demonetization:economics and politics

जागरण संपादकीय ब्लॉग

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It has been a fortnight since the unprecedented currency demonetization and is hardly surprising that the perfervid reaction it evoked has not yet ebbed. It is rare that in a country as vast and as diverse as ours, a particular issue remains in public conscious for so long.
This act of central government that of course is historic and revolutionary, has been the central theme of discussion across sections and genres and the hullabaloo around it continues to reverberate throughout our socioeconomic fabric. The economists and analysts have been attempting to unravel the uncertainty and propound theories, which often confuse more than they expatiate. The jury might still be out on the future ramifications, but it is fair to state that the decision is seminal. If ever there has been a watershed moment in India’s socioeconomic history, this is it.
As a self confessed right-wing leaning observer and perhaps a partial thinker, I cannot fault the intent of the government or rather the prime minister. Few can argue that there does exist an almost parallel economy in our country that over the years has attained grotesque proportions and for any semblance of social equality and justice, this problem needs to be addressed. The social evils of corruption and hoarding are pernicious and there can be no half measures in dealing with them. The move was sudden but then so it had to be in order to be potent.
I am perfectly in sync with the ideation and conception; however, the free thinker in me is not sold to the execution. The devil as they say lies in the detail. Good intentions cannot justify bad delivery.
In the realm of taxation, the government to boost its revenue has used income disclosure schemes. The Supreme Court of India had imposed a restriction on these so-called amnesty schemes on the grounds that an honest taxpayer felt cheated. The result was that the rate of taxation under the aegis of such endeavors had to be higher than the prevalent tax rate and quite fairly so. The latest such measure lapsed on 30th September 2016.
Why could the government while demonetizing the currency not extend the disclosure scheme for another couple of months and effectively coerce tax evaders to comply? Now there would not have been an aggrieved party there. Someone who had disclosed under the scheme before 30th September couldn’t have taken a moral high ground to begrudge those who came into the fold subsequent to demonetization. If one were an evader till September the other would have been till December. What the government did instead was to scare the citizens by propagating 200% penalty, prosecution so on and so forth. That for all practical purposes shut the door on those who otherwise would have voluntarily surrendered.
As has been reported in the media, such tax offenders, for fear of punitive action, devised ingenious ways of converting their cash hoards into legal tender or other assets. The color of money did not change from black to white and while the government lost out on direct collection, various other violators in spheres of jewelry, real estate, retail had a field day.
What was the need for the Prime Minister to be so emphatic in scare mongering? It did not suddenly become a personal battle overnight post 30th September. If the concerns were counterfeiting, terror funding, loss of revenue, all of these would have been allayed. The chaos and mayhem that we have been witnessing for last two weeks could have been diluted, what with contracted people queuing up in large numbers to exchange currency or to deposit and withdraw money though innumerable untraceable accounts in collusion with bank staff. Why preclude the citizens from reaching out to the state directly? It might have something to do with political posturing because the economics of tax management did not warrant such complications.
Since I have moved to the politics of demonetization, let me expound further. There has been so much mention of the color of money and its classification as black or white; in parenthesis doesn’t such classification smack of racism where we always associate black with evil? Coming to the moot issue, what is black money? It is simply earning on which tax has not been paid. It is not necessarily money generated from terror or criminal or even illegitimate activities. A tax offender is just that, an evader. Our politicians are not serving the society by equating every tax violator with a hardened criminal or a terrorist. I am not suggesting condonation but perhaps disproportionate demonization can be reconsidered.
Let us not delude ourselves by believing that the system as has existed for the last 70 years is utopian. A small and medium sized entrepreneur who by virtue of being a violator, might in conventional wisdom be accused as guilty by our system, is often a victim of that system. The loopholes and leakages in the system have necessitated the need for unaccounted money to carry out legitimate business. Well ethically speaking, no amount of provocation, extricates him, pragmatically viewing, 200% penalty and prosecution certainly magnifies his offence. I am not glossing over the indiscretion and there must be atonement but by any principle of jurisprudence, reprisal has to be commensurate with the primary act.
We have heard our Prime Ministers speeches in the last fortnight where he has made a convincing and impassioned defense of the act of demonetization. Even his harshest critic cannot question his intent. Besides, it is hard not to be inundated by his volubility. Having said that, some of the references he made to the affluent class, were explicitly distasteful and could have been averted. “Meri kadak chai amiron ka swad bigad deti hai” My strong tea spoils the taste of the rich. He of course said it figuratively and rich there implied dishonest, but where was the need for such brackish metaphor? In a society as stratified as ours, why unnecessarily widen the gulf between the haves and have not’s. Perhaps pressures of electoral politics, but come on sir, you have made your point, your popularity is at an all time high, do you really need this demagoguery?
Despite two weeks of hardship, cash crunch and its concomitant damage to the economy, if a referendum were to be carried out, there would be overwhelming support for the Prime Minister and his act of demonetization. Despite the continuing patronage of the majority, the government cannot and should not overlook the kerfuffle that has existed ever since. We can understand the need for secrecy and subsequent logistic challenge, the delays and other inconveniences that such a mammoth exercise is bound to entail but concurrently, people do not deserve to be harassed for an indefinite period of time. For millions of people, this is their first face off with the banks and if that encounter is as chequered, it certainly does not augur well for the future.
I for one cannot accept the fact that there is a ceiling on bank withdrawals. It is my tax paid money in the bank and nobody should have the authority to restrict me from taking it out. One may argue that these are exceptional circumstances and for some opposition leaders to term it as economic emergency, might be unduly harsh, for me it certainly infringes my liberty. We may expect such infringements in an autocratic regime, definitely not in a democratic set up. Continuing cash shortage, long queues is reminiscent of a pre globalization India of the 1970’s. Besides exhortation to people to sacrifice in the name of patriotism seems straight out of a communist handbook and cannot be traced in any right wing philosophy.
The economic ramifications are speculative but what we do know is that 86% of the currency amounting to 14 lac crores has been demonetized. It is estimated that almost a quarter of it, say 4 lac crores will be lost. That obviously exonerates the RBI of the liability and results in a windfall of 4 lac crores for the government.
We hope and expect that this gain will benefit the society and the economy by way of tax concessions, interest cuts, infrastructure and other facilities. The allegations leveled from some quarters that a part of this profit might be used for writing off NPA’s of banks and thereby facilitating loan waivers to big corporate defaulters, appear at this stage prima facie baseless and it is reasonable to anticipate that going forward these charges will be disproved.
The epoch decision of demonetization has surely dealt a blow to the prevalent stock of unaccounted wealth held in cash, which runs in lacs of crores. That is quite a formidable accomplishment. At the same time we must be mindful that only the present stock is hit and the process or the flow has not been impacted. Demonetization might be an essential but not an adequate step to preempt future generation of ill-gotten wealth. To achieve that we need systemic reform and evolution which as of now seem distant and bleak. Judicial reform for example lies at the heart of any social/economic progress.
Apart from extensive reforms, the top priority for the government will be to restore order and faith in the banking system. In two weeks, government has been able to reintroduce 1.35 lac crore of currency, which is roughly 10% of the currency withdrawn. At this rate it will take around 5 months to replenish the revoked sum. Cash starvation for that long may cause far-reaching damage to the economy, besides the risk of people running out of patience. While it might be laudable to move towards a cash less economy or more realistically, curtail the cash usage, lets not forget that India has a sizeable cash economy and not all cash is bad cash.
I am confident that this is a determined government that will not renege but I expect a robust framework that will ameliorate the hardships. I hope that this exercise will be recorded in the annals as a substantive measure rather than a quixotic quest. I support the economic rationale of demonetization and along with the ATMs expect the politics over it to be recalibrated. However, certainly for sometime more, the denouement remains a conjecture.

Author:

Tarun Gupta,

Executive President,

Jagran Prakashan limited.