On November 8, 2016, the honorable Prime Minister of India, Mr. Narendra Modi, during an address to the nation, announced his decision to demonetize high value currency notes of ₹500 and ₹1000 from the midnight of the same day. Since the day of the announcement, we’ve heard lots of opinions with regard to this move, ranging from vehement support to immense anger to even a myriad of conspiracy theories hatched by the opposition. Amidst all this noise, the larger narrative of this historic decision seems to have been lost. In this post, I’ll be analyzing in detail both the intent and the intended/unintended consequences of this decision in an attempt to clear the air surrounding it.
The Intent
Typically, when a decision is taken, its intent is broadly analyzed on two parameters:
- what/how does the decision maker benefit from it?
- who does this decision really affect and how?
In a democracy, a decision is typically taken by leaders keeping in mind the interest of their intended audience, which may/may not include all sections of the society and consequently not the entire country. A few examples of such decisions include:
- The Shah Bano case of the 80s wherein the Rajiv Gandhi government of the time reversed a Supreme Court judgement under pressure from the Islamic orthodoxy to deny alimony to a poor Muslim woman.
- In more recent news, Arvind Kejriwal announcing his intent to appoint a Dalit (lower caste) Deputy Chief Minister in Punjab if voted to power in the state.
Such populist measures are a mere ploy to win elections ‘hook or crook’ style, which more often than not do more damage than good to the country. Apart from our modern day politicians lacking character and a vision for the country, one of the reasons why they resort to such measures is due to the fact that India is always in an election mode: neither are state elections held simultaneously nor do they coincide with the general elections. With elections due every year for one state or another, the state and the central government machinery is always geared towards winning them mostly via announcing state-specific populist measures prior to the said elections. To get an idea of how this approach has impacted India since its independence from the Britishers in 1947, watch this excerpt from a speech given by Mr. Ajit Doval before he was appointed India’s national security adviser in 2014.
Coming back to the question above and the topic at hand, how does the decision maker (Modi) benefit personally from the decision (demonetization)? The answer is simple, he doesn’t, at all! Demonetization, for one, is NOT a populist measure by any standard. It’s a gamble more than anything that can cost Modi’s Bhartiya Janta Party the upcoming elections in Uttar Pradesh and may even jeopardize his re-election bid in 2019. Considering that there doesn’t seem to be any selfish motive behind this move, the only reasons that come to mind for taking such a politically and economically sensitive decision are to:
- tackle the menace of black money by invalidating currency notes that small and big businesses hold in unaccounted wealth in order to avoid paying taxes to the government.
- tackle the funded unrest in the Kashmir valley following the encounter of Hizbul Mujahideen terrorist Burhan Muzaffar Wani by security forces in July 2016.
- put a plug on the fake currency being circulated in India by Pakistan via neighboring countries like Nepal and Bangladesh.
- make a push towards ‘Digital India’ that will go a long way in addressing the problem of black money.
One question that arises here is: if this move is so good for the country, how could it electorally go wrong for Modi?
Our Inherent hypocrisy
There are two categories of people who have been affected by demonetization:
- those whose livelihoods have been affected/lost
- the rest, including tax evaders
This section talks about the second category of people mentioned above. Those falling under the first category are discussed under the ‘The Drawbacks’ head further below.
In a democracy, people vote for the candidate they like. For a candidate to be likable, people believing that they are benefiting from their candidate’s actions is far more important than what the candidate believes is good for his/her people and the country in the long run. Inconveniencing people in the larger interest of the country is a rarity in Indian politics and one of the fastest ways to become unpopular. Given that small traders/businesses constitute a big chunk of Modi’s core vote bank, one of the worst affected by his demonetization drive, antagonizing them may not go down well with them.
As much as we like to believe we have high morals when we denounce corruption, we conveniently ignore the hypocritical aspect of our behavior: our stance against corruption does not include the corruption that we ourselves indulge in. We oppose this malady based on what/who we perceive as corrupt, not when we ourselves are beneficiaries of the same corrupt system. For example, how many times have we paid the chemist in cash in order to avoid paying sales tax on medicines purchased or on that saree bought from that apparel store nearby? But of course, that’s not stealing state tax, that’s being a smart ass, right? With this demonetization drive, Modi has brought the fight against corruption to our doorstep.
According to this report, only 1% of Indians paid tax on their earnings in 2013. Where did the rest go? Now ponder over the following two statements:
- India has the third largest GDP in the world in terms of purchasing power parity and is among the top ten economies overall.
- According to the aforementioned report, 99% of India’s population is incapable of paying taxes, either by virtue of their being unemployed or not making enough money to pay any tax at all.
We know that the first statement above is true and the two statements cannot both be simultaneously true. Hence, we can safely conclude that the majority of Indians are not honest in paying their tax. In India, the physical size of the shop in not an indication of its owner’s earnings. Many of these ‘small’ business owners/traders are small only in terms of the real estate their business occupies and in the earnings they declare to the government, which more often than not is an incorrect amount. Many of them are dollar millionaires who have evaded paying taxes for years on end. Just to clarify, I’m not referring to all the small businesses running in India here: there are many who barely get by, and they are not the ones being spoken about above.
‘OK, we get it, but demonetization is not a permanent solution to tackle black money, is it?’ No, it’s not, and there should be no misunderstanding on this front, as discussed below.
Will it solve the menace of black money?
Let’s face it: demonetization is not a permanent solution to solve the menace of black money, neither will it stop people from hoarding cash in the new currency denomination in the future. In fact, people who used to keep their illegal stash in the form of cash will now explore other options like precious metals, foreign currency or real estate. So what was Modi thinking?
Let’s begin with the basics: what is black money and how does it come into being? Black money is unaccounted wealth that people hide from the government in order to avoid paying taxes. Few examples of how it’s generated include:
- people renting out their property and accepting rental payment partly in cash (illegal/black money) and the rest in check (legal/white money).
- people buying/selling property and paying/receiving money largely in cash (illegal/black money) and a token amount in check (legal/white money).
- paying in cash for everyday purchases like medicines, groceries or that high end eye wear in order to avoid paying the sales tax.
It’s a win-win situation for both the seller and the buyer: the latter doesn’t have to pay any sales tax and the former doesn’t have to show a sale in order to avoid paying taxes to the government. By this move, Modi has invalided the unaccounted cash holdings people had. You can argue all day long that cash is not the only form in which people hoard black money, which is correct, but it still is one of them, and a significant one at that. What else explains the expected drop in property prices post demonetization? Cash is where it all starts before it’s converted into gold, property and what not. Plugging one source of leak (cash in this case) doesn’t imply that all others have to be plugged in simultaneously or none should be. It also doesn’t mean that none should be plugged in considering there are so many other sources of leak. It has to start somewhere, so view this demonetization drive by the Prime Minister as his tirade against black money in cash holdings, and see what plans the government has to tackle the rest.
‘But didn’t you say that demonetization is not a permanent solution, then why go through the pain when people will again hoard black money a few months down the line?‘
Two things here:
- Crooks will always find a way to cheat the system to have their way. Haven’t all of us at some point in time gone above the stated speed limit on a road while driving? If the government has mandated 60 kph on a stretch of road, driving at 100 kph does not mean that there was a flaw in the policy of assigning speed limits to respective roads. The law enforcement will take care of those who break the law. Similarly, people being able to find a way to hoard black money post demonetization is not a failure of the policy itself, neither is that its intent (explained in the next point). It is the job of the Income Tax Department to make sure people comply with the rule of the land as far as tax evasion is concerned, which they are doing by the many raids taking place all across the country.
- More importantly and as stated before, demonetization is not a permanent or foolproof solution to tackle black money. Look at it this way: do we avoid cleaning our houses knowing that it’ll again get dirty in a few days time, so why put in any effort towards cleaning it in the first place? We don’t! Similarly, think of the Prime Minister’s move as his attempt to clean the house (India) of dirt (black money) once and then expecting us, the people to take up the mantle to keep it clean.
Still not clear?
Enter ‘Digital India’
‘Digital India’ is one of the flagship programs of the Modi government with an aim to promote digital literacy, infrastructure and services in India. Part of this program is aimed at popularizing cashless modes of payment in day to day transactions as stated by Modi recently when he called upon his countrymen to move towards a cashless society.
‘But again, how will it help in tackling black money?‘
Remember that scene from the movie Nayak where Anil Kapoor in his capacity as the Chief Minister of Maharashtra exhorts the citizens to demand a bill for all their purchases? It’s no different from what Modi is doing: asking us, the people of India, to move to a cashless society such that there is a trace of all the transactions and people find it hard to evade taxes.
A leader can only set the vision and the onus lies on us, the people to see his vision to fruition. The ‘you first’ mentality will not take us anywhere. ‘Let big businesses do it first, let political parties come clean on their funding first’ does not solve the problem. It has to start somewhere, and stealing taxes from the government because everyone else does it makes us a contributor to the corruption we like to complain about so often. We doing our duty is not contingent upon someone else doing it with us. ‘I accept bribes because everyone else does’ can never be a valid argument. Morality is a subjective notion, to alter it depending on our surroundings wreaks of hypocrisy.
Now for naysayers, who think India is not yet ready for this digital revolution citing infrastructure issues, education, etc., well, I guess the country and it’s people are a lot more intelligent that we give them credit for. We are known for our ‘Jugaad‘. Haven’t we seen news reports of how so many auto rickshaw drivers and vegetable vendors have switched to services like Paytm post demonetization? Most of them don’t have fancy college degrees. In another example, when mobile phone services were launched in the country a few decades back, didn’t we have the same discussion as to how the poor will afford them or even know how to use their phones? As of today, India has the second largest mobile phone subscriber base in the world with over a billion active connections. Why can’t it be replicated for going cashless? Hasn’t Akodara in Gujarat shown us that it can be done? Moreover, we’re again looking at India as a monolith: when Modi asked us to go digital, why is it being seen as an all or none kind of a deal? What’s stopping people in the metropolitan areas from using plastic money? Why do all the 640,867 villages of India have to embrace digital mode of transactions in order for the Prime Minister’s call to be successful? Even in the U.S., there are small towns where credit cards are still not accepted and your bill is handwritten before it’s handed over to you. It has to start somewhere, so rather than pondering over why it can’t be done in villages, be the change and do it in the cities!
It’s a human tendency to resist change. When people have been going about their lives in a certain manner for generations, how do you make them adopt other means. Modi promoting digital services via his speeches wouldn’t have changed much on the ground. A shock therapy like demonetization could certainly have, and it has!
‘But, hasn’t the Govt. broken it’s promise to pay the bearer per the currency note’
According to the Reserve Bank of India Act, 1934, Section 26 Part 1,
“(1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in [India] in payment or on account for the amount expressed therein, and shall be guaranteed by the [Central Government].“
However, the very next part (Part 2) states:
“(2) On recommendation of the Central Board the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender [save at such office or agency of the Bank and to such extent as may be specified in the notification].“
In short, the government is within it’s legal right to withdraw/demonetize currency whenever it deems necessary.
As a request: kindly verify your facts before indulging in false propaganda on social media, which unfortunately is the only source of news for some people. We must have enough control over our thoughts to differentiate between voicing support to people/actions/events agreeing with our political ideology and blatant lying emanating from our deep seeded hatred towards the ones who don’t.
The Drawbacks
Before I begin with the drawbacks, let’s be clear about one thing: it’s no mean task to invalidate currency in a country of 1.2 billion plus people where the economy is largely cash dependent. Even though other countries have demonetized their currency in the past, the scale and manner in which it was done in India has never been attempted before. When a politician risks his political future by a decision that he personally doesn’t benefit from, the said decision cannot be dismissed as rash or not-so-well-thought-of without subjecting it to serious scrutiny. Considering that there is no precedence of such a move in the past, there will be some unintended consequences that the government might not have factored in. In such a case, the aim should be to bring any such fallacies to the government’s notice such that they can be remedied, rather than feeling dejected and spouting anger on social media. If it wasn’t already apparent, let me state it here explicitly: the government is constituted of humans like you and me, humans who make mistakes. Even when events involving a few thousand people are organized by experienced event planners, not everything goes as per script and hiccups do occur. Hasn’t anyone made any mistake in their place of work, ever? So let’s cut them some slack and bring to their attention what’s missing and needs rectification.
Let’s begin: even though one can marvel over what an intelligently designed machine an airplane is given it’s gravity defying take offs and the sheer weight it can carry, it all boils down to its tires when it lands. If they malfunction, all the effort that went into building this beast of a machine will go down the drain. Similarly, the success of this policy of demonetization is heavily dependent on how it’s implemented and by whom, irrespective of the noble intent and planning that went in it.
Numerous reports have been received of bankers colluding with the elite to help them convert their black money into white. If these bankers will squander away all the cash in this manner, how will the general public be able to get the new currency? It’s not a demonetization-specific drawback as much as it is of that one inherent limitation that plagues most of the government schemes: corruption. The success of this scheme is heavily dependent on the banking community and such antics can very well derail the process, though I must commend the work being done by the income tax department in addressing such loopholes and bringing the culprits to justice.
Lots of people have lost their jobs and many have died waiting in queues. There is no argument/justification on the lines of ‘it’s for the larger good of the country’ that one can make here simply because there is bound to be collateral damage of any such decision and all one can do here is pray for the souls of those who have died and hope that this rejig is completed at the earliest such that people can get their jobs back. Even though we know these daily wage laborers will eventually be employed again, how will they feed their families in the absence of a source of income is worrisome. Seeing the bigger picture for the greater good works only when you’re well fed, not when you’re without a job, have bills to pay and a family to take care of.
Farmers are suffering. This (what is said in the article) is NOT acceptable. There is a provision to provide a minimum support price for produce to the farmers, then why isn’t it being given to them? One of our domestic helpers back home owns some farming land in her village. Unexpected rains destroyed their produce earlier in the year and cash crunch caused due to demonetization has left them with no money to buy seeds and fertilizers for the new season. When the government decided to announce this step, how did they think the farmers will manage? If the farmers suffer, then they’ll be adding to their already massive debts and will be forced to sell their lands. A big chunk of the Indian economy is dependent on agriculture, and any negative impact on this sector can potentially push the economy towards recession. Can the government look into it, URGENTLY?
Even though I support the way demonetization was done with utmost secrecy, the government should have paid close attention to the underlying infrastructure, particularly the state of the ATM machines in the country. Moreover, even though the introduction of ₹2000 notes before ₹500 notes seemed like a policy oversight to me initially, the reason could very well be that the government wanted to serve more people with higher denomination currency notes as opposed to serving a few with the lower denomination ones. Of course, having a higher denomination note means that one will face problems buying something cheap with it, but giving away a lower denomination one would have meant serving lesser number of people. Both the approaches had their set of merits and demerits.
The Politics of it all
Post demonetization, a lot of noise has been generated by the opposition, particularly by the sibling-like rivalry between Arvind Kejriwal and Mamata Banerjee as to who can make the most outlandish accusations in order to claim the coveted prize of being accepted as an anti-Modi messiah by the voters. What can be written about these two that has not been already said?
- one runs a jihadist industry in her home state of West Bengal and has presided over scams like Saradha Chit Fund among others. What a security nightmare it will be for India as a result of her turning a blind eye to this growing menace of Islamic radicalization will be known in the days to come.
- the other questioned the veracity of India’s surgical strikes across the Line of Control with Pakistan in order to settle personal scores with the Prime Minister. When you think he can’t stoop any further, he’ll proudly prove you wrong and you’ll be left scratching your head thinking what the heck just happened!
Their noise does not bother me as much as their oddball arguments finding resonance among their supporters, who have the power to vote and change governments. ‘Only common people are suffering in bank queues because nobody has seen high profile businessmen and politicians waiting in these queues‘ is one of the arguments that was put forth. By that logic, I’ve never seen the Prime Minister wandering around in Mother Dairy or in any other grocery store carrying a plastic bag to buy vegetables, which must mean that he’s been lying all along about being a vegetarian. Whatever happened to our thinking capability? Kuch bhi (What gives)?
Then there is our former Prime Minister Mr. Manmohan Singh and this oped of his that he wrote for ‘The Hindu’, aghast at the suffering of common people. Who better than him will know how the honest suffer due to government policies? After all, he presided over one of the most corrupt administrations of independent India for a decade, screwing her over and over again in every possible hole that he and his team could find and drilling more where none could be found, only to satisfy their insatiable libido for corruption. I’m all for constructive criticism from the opposition and given Mr. Singh’s background in economics, he could have been a bit more specific as to how the government should tackle the menace of black money. ‘Counterfeit currency and black money are as grave a threat to the idea of India as terrorism and social division. They deserve to be extinguished using all the firepower at our disposal.‘ is something that we all know, and suggesting that demonetization is not a way out of this mess is also known to many. But what else can be done and how should this mess be fixed, that is a question he doesn’t seem to have an answer for. He also sounded concerned at the loss of life. Hundreds of innocent lives were lost in 26/11 during his tenure, and I’m not blaming him for those attacks because a terror attack can take place under any government. How the government responds to it in order to prevent future attacks is what matters. Mr. Singh chose to register protests with the Pakistani consulate in New Delhi and exchange dossiers with them. That was his answer to a war waged against the union of India. In essence, ‘I don’t agree with what the government is doing but I won’t offer any suggestions as to what can be done because I have none. Ten years was too short a time period for me to do anything about this issue’ seems to be his mantra. All talk and no action, or in his case, small (and nearly inaudible) talk noise and no action. Now he seems to have discovered a side to him that is pained by the hardships faced by people.
Moving on, many of my friends have reported that ATM queues in their cities have shortened and cash is readily available now. That is not to say that it’s true for congested areas like Delhi as well, but the situation is not that bad everywhere. So why is the media reporting only from areas that are in a the mess and not from those where the situation has improved? Moreover, why are stories like these not being highlighted by the media, which I am sure there are many more examples of? Positivity begets positivity, and we could use some of it in these trying times.
Last but not the least: ‘Do it for the soldier’
It has been reported time and again that the protests in Jammu and Kashmir against the Indian army are funded by Pakistan via their handlers in the Hurriyat Conference. Since demonetization was announced, stone pelting by miscreants on our soldiers has suddenly stopped. If the protests were genuine, how would invalidating the Indian currency have a bearing on violence, unless of course they were funded by someone? A devil’s advocate might argue that these protesters were indeed sincere in their actions and that they are (probably) busy waiting outside the banks to get their currency exchanged, suggesting that they’ll be back on the streets soon. Even if we go with this argument, doesn’t this imply that if these young men had a real job, they won’t resort to, rather, won’t have the time to pelt stones, in which case, shouldn’t we be concentrating on educating them to earn a livelihood through proper channels rather than wasting time in analyzing why they are protesting when it’s nothing more than a paid gig for them?
Not just the protests, but terrorism in general in the state of Jammu and Kashmir as well as in the rest of the country is funded by what the security agencies call the fake Indian currency note (FICN), which are produced in Pakistan and enters India through the porous borders it shares with Nepal and Bangladesh. With the government invalidating these currency notes now, it’ll serve as a body blow to those involved in this racketeering.
Our soldiers in Jammu and Kashmir are facing enemies from two sides: one from across the border in Pakistan Occupied Indian territory and the other from within India in the form of the aforementioned miscreants. Advocates of demonetization have often compared the plight of the people in serpentine queues outside banks with the work our soldiers do in protecting our country. Personally speaking, I feel it’s a juvenile argument and the two cannot even be compared, not to mention that it comes across as an insult to our jawans. Having said that, if we bear in mind that the fight against terror is every Indian’s responsibility and not just the soldier’s, supporting demonetization means taking a stand against money that funds such attacks on our soldiers. If not for anyone, do it for the soldiers.
I sincerely hope that it all works out well for everyone involved, and the country emerges victorious at the end of it all.
Jai Hind!
