Prime Minister Modi’s call for a ‘celebration of integrity’ through a sudden demonetization of Rs. 500 and Rs.1000 currency notes, much like his earlier schemes like the Jan Dhan Yojana, is yet another ‘jumla’. But if the opening of millions of ‘zero balance’ bank accounts under the Jan Dhan Yojana was a harmless gimmick, the ill-conceived monetary experiment this time may actually end up inflicting some costs on the public.
The temporary proscription of currency notes of higher denomination is supposedly aimed at rendering the presently held stocks of black money and counterfeit currency worthless. What is noteworthy is that it neither makes any difference to the generation of black money through myriad channels, nor does it touch that part of the stock of black money held in other forms of assets like benami properties in land and real estate, gold, foreign currency, offshore bank accounts, etc.
Nobody knows how much of illicit wealth in the country is stashed in wads of Rs. 500 and Rs.1000 currency notes. One can only guess that it would be the petty brokers, wheeler-dealers and thieves who store their ill-gotten wealth in that fashion, besides mainstream political parties and politicians like the ones seen in the Tehelka or Narada tapes. The big fish have long devised much more sophisticated ways of stashing or laundering their money. Hence the current demonetization is unlikely to touch anything more than a miniscule fraction of the present stock of black money in India.
To the extent it will succeed, the stocks of illicit wealth are likely to be only destroyed but not unearthed or confiscated, nor the illegalities punished. Given such uncertain and measly benefits, the costs of demonetization are significant.
First, a disruptive shock has already been delivered to the cash-transactions based economy, which has particularly affected the lives of the rural and urban poor, who eke out a living in the vast informal economy, besides inconveniencing a significant section of the middle classes who are yet to get included in the world of cashless transactions. The impact of this is certainly short-term and transitory, but whether this shock was necessary at all is questionable, given the elusive benefits.
Second, the move may just end up increasing the proportion of other assets like benami property, gold, dollars etc. in which black money is held and diversify the market for money laundering instruments, making it even more difficult to detect. Third, given the fact that new Rs. 500 and Rs.2000 currency notes will now be introduced to replace the proscribed currencies, the RBI will have to incur significant costs of printing a very large volume of currency notes. Moreover, if high denomination currencies are really the problem, why replace the Rs. 1000 denomination with Rs. 2000, which will make it even easier to build fresh stocks of black money?
There is no guarantee that the high denomination currency notes won’t be faked again, given that the agency and technology of counterfeit Indian currency notes remain unearthed. As for the contribution of this move to combating terrorism, it is a red herring. The role of opaque instruments like Participatory Notes, used by FIIs operating in the Indian stock market, are more relevant for financing terrorism than Indian currency notes of high denomination.
The real problems ailing the Indian economy lie elsewhere. The amount of stressed loans in the Indian banking system has crossed a whopping Rs. 9 lakh crore, a bulk of which is owed by domestic corporates to the public sector banks, causing a huge debt overhang. Despite doubtful claims of fast economic growth, revenue mobilisation has not shown any signs of improvement and consequently, redistributive policies have been rolled back.
Under the Modi regime, substantive measures to promote investments, economic growth, revenues and welfare expenditure have been supplanted by gimmicks, PR spins and a brazen pursuit of select corporate interests. The latest instance of a conflict of interest lies in today’s full page newspaper advertisements by an online payment service provider congratulating the Prime Minister for the demonetization announcement.
The writer is a left-leaning economist