Isaac
Newton was the Warden of the Royal Mint in England around the end of the
seventeenth century, a time when every fourth coin was a forged one. Newton
went after William Chaloner, a key mastermind of the forgery racket. He
designed new minting machines which made forgery harder and started letting off
an arrested forger if he or she informed on two other forgers. Very soon, Newton
was able to get Chaloner hanged. Now,
let us move to a more contemporary experience.
The
latest RBI Annual Report indicates that 6.33million high-denomination forged
notes were detected last year, an increase of about 46 percent since 2011. The forged currency is reportedly being pumped
into India by Pakistan. While high
denomination Indian notes were readily accepted in Nepal for decades, they are not
accepted there anymore! One is reminded
of Keynes who wrote in his book titled The Economic Consequences of the Peace – “Lenin was certainly
right. There is no subtler, no surer means of overturning the existing basis of
society than to debauch the currency.” Forging notes is only one aspect of “debauching”
or debasing a currency. There are three other forms that get christened ‘black
money.’
One is the market for
illegal goods such as narcotics, liquors, weapons, and human trafficking. These markets also get financed by counterfeit
Indian rupees. The second is the markets
for goods that are legal but the transactions are either unreported or under-reported. The consequent tax evasion leads to lower
government revenues and poorer levels of public goods delivered to the destitute.
It also leads to underestimation of
GDP. Yet another form is corruption. This involves bribery to curry favours in business
deals and to skirt administrative rules.
Corruption results in allocation of contracts to inefficient firms,
violation of safety and sustainability rules, and distribution of income in
favour of politicians/bureaucrats. Income
generated through any of the above routes can get invested in gold, benami
properties, or sent abroad through hawala
and often brought back in the form of FDI, a process known as round-tripping. In all these forms, the overwhelming mode of
payment is cash.
We have witnessed such forms
of financial debasement for long, but nothing worth mentioning was done about it. Morarji Desai did scrap Rs. 1000 and higher
denomination notes in 1978. Of course, its
effectiveness was not high, for very few used large denomination notes and the
element of surprise and secrecy was missing. The demonetization drive that
began on 8 November may appear to be madness to some, but there
seemed to be some method in it. It is
now clear that secrecy had to be, and was, maintained at the highest levels. There
was bound to be some inconvenience to the population when exchanging the old notes. Despite the 50-day window, people were
anxious resulting in long queues. Issuance
of new Rs. 2000 notes also seemed to have been done with a view to prevent
persons from recycling old Rs. 1000 notes into new Rs. 1000 notes through ATM
withdrawals and subsequent deposits. Yes,
reaching the last branch and the last ATM was a gargantuan task and may have
had its own challenges. However,
alerting on such possibilities prior to the demonetization announcement would
have led to an abortive demonetization effort!
The failure of the bandh called
by political parties and the tolerance shown by people so far indicates that
society has adjudged the transition as a regrettable necessity for the larger
good in the long run. Daily news
regarding police/IT officials stumbling upon large caches of old high-denomination
notes are indicative of the fact that a credible threat seems to have been
created for avoiding purposive or inadvertent unreported transactions.
Of course, demonetization is only one of the
pieces of the jigsaw puzzle of eradicating black money. Hopefully, more and more citizens will opt
for use of debit/credit cards and internet banking. There has been a surge in the use of ‘cash
wallets’ as well. The importance of
financial transactions through Post Office Correspondents in rural areas gets
highlighted in such situations. A few
more measures need to be followed through.
Demonetization restricts current flow of black money and deters its future
flow. However, the stock of black money invested
in benami properties will have to be
addressed as well. It is no coincidence
that two important laws were amended and passed just before November 8, 2016. Provisions of the amended Benami Act had come into force on November
1, 2016 and Black Money Act had come
into force only a year earlier in July 2015. These recent provisions give the required
fillip to the administration to follow up on demonetization efforts. GST implementation in the near future would
also provide an incentive for businesses to get into formal sector. Similarly, the time is opportune to bring all
donations to political parties within the gambit of formal banking.
Some criticize the demonetization decision as
dictatorial. Perhaps we had become used to justifying indecisiveness on grounds
of the compulsions of coalition governments; and are not used to
transformational decisions attributed to a seemingly dictatorial electoral majority. Such perceptions are intriguing when some Indians
hold charitable opinions on dictators like the late Fidel Castro who thrust many
sacrifices on to Cubans for long periods.
India is a democracy. Assembly
elections are round the corner. The Taste
of the Policy is in the Polls!
Views are personal
