CRITICS: In an interview to the Times of India, Rajan (l) said although the RBI was consulted, at no point during his term was it asked to take a decision on demonetisation, and in fact he cautioned against it. Steve Forbes (r) didn’t mince words when he called demonetisation ‘theft’ and compared it with Indira Gandhi’s infamous, short-lived, forced-sterilisation programme of the 1970s
Both the former RBI governor, Raghuram Rajan, and the editor-in-chief of the Forbes magazine have condemned demonetisation and called it a theft of the people’s money. This came after RBI revealed that almost all the so-called black money was back in the bank
By Dinesh Unnikrishnan
SEVERAL questions pop up in light of revelations by Rajan in his new book, titled I Do What I Do: On Reforms Rhetoric and Resolve and through his interviews to media.
One, if Raghuram Rajan didn’t approve of demonetisation “at any point during his term”, how did the government claim it got the Reserve Bank of India (RBI) on board some six months before the launch to start preparations for the massively disruptive exercise in the economy? Rajan left the RBI on September 5, 2016 and demonetisation was announced just two months later, on November 8, 2016.
Two, if the RBI, under Rajan, had duly warned the government that short-term costs of the move could outweigh the long-term benefits, particularly if not executed well, and there are alternative ways to achieve this objective, then why did the government still go ahead with the plan ignoring the advice from the monetary authority and custodian of currency, in an economy where growth hadn’t taken a firm hold yet? In hindsight, we all know that the government and RBI miserably failed to plan it properly.
Answers to these questions are even more critical after 10 months of demonetisation, wherein 86 per cent of currency was nullified in a few hours through a televised announcement by Prime Minister Narendra Modi. As per the recent annual report of RBI, about 99 percent of the demonetised notes have come back to the banking system. Still, this is not the final number. The RBI is yet to count old notes received by cooperative banks and those deposited by citizens and institutions of Nepal. Once this exercise is over, the final tally won’t be far from the 100 percent mark.
The monetary cost of printing new currency for RBI has escalated to `7,965 crore, more than double compared with `3,421 crore in the previous year. The number of counterfeit notes or fake notes detected during the exercise is only minuscule, just about 7.6 lakh pieces. The cost of printing new currency and the interest paid on reverse repo operations to suck out the excess liquidity in the banking system post demonetisation have contributed to a sharp fall in the RBI’s earnings and its dividend transfer to the government, which fell by half to `30,659 crore from `65,876 crore last year and against an expected target of `74,901 crore.
All in all, the tangible costs of demonetisation has far exceeded the gains, so far. The government had initially expected about `3 lakh crore to `4 lakh crore of currency would not come back to the system and this will be a windfall gain. But, it didn’t happen. The economy has paid a heavy price for this exercise, with GDP falling to 6.1 per cent in the March quarter and further to 5.7 per cent in the June quarter. There are reports of major job losses in informal sector. Even the right-wing labour unions have accused the Modi-government for destroying jobs with the ill-prepared demonetisation move.
There are claims and counter claims about the stated objectives of demonetisation after 10 months. There were three main objectives to it in the beginning before the government began shifting the goal posts after each stage. These were fighting black money, cash-based corruption and terror funding. And later the objectives of digital-shift and cashless economy were added when Modi spoke about this in his Mann ki Baat programme. Subsequently, much stress was given to mainstreaming of money and expanding the tax base as the major victories of demonetisation.
There aren’t any solid evidences of demonetisation achieving any of these objectives contrary to the government’s claims. There was a spike in digital transactions post demonetisation when cash was not available in the system and now it has come back to the “trend growth line”. Data suggests that tax payer base might have gone up on account of note ban and how many of these will actually contribute to higher tax revenue is debatable. Clearly, corruption and terror funding have not been impacted much due to note ban.
As far as black money is concerned, the only way demonetisation can be salvaged now is when taxman unearths substantial amount of illicit money from the money deposited in bank accounts post demonetisation. But, here, Rajan cautions. “The government can investigate the deposits, and some of it may turn out to be black money but it does imply that a greater effort is required and could also mean – and this is something a number of commentators have pointed out – more harassment for the general public that has honestly deposited money that was lying for one reason or the other in various accounts. So that benefit – if it comes – let us see at what cost it comes.”
If one looks at the record of India’s corrupt, under-equipped tax department, the rate of success in the battle against tax cheats aren’t very encouraging. The government and taxmen will have to work hard to change this record. But, as Rajan cautioned, giving a free hand to taxmen and pushing them for targets could also lead to harassment of even legitimate depositors. The government needs to be careful not to let this happen. The gains of demonetisation on black money continue to be uncertain.
But, the moot question here is this: If the RBI didn’t approve of demonetisation until 5 September and warned about its likely damaging effects on economy, then why did the government go for this dangerous gambit? Was it worth the pain for common man and the economy? And more importantly, if the government hasn’t still learned any lesson from the demonetisation episode (finance minister Arun Jaitley believes the exercise has achieved its objectives) and is confident that it didn’t hurt the political prospects (evident from UP polls), will it go for similar gambles yet again in the economy? Rajan’s revelations only raise more uncomfortable questions.
TEN months later, India’s move of demonetization is still drawing flak. And this time it is not coming from home but from Steve Forbes, the editor-in-chief of Forbes magazine.
In what is an out-and-out blow to the Indian Government, Forbes has said that demonetization was ‘sickening and immoral’. And that’s not it. He went on to say that the move was a ‘massive theft of people’s property’.
“What India has done is commit a massive theft of people’s property – a shocking move for a democratically elected government”, he said.
Calling the Indian bureaucracy ‘notorious’ for corruption, red tape, and lethargy, Forbes compared the decision with former Prime Minister Indira Gandhi’s infamous sterilization program in the 1970s.
“Not since India’s short-lived forced-sterilization program in the 1970s (this bout of Nazi-like eugenics was instituted to deal with the country’s “overpopulation”) has the government engaged in something so immoral,” he said.
Forbes has criticised the Indian government’s narratives to support demonetization pointing out that businesses are closing as companies are not able to pay their employees, and that currency change cannot stop terrorists from committing evil acts of terror. He went on to say that digitalization “will happen in a free market one way or the other, but it needs time”.
But apart from criticism, Forbes also had some advice to share.
“India should get rid of such a complex tax system, which is the main reason for tax evasion. India should slash income and business tax rates and simplify the whole tax structure; make the rupee as powerful as the Swiss franc; hack away at regulation.”
And since subtlety isn’t his strongest suit, he also said:
“India is the most extreme and destructive example of the anti-cash fad currently sweeping governments and the economics profession.”
He added that India, apart from immorally harming its own people, has set a bad example for the rest of the world.