IN AN INTERVIEW TO ‘The Wire’, eminent economist and former professor of economics, Prabhat Patnaik, was, as usual, incisive: “There is a feeling that black money is basically a stock of money, which is put in pillow cases or trunks or underground. That’s not the case. Black money is something which refers to a whole range of activities which are undertaken either illegally or in order to avoid taxes… In other words, there may be, let’s say, arms trade or drug running and so on which are completely illegal activities. Alternatively, there are activities which are legal but nonetheless undeclared because they want to avoid taxes. So we have to really think in terms of black business or undisclosed business as opposed to black money. In any business, you are using money. When you use money for a greater or a less period of time, you will be holding money. That is true in any business and for black business as well… It is not even the case that black business is carried out with cash while normal business is carried out with cheques and so on. Because normal business also requires cash transactions. So normal cash holding and black cash holding are not qualitatively two different things; and as a result to say that if we demonetise a range of currency, we will be able to catch black money is not correct because everybody then needs to change. It is not only those doing black business but even normal businessmen who need to change it. And if so, you can actually have black businessmen coming to normal businessmen to help them change their black money for money which is not accounted for.”
With almost 99 per cent of the cash back in the banks after the ‘revolutionary and earth-shaking’ decision by Prime Minister Narendra Modi on November 8 last year, the debate has raged across the nation, among the academia, economists and bankers, and among ordinary people: So whatever happened to the black money if all the money in the black market has been turned into white and legitimate cash after demonetisation? Indeed, this anomaly, combined with the irony that the pre-election promise by the Prime Minister that all the black money hidden abroad by Indians will be brought back and every Indian citizen will have Rs 15 lakh in her/his bank account, turned into a dark and bad joke. It became a double whammy of sorts, a bit too much to digest, even by all those who genuinely believed in the Prime Minister’s promises and thought that the sacrifices they are doing, or the daily misery they are undergoing, will be finally good for the nation and its political economy. Indeed, the patriotic dimension of demonetisation was lost in its total failure on the ground.
Amidst the changing goal posts during demonetisation, it was also said that it would stop fake currency, and block the use of cash by Maoists and terrorists. Considering the deaths of Indian soldiers across the Line of Control at the Indo-Pak border and in conflict zones in India, and considering that Maoists still call the shots in the tribal hinterland and forests of central India (as shown in the film, Newton), clearly, this promise too seems to have found its rightful place in the dustbin of history. So what is the actual story of demonetisation, which, actually led to the deaths of 100 plus people who waited in serpentine queues across the Indian landscape, with most ATMs showing closed or no money signs pasted on the machines?
As Professor Patnaik points out in the same interview: “This move betrays a lack of understanding of capitalism in the government. Typically, what happens in capitalism in a situation like this is that there would be a new business opening up about how to change old currency notes into new ones. This is what Schumpeter called innovation – and in capitalism that is forever happening. A whole range of people would come up who will say you give us Rs 1000 and we will give you Rs 800 or 700 or whatever. Consequently, instead of curbing black business it will actually give rise to the proliferation of black business… Likewise, for instance, since there is no distinction between black money held as part of business and white money held as part of business, many of those engaged in black business would like to get others engaged in white business to change money for them. And they would, therefore, backdate bills and apparently purchase from them, etc. Millions of such transactions would be happening and if they do, no tax authority will be able to catch these transactions. This way of unearthing black money is something which inconveniences people enormously, without really being successful in stopping the flow of black money.”
Besides, it really hit the rural and unorganized sector very hard. In a rural economy steeped in severe distress with the growth rate stagnating at less than 2 per cent, and farmers’ suicides and mass debt stalking the landscape, demonetisation hit the farmers — big, middle, small and landless – where it hurt the most. In any case, the government refused to implement the Swaminathan Commission recommendations in support of the farmers. More so, Modi’s promise of providing 50 per cent more above the minimum support price to the farmers was betrayed. Debt-ridden farmers were face to face with factories and mills which refused to pay them even the market price, forcing them to go for distress sale. Even as inflation hit the urban market, farmers were compelled to dump their onions, tomatoes and potatoes on the streets, rather than sell them for dirt cheap to the sharks who were taking the lack of cash due to demonetisation as yet another method to strengthen the parasitic, exploitative economy.
Hence, even while the country saw bumper crops, the farmers found themselves as losers and on the receiving end, while mass migration of landless labourers further complicated the situation. So much so, Modi’s promise of creating two crore jobs in a year proved to be a total failure, even as tens of thousands of daily wagers and small-scale entrepreneurs lost their livelihood, shutting down their small and ancillary units, unable to pay the workers, and trapped in an economy which spelt nothing but doom for them. It has taken them months to come out of this dead-end, even as 93 per cent of the Indian economy lies in the unorganized sector, with not even 100 days of permanent work, no job surety, and no social security at all– which includes almost 40 per cent women.
Hence, both the urban and rural sector was caught up in a twilight zone, as was witnessed in the industrial hubs of Surat in Gujarat. For those with assets, as in Surat, it was still not so difficult to cope with the crisis. But for those, who lived on a day-today minimalist budget, demonetisation was a disaster.
In an interview with NDTV, Nobel laureate and eminent economist Amartya Sen said, “The demonetisation of currency was a despotic act as the government broke the promise of compensation that comes with a promissory note… Demonetisation goes against trust. It undermines the trust of the entire economy.” Talking to ‘The Indian Express’, he said, “Only an authoritarian government can calmly cause such misery to the people — with millions of innocent people being deprived of their money and being subjected to suffering, inconvenience and indignity in trying to get their own money back.”
Indeed, barring a handful of BJP and Modi-loyalists, top economists in India and abroad have all echoed, more or less, the words of Sen. “Demonetisation was ostensibly implemented to combat corruption, terrorism financing and inflation. But it was poorly designed, with scant attention paid to the laws of the market, and it is likely to fail. So far, its effects have been disastrous for the middle and lower-middle classes, as well as the poor. And the worst may be yet to come,” leading economist Kaushik Basu wrote in ‘The New York Times’.