reliant country where millions have been left without enough to cover their daily needs.
 / AFP PHOTO / INDRANIL MUKHERJEE

You have to be a believer of miracles in this country. This implies implicit faith in the power of one man to fix a problem that has been eluding a solution for a long time. If you go by the television news coverage of 24×7 news channels, then the people of this country believe that Prime Minister Narendra Modi’s gambit of demonetising the Rs 500 and Rs 1000 currency notes is a miracle that would end the curse of black money in the economy. For this gain, the people do not mind all the pain.

It is this belief in the miracle that prompts Prime Minister Modi to assert that those criticising the government for being unprepared for the consequences of demonetisation are actually cribbing because they did not get ‘time to prepare’. In other words, he has made it clear that the opposition is criticising the government because their leaders did not get the time to convert their black money into white before the decision was to be implemented. This is an assertion that goes down well in the perception of common masses given that politicians in power are known to have amassed wealth quite disproportionate to their known sources of income. Besides, the connection between politicians and big black money is well-established through the costly election process.

So, we have a situation in which the people believe that the miracle of busting the black money has happened, with the added advantage of the politicians losing their cash. Nothing could be better than this. If in the process, the economy takes a hit, then so be it.


It is in this atmosphere that Prime Minister Modi appears to be avoiding the parliament. Like everything else in his scheme of things, this could be strategic. In the sense that he is waiting for the right time, to make a grand appearance, silence the Opposition with his rhetorical flourishes. In a parliamentary debate, it is the overall impression, and not the nuances that are registered by the audience.

But does this negate the fact that the parliament has been rendered dysfunctional for days, and there are millions who are struggling in their daily life because the Modi Sarkar has decided to render 86 percent of the currency circulation illegal tender? Does it also imply that the Modi Sarkar does not have to answer all the questions that are raised by the opposition, specially the former prime minister Dr Manmohan Singh?

If even by the end of this winter session, the answers are not forthcoming in a convincing manner, then it would be a negation of the basic principles of our democracy, where the prime minister is accountable to the parliament. True, a government with a majority in the Lok Sabha can have its decision endorsed by a house of the parliament without a discussion, but if it does that without being accountable then the principle of the prime minister being the first among the equals among the cabinet members and the elected representatives of the people would also be violated.

There is one fundamental genetic flaw with miracles. They take place in the world of make-believe, and hardly impact the real life. Even Mother Teresa the great revered miracle maker had trouble with the darkness of real life. So, the real life situation with respect to the black money is far less impressive than the imagined miracle that is supposed to be brought through demonetisation.

For starters, very little of the black money resides in the currency that has been demonetised. A large chunk of the currency may be outside the income tax radar or away from the banking system, but it is not necessarily black. The fact that of the Rs 14 lakh crore banned currency, almost 60 percent – Rs 8 lakh crore – has made its way to the banks, and there are still more than 30 days to go before the window for depositing the currency shuts down, should speak for itself. Those depositing the currency are either prepared for the penal action that the income tax officials are threatening, or have taken adequate precautions to circumvent the wrath of the taxmen. Either way, it is not proved that they held black money.

The common assumption among economists is that the extent of black money ranges from 6 to 15 percent of the currency in circulation. In India, this would mean that the total black money in circulation is Rs 2 lakh crores at the most. In the current euphoria of the miracle of black money coming to end through demonetisation, the logical question as to why 86 percent of the currency has been demonetised just to make sure that 15 percent of it is rendered ‘useless’ seems to have disappeared in thin air.

For the time being, as the news channels tell us, the bulk of the people are appreciative of the prime minister’s demonetisation move (notwithstanding the pain they are suffering), and even a survey conducted by the prime minister’s own app has given a thumbs-up for the decision. In a democracy, public sentiment expressed through whatever form should be respected. At the same time, dissent should not be brushed away as irrelevant or anti-national. It is for the government of the day to strike the right balance between the two.

Demonetisation is a highly disruptive move. It would be some time before equilibrium is found, and it is not necessary that this would be the same one that existed prior to November 8th. Right now the people have deposited their cash in banks, because this is the only option for them. There are limits on withdrawals of cash from banks, but these cannot be continued endlessly. Once the limits are withdrawn, may be we would move towards a new equilibrium. But this would also depend on the overall environment the government creates after the December 30th deadline. Till then the uncertainty, mystified by Prime Minister Modi’s silence in parliament would continue. This is an uncertainty that is not good for the nation’s health, the miracle of busting the black money notwithstanding.