Demonetisation

Modi’s Defence of Demonetisation Is Based on a Selective Memory

While citing the Wanchoo Committee’s recommendations on demonetisation, the prime minister conveniently left out that the committee was against voluntary disclosure and tax amnesty schemes.

Prime Minister Narendra Modi. Credit: PTI

Prime Minister Narendra Modi. Credit: PTI

One could call it selective amnesia or partial use of facts, but Prime Minister Narendra Modi cited just one of the Wanchoo Committee’s recommendations to claim that while Indira Gandhi lacked courage and will to demonetise high-value currency in the early 1970s, he demonstrated exemplary courage since he is not driven to seeking short-term political and electoral gains and instead is motivated by the objective of eradicating black money.

On December 16, the government announced the fourth tax amnesty or voluntary disclosure scheme in a span of 15 months and the third this year. The same morning, while addressing party lawmakers, Modi engaged in a bout of one of his favourite activities – running down the Gandhi-Nehru clan. But while attacking Gandhi for reportedly dismissing the proposal for demonetising high-value currency, Modi conveniently sidestepped the Wanchoo Committee’s observation on the futility of voluntary disclosure and tax amnesty schemes. The committee concluded in its 1971 report:

 “We consider that a disclosure scheme is an extraordinary measure, meant for abnormal situations… Resorting to such a measure during normal times and that too frequently, would only shake the confidence of the honest taxpayers in the capacity of the Government to deal with the law breakers and would invite contempt for its enforcement machinery. We are convinced that any more disclosure schemes would not only fail to achieve the intended purpose of unearthing black money but would have deleterious effect on the level of compliance among the taxpaying public and on the moral of the administration. We are, therefore, strongly opposed to the idea of the introduction of any general scheme of disclosure either now or in the future.”

It is evident that the Wanchoo Committee report is the Gospel for Modi insofar as demonetisation is concerned, but not when it comes to serial voluntary black money disclosure schemes. Significantly, the reference to the Godbole book is not Modi’s original contribution to the discourse since November 8. Evidently, he picked up the anecdote from an article in the Open magazine on November 25 written by NITI Aayog member and economist, Bibek Debroy, who referred to an incident involving Gandhi and Y.B. Chavan. Modi’s selective use of facts and arguments gets further evidence because the prime minister made no mention of the fact that the same article mentioned that the recommendation on demonetising high-value bank notes was only part of the committee’s Interim Report of 1970 and the final report had nothing further to say on the issue. Furthermore, Debroy wrote, the Wanchoo Committee accepted that: “Demonetisation was not successful then because only a very small proportion of total notes in circulation were demonetised in 1946 (the first time when high value currency was scraped)…”

In his address to the BJP parliamentary meeting, Modi claimed later that what was not done (by Gandhi) in 1971, had now been done by him now. The assertion underscores the attempt to erase from history the fact that Morarji Desai and his finance minister, H.M. Patel, demonetised Rs 1000, Rs 5,000 and Rs 10,000 notes. This is a typical ploy of Modi to project himself as the sole leader who dares tread where others have either feared or chosen not to venture. That aside, demonetisation has never worked. In January 1946, the government scrapped bank notes in denominations of Rs 1000, Rs 5,000 and Rs 10,000 but in just eight years, in 1954, the government reintroduced these notes, a fact which prompted Debroy to write that “one deduces that this 1946 experiment wasn’t terribly successful”.

Yet, the Janata Party government scrapped high-value notes on January 14, 1978. The National Institute of Public Finance and Policy conducted a study in the mid-1980s on demonetisation in 1946 and 1978 and the assessment was unappreciative: “…there are other good reasons to doubt the efficacy of this measure in combating black income generation. First, the measure is limited to inflicting penalties on those who hold their black wealth in the form of cash … There is every reason to believe that cash is not an important form for holding black wealth…Second, even for holders of cash, there exist avenues for converting high denomination notes into lower valued ones, at a discount, through intermediaries. Third, and perhaps most importantly, the measure does not address the underlying causes of black income generation. Hence, subsequent generation of such incomes can continue unabated…” Incidentally, this report too was cited by Debroy.

Because the 1978 demonetisation did not achieve what was intended and also because of declining purchasing power of the Indian rupee, the government introduced Rs 500 notes in 1987 and Rs 1000 notes in 2001. Yashwant Sinha, finance minister in the Atal Bihari Vajpayee-led NDA government, piloted the High Denomination Bank Notes (Demonetisation) Amendment Bill necessitated because the Desai-Patel duo opted to banish high-value currency through the legislative route (in contrast to Modi’s decision to opt for the executive route). During the debate on the Bill in Lok Sabha in December 1998, Sinha argued: “If through demonetisation we could put a brake on generation of black money then the black money circulation and quantum of black money in this country would not have gone up between 1978 and 1998….it is not the denomination, but there are other things which determine whether black money will be generated in this country or not…”

It is evident that Modi demonetised 86% of the total currency in circulation despite evidence that previous measures were not successful and against the wisdom of his party leaders. Alongside, he also rolled out one immunity scheme after another, again contrary to prior experience. In fact, in the same speech referred to previously, Sinha declared he wished to “make it very clear that this government does not believe in promoting or encouraging the generation of black money and then coming repeatedly with one amnesty scheme after another…we shall continue to strike at the root of generation of black money so that black money generation is reduced to the minimum and honest taxpayers are not discouraged in this country. Every honest taxpayer comes to us and says, ‘what is the point in paying taxes if at some point of time or the other we know that you will bring measures which will give amnesty to all those who have avoided paying taxes and evaded paying taxes’.”

It is pertinent to recall that Gandhi’s government quashed rumours regarding imminent scrapping of high-value bank notes. It also did not introduce tax amnesty till October 1975, by when Emergency had been imposed and people were fearful of the government. It was another ten years till the government in 1985 stealthily issued seven CBDT circulars issued between June 26, 1985 and February 17, 1986, allowing tax evaders to disclose their unaccounted incomes and wealth. The Voluntary Disclosure of Income Scheme of 1997 was the next major tax amnesty and this was followed by Modi regimes plan in 2015. Three successive schemes this year are an indication that the Modi regime has continued on the beaten path while accusing predecessors of being meek-hearted.

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

  • Bapi

    Till now I am not able to understand how this demonetization will help to remove corruption from our society. As far as Modiji is concerned, he is the most knowledgeable PM we have ever got. This article mentioned Mr. Yashwant Sinha’s comment and how Modiji superseded his wisdom. Another instance is, Mr. Atal Bihari Bajpayee after his experiments with pakistan, said that “Dudh mangoke to khir denge, Kashmir mangoke to chir denge”. But Modiji also superseded his wisdom. This proves he is the most knowledgeable PM we have ever got.