“Change is fundamental to our lives. However, no one expected the quantum of change demonetisation would usher into our lives when Prime Minister Narendra Modi announced on 8 November 2016. Despite the hardship and inconvenience it has caused, citizens have largely accepted the move and it is quite remarkable to see how the nation has coped with this unprecedented exercise in public policy,” said T Shivaraman, immediate past president, Madras Management Association (MMA), kick-starting the evening’s proceedings at the seminar on “Demonetisation: Opportunities and Challenges” at Chennai on Monday, 19 December 2016.
The Madras Management Association (MMA) in association with Konrad Adenauer Stiftung, with Observer Research Foundation (ORF), Chennai Chapter, as ‘Knowledge Partner’, had organised the seminar.
Delivering the welcome address, T Shivaraman added that while we may debate on the pros and cons of demonetisation, it is essential to reduce (if not eliminate) corruption at source. This requires radical simplification of laws, increased transparency in functioning of the government, and an efficient and robust implementation of GST will bring down the black economy.
Pankaj Madan, Head Programmes at Konrad Adenauer Stiftung, in his introductory remarks, highlighted that change has never been as dynamic as in the past few weeks. There is no doubt that it has created challenges for the common man, on the flip side demonetisation has also created new opportunities to digitise the economy, streamline and expand the tax base.
N Sathiya Moorthy, Director, ORF Chennai, in his remarks commented that the Supreme Court may give directions for the future, but may not set the clock backward on demonetisation. Further, the judiciary may explore the legality of the move, but is quite unlikely to issue any retrospective directions, as had happened in the ‘S R Bommai case’ in 1994, in relation to the Centre’s powers to dismiss elected State Governments and dissolve State Assemblies.
Sathiya Moorthy opined that it was too early to comment on the pros and cons of demonetisation over medium and long terms, whatever be the experience and opinion in the immediate term. In the case of ‘democratic socialism’, bank nationalisation, economic reforms and a host of Government initiatives on the economic front, experts and practitioners, including the common man, had held different views at the time of their introduction and years afterwards. “It may thus be too early to pass value-judgment of whatever kind on demonetisation, which is a much more complex process than all the earlier ones put together,” he said.
Delivering the opening remarks M R Sivaraman, IAS (Retd), former Revenue Secretary, GoI and moderator for the evening, did not buy the argument that ‘secrecy’ was a pre-requisite for demonetisation. He said that if the guilty were not to escape hence some of the procedural hiccups were unavoidable. He pointed out how since Independence, they have been producing annual Budgets under strict secrecy, and there have been no leaks whatsoever, barring a solitary insignificant one. Speaking from experience, he said that the planning and implementation of demonetisation was not up to the demands and requirements.
Sivaraman opined that the demonetisation exercise has ushered in a disruptive transformation, nevertheless only time will tell if the transformation has been worthwhile. An earlier report on black money published by the National Institute of Public Finance and Policy (NIPFP) has estimated black money to be 75 percent of the national GDP and several other reports estimate it to be around 60-65 percent.
Examining merits of the move from a monetary standpoint, Sivaraman said that at 13 percent, India has the highest currency to GDP ratio among developing countries. Every year 70 percent of the currency in circulation is withdrawn and replaced, which costs a significant amount of money for Reserve Bank of India. From a fiscal perspective, the move is expected to widen the tax-base by bringing in unaccounted income into the formal sector. However this will only widen the GDP without any net value-addition. On the contrary, the GDP may contract in the short-term due to liquidity (cash) crunch.
The other argument that the move is expected to increase bank deposits, thereby allowing banks to increase their loan portfolio at reduced rates, will have to be analysed logically, Mr Sivaraman said. Investments depend on expectations, but demonetisation and subsequent change in rules for currency exchange and withdrawal has only increased uncertainty in the economy, thereby dampening the capitalistic and entrepreneurial spirit.
Ashok Malik, Distinguished Fellow, ORF Delhi, the first of the distinguished speakers, focused on the strategy underlying the move and enumerated the objectives the Government expects to achieve from this exercise. Discussing on the “why” question, Malik said that the volume of black money in the economy at this juncture is quite high, and this is a by-product of a decade -long growth and asset-bubble. Several gaps in the regulatory system has allowed individuals to amass huge surpluses from the asset-bubble, which is now stored away as black money.
Since inception, the incumbent Government of Prime Minister Narendra Modi has acted swiftly to curb corruption and black money, Ashok Malik said. It has targeted critical areas of black money generation – gold, real estate. The demonetisation move needs to be looked as a natural progression. Other significant reasons underlying this move are the need to bring households into institutional finance and banking, clean up the real estate sector and election funding. The Government expects all black money to come into the formal system, with a part of it generating tax revenues. Additionally, there is a gamble that the high cash to GDP ratio will be brought down to 7-8 percent by January 2017.
While the exercise was in good intent, the implementation was extremely poor with no adequate preparation. Civil servants were unmindful of consumer psychology and communication from Government functionaries was lackadaisical, with the result, it might have been counter-productive in some sectors and regions, Ashok said. He pointed out that Naxalites have been using Jan Dhan accounts of the poor and innocent to launder their stocks of high-denomination, demonetised currency in the form of Rs 1,000 and Rs 500 notes.
Gopal Krishna Agarwal, Member, Economic Policy Formulation Committee of the ruling Bharatiya Janata Party (BJP) at the Centre, admonished the media for being critical of demonetisation, when the citizenry at large has hailed the Prime Minister for his bold step against corruption and black money. He cited figures of the survey conducted, post-demonetisation. He further stated that demonetisation must be looked in conjunction with the other initiatives taken by the Government to curb corruption and black money.
Such moves include the Special Task Force, appointed by the Supreme Court, to look into black money stashed abroad, illegal foreign assets declaration scheme, renegotiation of the treaty with Mauritius to stall the Participatory Notes (PN) route, the G-20 agreement on exchange of financial information, benami properties law and the recent voluntary income disclosure scheme. Additionally, the Government also plans to move two important bills in Parliament, on whistle-blower protection and amendment to the Prevention of Corruption Act, whereby definition of the corruption is changed to include third party gratification and lobbies.
Quelling concerns over the compulsory move towards a digital economy, Gopal clarified that the government does not intend to force people into a cashless economy. Liquidity will be restored in the due course as newly-minted notes are infused into the economy. The Government is planning massive capital expenditure after the demonetisation move to provide fillip to the economy. Concluding his talk, Gopal agreed that the move could have been executed better, though it was well-planned and strategised.
Prof M V Rajeev Gowda, MP and Spokesperson, Indian National Congress, in his talk focused on the mismanagement of the demonetisation exercise and its downstream socio-economic impacts. He accused the government of shifting goalposts from curbing terrorist financing, counterfeit currency, black money to the latest cashless economy narrative. Several reports on black money have suggested that only three percent of illicit wealth is held in cash whereas the rest are either shipped off to overseas tax heavens or held in real estate and gold.
Gowda questioned the prudence of the move to unearth this three percent of black cash when it was expected to weigh down heavily on the common man. A large part of the informal economy in the country runs on cash and demonetisation has severely disrupted this socio-economic cluster, which mainly constitutes of middle, lower-middle and low income groups. Many cash -intensive sectors such as leather, construction, metal, textiles, agriculture and micro-finance have shown stunted or no growth in the past few weeks.
Commenting on the Jan Dhan accounts for the poor being used to launder demonetised currency in a big way, Rajeev Gowda said that the Government does not have the wherewithal to investigate lakhs of suspicious accounts, especially considering the number of tax officials available at its disposal. Also, there are no clear indictors to measure the success of this move since the goal-post/objective has been shifting regularly. More importantly, this move has severely damaged the reputation of RBI as an autonomous institution. If the velocity of money goes down due to liquidity issues, it may even cause a recession in the short-term, said Prof Gowda, who is a former member of the RBI Central Advisory Board.
Dr R Vaidhyanathan, Professor of Finance and Control, IIM-Bangalore, provided a crisp analytical view on demonetisation. The proportion of Rs 500 and Rs 1000 currencies to the total money supply was around 35 percent in 2003. This value had risen to 86 percent by the end of the UPA era. Asking why more lower denomination notes weren’t printed and put in circulation he suggested that the Government must set up an independent committee to investigate the rise in higher denomination notes (HDN).
Vaidhyanathan too lamented the poor execution of the demonetisation decision. There was no clear direction and RBI was issuing new rules every day, adding up to 32 by the beginning of December. Commenting on the infrastructure arrangements, he said that Public Sector Banks have performed better than the private sector banks in handling the demonetisation exercise. The Government must have identified NBFCs and micro-finance institutions to act as points of transaction for exchange of old notes for new.
This, he said, would have helped manage the demand and lessened the burden on common man. Otherwise, demonetisation has succeeded in creating a new breed of corrupt officials in the banking sector and RBI, considering the recent news about hordes of money in the new, Rs 2,000 bill being unearthed in many places, Prof Vaidhyanathan added.
The seminar ended with a vote of thanks by Gp Captain R Vijayakumar (retd), Director, MMA.
This report is prepared by Deepak Vijayaraghavan, Associate at ORF Chennai.