Economy

The Demons of Demonetisation

While farmers and informal sector workers suffer, the move to demonetise Rs 500 and Rs 1000 notes will have little impact on black market offenders.

A man puts a notice inside his eatery in Mumbai, India, November 9, 2016. Credit: Reuters

A man puts a notice inside his eatery in Mumbai, India, November 9, 2016. Credit: Reuters

Regardless of party affiliation or political ideology, every individual agrees that the issue of black money in the economy needs to be resolved. However, the Narendra Modi government’s decision to withdraw Rs 500 and Rs 1000 denomination notes from circulation with immediate effect is set within arbitrary parameters, which is fatal to its success.

The BJP machinery and its horde of online yes-men have swung into action, hailing the move as the single greatest reform “since independence”. In their enthusiasm to celebrate every decision, no matter how poorly thought out, they have ignored the grim reality playing out in the streets, outside barely equipped ATMs, banks and post offices. There are several yet unanticipated fallouts of this move, but five deserve immediate discussion.

Making criminals of the rural masses and farmers 

The BJP government, never known for its sensitivity to the rural masses, has proceeded on several unsubstantiated assumptions. The first among these is that everyone has access to bank accounts or has the means of identification to get one.

This government, like the ones before it, has admittedly grappled with the problem of financial inclusion. Estimates vary but it is generally accepted that 40% of citizens or more do not have access to bank accounts (of the remaining accounts, 43% are dormant). For reasons traditional and mercantile, individuals in rural areas either prefer to hold their income in cash or simply don’t have banks willing to cater to them.

As a result, several crore people have suddenly been told their holdings no longer have any value. Banks, even if they could, are unwilling to accommodate individuals who get paid in cash and have no form of identification (and in some cases, an Aadhaar card).

Small and marginal farmers have been placed in a terrible situation. Indisputably, agricultural income is not subject to tax. However, a public statement issued by finance secretary Hasmukh Adhia, in the presence of the finance minister, portends otherwise. Adhia suggests that amounts deposited by farmers will be measured against the size and yield of declared land holdings. This is an arbitrary and undefined measurement fraught with the almost certain consequence of taxing agricultural income in the garb of such an inquiry by authorities.

Our prime minister and finance minister, oblivious to the vagaries of a farm cycle and its economics, do not seem to understand that with kharif harvesting over and the rabi crop being sown within November, farmers require immediate cash for seeds, fertilisers, diesel and other inputs, besides payment to the farm labour. Unlike in the world of ruling elite traversed by Arun Jaitley, no one accepts credit cards for seeds, fertilisers or farm labour nor do the farmers swipe credit cards. In fact, two-thirds of farmers still rely on informal sources of financing to sustain their daily needs. Modi’s historic decision is a gross nightmare for farmers.

Chaos galore in the unorganised sector 

Nearly 40% of India’s economy lies in the unorganised sector, which is also the biggest job generator. Entire vegetable and flower trade is in cash. So are the trades and vocations undertaken by small and petty contractors, vendors, plumbers, carpenters, blacksmiths, barbers, mechanics, washer men, small eateries, dhabas, tea shops and multiple others. They constitute the core of India’s economy. No one can dare to call this ‘cash economy’ of hardworking Indians a ‘black economy’ only on the plea that they do not thrive within the precincts of a banking system that still caters to the affluent.

The beauty of this economy is that it sustains upon one-day cycles of earnings. All of those working informally find themselves lost, with a question mark on their earnings, savings and capacity to recycle their incomes. Moreover, the new regime, declared by the finance ministry, shall scrutinise all deposits beyond Rs 2.5 lakh and subject them to penalty and prosecution. Imagine the entire rural and urban unorganised sector being first asked to go to a bank to replace currency by forsaking their daily earning cycle and on top of it, a large number of them receiving a notice from the department of income tax accusing them of being black money hoarders. How scary it could be for a barber or a carpenter or a tea shop owner or a housewife is beyond the comprehension of Modi and Jaitley. The net effect is that hoards of honest citizens in the rural and urban unorganised sector will be viewed through the prism of criminality and evasion.

Sources of black money unaffected 

And here lies the tragedy of this move; the real offenders will remain unaffected. Discerning commentators may have observed that the lakhs of people queuing up outside banks across the country are not there to deposit vast reserves of cash. They are simple, everyday people trying to salvage the best of a bad situation. Black money, especially in the quantities the government claims to target, is never held in wads of notes taped together.

The most popular sources of hoarding black money are gold, jewellery, property, foreign exchange, shares, bonds and other securities. With gold prices skyrocketing to Rs 60,000 per ten gm, compared to Rs 30,000 per ten gm 48 hours earlier, those holding black money in the form of bullion have actually doubled their money. They can sell their stores at twice the original value, once the supply of new notes becomes readily available.

Purpose of hitting at black money defeated by the decision 

In his address to the nation, Modi was vehement in pointing out that black money hoarders store this money in wads of currency notes of the denomination of Rs 500 or Rs 1000. In the same breath, however, he reintroduced Rs 500 and Rs 2000 denomination notes. The finance minister and the revenue secretary said even Rs 1000 denomination note is being reintroduced. How withdrawing notes of the denomination of Rs 500 and Rs 1000 and replacing them with Rs 500, Rs 1000 and Rs 2000 denomination notes, helps to fight black money is incomprehensible and beyond any sense or logic.

A new era of tax terrorism 

The BJP wooed the private sector on promises of ending an ‘era of tax terrorism’. Ironically, this move has empowered the bureaucracy to an unprecedented level. Every citizen depositing cash reserves beyond the Rs 2.5 lakh limit will be subject to the mercy of income tax officials. In fact, even under the voluntary disclosure scheme, there were reported instances of individuals being coerced as tax officials struggled to meet their targets. In the end, Rs 65,000 crore were recovered from 64,000 individuals (just 4% of the BJP’s originally stated target). The math speaks for itself.

The UPA government took similar measures under the stewardship of Manmohan Singh. Rs 500 and Rs 1000 rupee notes printed prior to the year 2005 were demonetised and new notes were circulated. No grand announcement was made via an address to the nation nor was any panic created like at present.

All of this gives rise to a nagging scepticism that the BJP government has indulged in a form of policy theatre to divert attention from its failures. In the context of almost two and a half years of lacklustre governance, it faces unrelenting questions about Modi’s hollow promise of bringing home Rs 80 lakh crore of black money stashed overseas. In fact, one would have assumed that a government keen to punish those hoarding money abroad would have been overjoyed at the disclosures made in the Panama Papers with names and accounts being made public. Yet no action whatsoever has been taken.

All in all, the Modi government’s decision on demonetisation gives rise to more questions than answers. But one thing has become eminently clear: policy making devoid of humanity and aimed solely at political agenda setting benefits no one.

Randeep Singh Surjewala is an MLA and communications in-charge of the All India Congress Committee 

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