Economy

Modi’s Demonetisation Plan Disregards Lessons from Previous Governments

Demonetisation aims to eradicate black money, but the move deflects attention from the core issue to a dramatic action that may fail to tackle the problem.

Prime Minister Narendra Modi. Credit: PTI

Prime Minister Narendra Modi. Credit: PTI

Self-righteousness is a convenient cloak to drape in politics. It gets more advantageous when the cape is dipped in nationalistic fervour. In his dramatic speech on the night of November 8, Prime Minister Narendra Modi repeatedly justified his action to demonetise Rs 500 and Rs 1000 currency notes by citing nationalistic reasons.

The raison d’être given for the move was patriotic rather than economic. Little explanation was given about how this step would end the scourge of the so-called black money in the long-term.

Since this move is a one-time action with no accompanying structural change to ensure compliance with the tax regime, there is an overwhelming sense that Modi’s step is little more than an incomplete idea.

“There comes a time in the history of a country’s development when a need is felt for a strong and decisive step,” Modi asserted and asked the ordinary person to “put up with difficulties for some days”. He further added, “In a country’s history, there come moments when every person feels he too should be part of that moment – that, he too should make his contribution to the country’s progress. Such moments come but rarely.”

“Now, we again have an opportunity where every citizen can join this mahayajna against the ills of corruption, black money and fake notes. The more help you give in this campaign, the more successful it will be.”

Modi’s plea to the people is also tinged with nationalism because the ‘hardship’ that he asked citizens to endure is because of India’s twin challenges – “On the one hand is the problem of terrorism; on the other is the challenge posed by corruption and black money.”

It is worth recalling that 18 years ago Yashwant Sinha argued that high denomination bank notes had little effect on reining in the parallel economy and preventing counterfeit notes from being introduced into the economy with the support of external forces inimical to India.

In December 1998, as the finance minister in the Atal Bihari Vajpayee government, Sinha introduced the High Denomination Bank Notes (Demonetisation) Amendment Bill, 1998 to amend the law by the same name passed in January 1978 when the Janata Party government with Morarji Desai as prime minister and H.M. Patel as finance minister demonetised currency notes of Rs 1000, Rs 5000 and Rs 10,000.

Sinha wanted to amend this to introduce Rs 1000 notes as part of the political economic process after the proposal was “first mooted by the Reserve Bank of India for some very good reasons in April 1994.”

In his speech in the Lok Sabha on December 9, 1998, he explained that, “the Congress Party (government under P.V. Narasimha Rao) took a decision in principle in July 1994 that thousand rupee notes should be printed,” but it could not complete the process due to “complicated and dilatory mechanism by which the governments work.”

The idea was revived by the following United Front government that “decided to go ahead” but “political events intervened and they could not bring the Bill before this House.” Eventually, Sinha evaluated the proposal and “looked at the justification and background recognised by the two previous governments. Then we also decided to go ahead with this.”

Most significantly, Sinha recalled the justification given by the Janata Party government for its decision that “the availability of high denomination bank notes facilitates the illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes.” But he countered this argument and contended that he was “sure that the honourable members of this August House will share my view that the root cause for illegal transaction lies not in notes of high denomination but elsewhere.”

This means that not only did the Modi government disagree with the wisdom of at least three governments headed by almost the entire gamut of political parties, but it also resorted to a step that was taken by a government four decades ago with inadequate results. The decision of the Desai government did not eradicate black money. At best, this step would suck out a part of the unaccounted money and put the counterfeit notes out of circulation but the root of the problem would remain.

Sinha also stated that during the decision-making process, the government was aware “that the ISI is printing counterfeit notes and that fake notes are being circulated in this country.” He declared that the “a number of steps through the Ministry of Home Affairs and through the intelligence agencies” had been taken and added that there would be no let up in initiating “strongest possible action against any foreign agency which tries to disrupt our system by bringing into this country currency notes which are fake or counterfeit.”

Effectively this means that the problems cited by the Modi government are no different from those in the past. But instead of addressing the basic problem, the decision simply deflects attention from the core issue to a dramatic action that may not tackle the primary challenge but instead is likely to add new ones. In this case, the issue of how people will manage the transition.

Modi’s choice of words and references often promote majoritarianism and he resorted to it in significantly this time too. On an issue where reference to religious festivals is uncalled for, he twice evoked the spirit of Diwali. On the first occasion he beseeched the citizens, “My dear countrymen, after the festivity of Diwali, now join the nation and extend your hand in this imandaari ka utsav, this pramanikta ka parv (this celebration of integrity, this festival of credibility).”

On the second occasion, while closing his address, he asked people to “make [your] contribution to this grand sacrifice for cleansing our country, just as you cleaned up your surroundings during Diwali.” The prime minister also termed the demonetisation drive as a “mahayajna against the ills of corruption, black money and fake notes.” Cleaning up homes for Diwali is not a universal practice in India and mahayajna is undoubtedly a Hindu ritual.

Nilanjan Mukhopadhyay is a Delhi-based writer and journalist. He authored Narendra Modi: The Man, The Times and Sikhs: The Untold Agony of 1984. He tweets at @NilanjanUdwin.

  • Siva Prasad Rao

    One suggestion. When discussing policy issues, acceptance of your point of view will be much better if you just stick to facts and rational arguments and not by mixing them with exposing your grudge against the current government. I was genuinely looking for reasons why demonetization didn’t work last time and how the current demonetization is different from the earlier one. There’s no proper evidence based explanation for that. Please do a proper research next time enabling us readers to form a informed opinion. Thanks