One month into the demonetisation the hardships faced by India’s citizenry have not abated. The point about these is that it is not the result of some natural calamity but follow directly from actions undertaken by the government. As we are a democracy the actions of the government and its associated bodies need to be scrutinised in public. We may start with the actions of India’s monetary authority the Reserve bank of India (RBI). The website of the RBI carries the preamble "To regulate the issue of Bank Notes to generally to operate the currency and credit system of the country to its advantage." Some of its recent actions would leave one doubting whether it has striven to uphold its own mission statement. At least now, in the midst of the gathering deflation of the economy following the demonetisation, it needs to go back and reflect upon it. That would also help it see that ‘monetary stability’ amounts not only to holding steady the purchasing power of the rupee but also upholding the public’s trust in the currency. There is no doubt that the latter has been shaken somewhat by the demonetisation. Some Indians now mention not wanting to hold on to money, at least in the larger denomination notes, as there is a possibility of demonetisation in the future. Then there is capital flight from the rupee itself as agents shift their funds overseas.
We have had over a month now to form the impression that the hardships due to the demonetisation are being experienced mostly by ordinary Indians. The government has referred to the cash crunch as a temporary inconvenience and inevitable as the plan to demonetise had to be kept secret. This is out of line with the stated position of the RBI. At a press conference held on November 8 its Governor stated that “… in the past weeks and months we have ramped up our production” of the notes to be replaced and the Bank was “ready to meet the requirement in the weeks and months to come.” There was also a clear signal that the RBI and the government were on the same page, for the Governor stated that there was “a congruence of thought between the RBI and the Government” on the need for demonetisation, even though he made the case for it mostly in terms of the presence of counterfeit currency in the money supply. If there had been months to prepare for the changeover why should there be a shortage of cash in the banks even four weeks later? The argument that the demonetisation was a scheme for eliminating black money was made by government’s representative, also present at the same conference. The Secretary, Economic Affairs of the Ministry of Finance made the case for demonetisation as follows: over the period 2011-16, the currency of all denominations rose by 40 percent, the circulation of 500 rupee notes increased by 76 percent and that of 1000 rupee notes by 109 percent while the economy grew only by 30 percent. The Secretary also referred to reports of unaccounted income being held in the form of the high denomination notes. While it is entirely believable that some of the unaccounted income is held as cash, the evidence used to justify the action undertaken is damaging of the credibility of the RBI. Even if there is no requirement that money growth be kept in strict equality with the growth of output, why was it increasingly supplied in the form of large denomination notes, something entirely within its control? Beside the implication that this may have facilitated the generation of unaccounted income there is the possibility of it having constrained low-value transactions which surely predominate. This lapse was taken to the next level when in place of the demonetised 500 and 1000 rupee notes the RBI went on to issue a 2000 rupee note for the first time. On December 2 at the Hindustan Times Summit the Finance Minister spoke of this being a way of quickly replacing the value of the notes in circulation. The impact of such reasoning can be seen in the silent bazaars, migrant labour returning to their home state for want of employment and idle buses being given a washdown, all reflecting the slowdown in the economy. This experience cannot but make one speculate whether the RBI’s straying from its preamble may have constrained output growth even before the demonetisation.
To the economic considerations may be added ethical ones. In a sign of shifting the goal post, the government has rationalised the demonetisation as a strategy for moving to a cashless economy. There are undoubted advantages to such an arrangement. In what serves as a rebuttal of the argument that the demonetisation will eliminate corruption, we have reports that raids in Karnataka and Tamilnadu unearthed hoards exceeding four crore rupees in new 2000 rupee notes. If evidence is needed that extortionist public servants prefer high denomination notes you have it here. But it shows not only that the demonetisation has not succeeded in ending corruption but also that causing hardship to the larger populace is not necessary to unearth black money. What is needed is directed action. Instead, unable or unwilling to punish the few for generating black money the government has unleashed insecurity on the many innocent who are economically vulnerable. Much the same goes for the government’s aspiration of moving to a cashless economy. This objective could have been achieved without the demonetisation. It could have been achieved by a pre-announced and timebound transition to less cash by the RBI merely reducing the growth of the money stock and the government requiring transactions above a certain value to be undertaken exclusively through verifiable accounts. While the move to less cash is quite far advanced among richer Indians, to enforce a transition under emergency conditions is unethical. It is not as if the peasants and workers of India are unaware of the advantages to them of digital payment. It is only that their historical disadvantage has left them unprepared for it. Unlike the educated middle classes the majority of Indians have not had the opportunity to make this transition partly also because financial institutions, including the public sector banks, have not found them attractive enough as customers. The timeline for transition to a cashless economy as proposed by professional economists is seven years. Here we have a government trying to squeeze it into what is left of its tenure.
Finally, there is the argument that the demonetisation will benefit the poor by strengthening the public finances. The funds are supposed to come from two sources, namely increased income-tax revenues and the reduced liabilities of the RBI, reflecting extinguished currency, which can be made over to the government in the form of dividend. These will be but one-off accruals and we do not as yet know the exact figures. From an ethical point of view, however, that is immaterial. The financial gains of the state are joint with the loss of income incurred by millions of citizens. Not only would money thus collected be tainted, but to distribute it via the Pradhan Mantri Garib Kalyan Yojana makes a mockery of governance. It would amount to paying Peter after first having robbed him of his livelihood.But there have been more tragic consequences. At Balrampur in Bihar’s Katihar District a 32 day-old babe in arms died as its mother queued-up to withdraw money from a bank. India’s poor, in whose name its authoritarian state has once again acted, pay for the demonetisation.
The author is Professor of Economics at Ashoka University; Honorary Visiting Professor, Centre for Development Studies, Thiruvananthapuram and Senior Fellow-elect, Indian Institute of Management, Kozhikode.