Newton to Namo: Debasement of Money & Demonetization

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