The RBI, 8 months after demonetization, has clearly unmasked the farcial claim that it will weed out black money. On the contrary, it has dealt a crippling blow to the Indian economy in terms of output, employment generation and in particular the informal sector (96%), which operates on the basis of cash. As per the Annual Report of the RBI, out of Rs.15.44 lakh frozen on 8th November, 2006 (in 500/1000 rupee currency notes), Rs.15.24 lakh (nearly 99%) was deposited back into banks by June, 30th, 2017. The returned notes amount to Rs.8900cr and face value of fake currency is around Rs.41 crore. The dividend of the RBI to the government has fallen from Rs.65876 crore, in 16-17 to Rs.30,659 crore, a whooping drop of Rs.35215 crore. This is largely due to the additional cost of printing new currency notes and more importantly due to the 6% reverse repo rate that the RBI had to pay to the banks for parking their overflowing coffers.

These tale tale data from the independent statutory authority flies in the face of PM’s statement that 86% of the high currency involved are in black and there is a proliferation of fake funding for terrorist activities. As they say, bad economics can often be good politics. Nothing could be more true in case of demonetization; the way UP elections later panned out. IG Patel, the RBI Governor had opposed his FM, HM Patel, when the latter suggested demonetization in 1978. In his book “Glimpses of Indian Economic Policy”, Patel wrote “steps like this rarely have striking results. It is a measure targeted at corrupt predecessors or government or government leader”. Patel could not have been more farsighted, the way the Modi government seemed to have pulverized his main political adversary.

In a brilliant and evocative book “The Curse of Cast” (2016), Prof. Kenneth Rogoff has given a fascinating argument against cash. He had observed that even in advanced economies like USA, which uses less paper money, a record $14 trillion was feeding tax evasion, corruption, terrorism, drug trade and human trafficking.Kenneth recommended that demonetization process should be slow, calibrated and properly planned, and allow small denomination currency to be in circulation. Quite clearly in India, we have overlooked his cautionary approach.

Sri Sitaram Yechury, of CPM, has interestingly quipped that the demonetization drive has helped most of the black money hoarders to “turn their black money white”. Sri Arun Jaitly, in an interesting repartee has observed that the objective of demonetization was digitization. This is in sharp contrast to Prime Minister Sri Narendra Modi’s statement in the Parliament that demonetization has given Indian economy Rs.5 lakh crore advantage! Like “Swachh Bharat, the decision is a movement towards clean India; of corruption and black money”.

The impact of demonetization has been catastrophic. For those who stood in the long queues, of whom around 100 reportedly died, it has been a prolonged nightmare for at least four months. The worst casualty has been the agriculture sector, which is heavily dependent on cash. Due to acute scarcity of new bank notes, many farmers had insufficient cash to purchase seeds, fertilizers and pesticides needed for plantation of rabi crops which are sown around mid-November. There was crash in prices of crops, leading to “poverty in the midst of plenty” (John Maynard Keynes). This is from a government, which promised to double farmer’s income by two times in its budget of 2016-17.The GDP was forecast by several independent rating agencies like Goldman Sachs to fall from 8% to around 6.7% during 2016-17. As per Gross Value Added figures released by the Economic Survey, Vol-II recently, it has dropped from 7.9% last year to 6.6% during 2016-17. The small scale sector, which contributes 80% of total employment has witnessed a fall in output to 4.9% as against 6.6% earlier, and a job loss of nearly 1.5 million as per CMIE report. These are truly distressing.

Interestingly the RBI acted in quite a demure and contrite manner, to begin with, giving an impression that it has abdicated its autonomy in its monetary policy to the government. Many retired Deputy Governors of the RBI had lamented about this pusillanimity and dithering attitude on the part of the RBI. This is in sharp contrast to its past record of being substantially independent as brought out by Shri Y.V. Reddy in his recent autobiography “Advice and Dissent: My Life in Public Service”.

Ruchir Sharma, a globally acknowledged investment analyst, observes that there is a decline in democracy in many countries due to rise of autocratic leaders like Putin in Russia, Trump in USA, Erdogan in Turkey and Modi in India. As Steve Forbes aptly observed the massive purloining of peoples’ legitimate cash, without following due, democratic process and absence of a serious backlash, is symptomatic of the dictatorial tendency, that many seem to be lapping up in democracies like India.

Right of choice, of how we keep our savings, what we eat, and what kind of private life we lead is the fundamental core of a democratic polity. The Supreme Court in the landmark judgement Puttaswamy vs Union of India has asserted that right to privacy is indeed a fundamental right. To quote Justice Chelameswar examples of privacy violation include forced feeding, telephone tapping, abortion etc. which must be eschewed. The draconian demonetization decision is indeed a serious infringement in to our right to privacy, how we intend to manage our legitimate savings. Sadly, the political juggernaut of the NDA and the inept political opposition that it faces, makes sensible discourse on important issues like this often ineffective.

All the same it’sgratifying to find that the RBI has asserted its institutionalindependence by bringing up facts rather than changing the goal post as Mr. Arun Jaitley is trying to do. Fareed Zakaria in a remarkable book “The Future of Freedom: Illiberal Democracy at Home and Abroad” had observed that independent unelected institutions like the Judiciary, Election Commission and RBI have contributed more to the achievement of democratic goals than the political representatives, in many countries of the world. RBI’s annual report on demonetization and Supreme Court’s recent judgement on right to privacy confirms Zakaria’s foresight. The Supreme Court asserted its independence after supersession of the judges in 1973 and coined the concept of basic structure doctrine which can’t be trifled with even by a majoritarian government. The RBI, in definitive way, has risen from its self imposed reticence to tell the public at large that facts rather politics defines its mandate!


Prof. Misra is a development economist and

is assisted by Sanjaya Ghadai for in-depth research

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