Notebandi or demonetisation of high value currency notes is the latest encroachment on the lives of the common man. At 8 p.m. on the 8th of November 2016, the Prime Minister Shri Narendra Modi appeared on TV and announced in sombre fashion that currency notes of Rs. 500 and Rs. 1000 were no longer legal tender from midnight and could only be deposited with banks. Most people who heard the news were shell-shocked. The banks would in due course exchange them for legal tender of equal freshly printed denominations. Unfortunately these were not freely available. The result was long serpentine queues outside banks waiting to get their hands on currency notes. The irony was that people had to wait for hours to lay hands on their own, hopefully hard earned money.
This move was hailed as a surgical strike against black money. It was also claimed as a riposte to the menace of counterfeit currency, with fingers being pointed at enemies of the nation, who had wanted to spread economic havoc. To compound matters, as the move was made in complete secrecy, it led to a swelter of conspiracy theories. The Opposition parties cried foul and pointed out, that the pain imparted to the poor would be horrendous and the economy would suffer a setback. The Government put up a spirited defence of its move and painted a rosy picture of the impact of demonetisation in the long term. It also claimed to usher in a digital economy. Both sides paraded their economists and intellectuals in support of their stand. Parliament which was the right forum to discuss this measure of the government was stalled. The cacophony outside was deafening. Unfortunately, it only generated heat and not much light on the matter.
To the middle classes it seemed a throwback to the Inspector Raj era with a vengeance. In those Socialist inspired days of the late sixties and seventies there were queues for everything. Now there are queues to get your hands on your own money. Currency notes are being rationed and people are seen standing outside banks and ATMs in queues, waiting like errant schoolboys, to receive their pocket money.
The economy is not a switch which can be switched off and on. It is a highly complex structure. By withdrawing currency notes, first you choke the system. Then to revive it, you give sops and subsidies. This is akin to driving a car, pressing the brakes and accelerator simultaneously. Is it any wonder that it goes nowhere? The State becomes a Leviathan, killing off private enterprise and people start depending on handouts and bailouts. Somebody has to tell the Emperor that he is not wearing any clothes.
Now what after all is black money? It is money on which taxes are not paid or generated through nefarious activities like smuggling etc. These should be tackled on the following grounds: First we need to rationalise why taxes are not being paid? Are they too high? Is the stamp duty on registration of property too much? Is the sales tax amount too high?
We also need to look into the ease with which taxes can be paid, by doing away, with cumbersome paperwork and harassment by the babus in charge of that segment. The process should be simplified and the tax rates brought down to reasonable levels. Then the urge to avoid paying taxes loses its appeal.
Some activities like smuggling etc. can be curbed by bringing down exorbitant excise and customs duties. Don’t hamper trade and industry – jobs come from there. Our politicians, should now focus on opening up the economy.
Neither the concept of demonetisation nor its implementation had been clearly thought over. The Government was caught in a dilemma. If the changing of currency notes was made easy, you would be flooded with both kinds of currency notes – black and white. Keeping the window too narrow would lead to the common man suffering untold misery. The Government seems to have muddled its way. Time will tell whether it was a successful strike on black money or a surgical strike on itself, by the Government.
The market is a delicate mechanism. Any attempt to tinker with it leads to unintended consequences, causing distortions, which result in misery for large sections of the populace. It would be still premature to assess the impact of demonetisation on the economy only from newspaper reports and anecdotal evidence. It appears that farmers, daily wages workers, small shopkeepers, small manufacturing units, low income households and small businesses have been hard hit. After all currency notes are to an economy, what votes are to the netas. An economy without notes is like a politician without votes ---impotent.
Instead of targeting the perpetrators of black money directly, through its hordes of law enforcing departments, the Government preferred to target the currency itself. An individual with a wad of currency notes had to go through the Agni Pariksha and prove to the authorities that his precious money was legitimate.
Notebandi has attempted to ban high value currency notes. Currency is only a means of transaction. The source of black money is caused by the action of the market participants. By banning these notes, you have banned the substance and not the source. It is like attacking the symptoms and not the disease. Black money or its source will simply find other avenues unless attempts are made to check the underlying causes. More importantly, the side effects of these experiments are deleterious to the health of the economy and to citizens of the nation at large.
The jury is still out on the long term economic and political fallout. It appears that political support is still strong. Even after standing in queues; many people still have faith that unaccounted money will be taken out and wrong doers will be penalised. This gives them a feeling of moral superiority and a sense of righteousness. An impression also seems to have been created that the black money from the corrupt and the rich will be taken over by the State and given to the poor and the needy. A similar impression was created in the heyday of the Socialist era when banks were nationalised and people thought the money was now available for the poor. Garibi Hatao was the popular slogan of that era.
Ironically all these three measures, which have annoyed the people, have potential social and economic benefits. The tragic part is that these were imposed on the janta with undue haste and in an authoritarian manner. There was no attempt made to build up a consensus and gradually create positive incentives so that the common man could benefit from these schemes. The hated Nasbandi Campaign led to complaints about coercion and forced unwilling people into sterilisation camps. A few died in botched up surgeries and many others suffered during post operative care. It was literally a hit below the belt for the hapless citizen. To compound matters there was a severe backlash and family planning became a detested word. So much so, that the entire campaign suffered. Under the new Government even the name of the Ministry was changed from Health and Family Planning to Health and Family Welfare. It was a classic case of haste makes waste.
Posterity with the advantage of hindsight will no doubt view notebandi in a more dispassionate manner than the unfortunate citizen standing in winding queues at banks and ATM’s. Yet, can the views of the long suffering citizens be ignored in the short term, so that our netas are able to usher in their version of Utopia in the distant future.
Many critics and naysayers have carped that these are fascist if not despotic tendencies. This seems rather an extreme indictment. They can be deemed as paternalistic measures smacking of “I know what is best for the people and they better follow my diktat.”These policies at best smack of authoritarianism and are irritating and vexatious leading to disruptions in daily life. It would be better to let the people decide what is good for them. They may like your ideas but they may like to adapt to them at their own pace.
Introduction of Prohibition has been done at the State Level and hence its impact is more muted. It also does not meet with stiff resistance as people resort to a variety of ways to simply sidestep the tentacles of the state machinery. They simply buy their alcohol from neighbouring states or even get their liquor from their favourite bootlegger. Contrary to the expectations of the diehard faddist, consumption and sale of liquor does not stop but is simply driven underground. There is no change of heart among the vast majority of the people who are devising ways and means to get their hands on their favourite tipple. In the ultimate analysis let the individual decide which drink suits him best – Whiskey or shall we say er... “Pisskey”.
The poor are again the worst victims of this welfare measure of the State Government. They resort to drinking illicit liquor which often leads to liquor tragedies in which a few lose their eyesight and also their lives. Many resort to other forms of abusive substances. A far better alternative would be for the morally upright leader to provide other welfare measures to improve the lives of the working class. In the ultimate analysis only the liquor mafia makes a killing and shares his booty with the like - minded excise and police officials. An unholy nexus develops which is worse than the original disease.
One reason for sub optimal results in all these measures is that however noble the intentions, they are rammed down the throat of an unwilling populace. The implementation is not thought through fully and at the ground level the work is handled in a callous manner, by Inspectors in various departments, grandly called the “cutting edge of the bureaucracy”. At their best they are lethargic and in their most demonic form are rapacious and downright vicious. Leaving the aam aadmi at the mercy of these ogres, is a sure fire recipe for disaster and the results are distortions of the grand and noble intentions of the leader.
A little nudge with a couple of incentives thrown in will work wonders as people comply with the new ideas and technologies which are being ushered in. Human nature is also a little perverse. If you force someone into doing what you feel is good for them, they may retaliate viciously or sulk and grudgingly follow that direction. Compliance which is unwillingly brought forth leads to perverse results. The whimsical, capricious and arbitrary manner in which these low level minions of the State implement the policies, crafted in Delhi leads to disastrous consequences. The common man thus lives in mortal terror of the long arm of the State in his daily life.
The need of the hour is for the Government to get off the people’s back. Outmoded rules should be discarded and procedures simplified. Discretions in Government offices should be whittled down. Miles of red tape can only be cut when the rules are simplified so that babus do not proliferate like rabbits and create roadblocks.
Our Governments have been working very hard over these last seventy years. It is time they eased their pace. Let the people live their lives instead of putting obstacles and hurdles in their daily lives. The Indians who go abroad do so well, yet, here their path is impeded by State made road blocks. Our politicians instead of resorting to grand theatrical gestures should now focus on opening up the economy and loosening their control on the lives of the people.
There are many more ways to promote digitization of the economy. Incentives can be created so that people are glad to turn to credit cards and other means of digital economy. The costs of electronic transactions have to be minimised and more important the infrastructure has to be in place. By a mere draconian diktat, black money cannot be exterminated and hey presto a modern economy is ushered in, where all transactions are digitised. It needs years of preparation, not a King Canute - like imperial edict. The irony is that the leader had loftily proclaimed that his ideal would be Minimum Government and Maximum Governance. This had swayed many liberals and the upwardly mobile middle classes in casting their votes for the party ignoring its other negative connotations.
Notebandi proved to be diametrically opposite. Notebandi to the common man felt as if the government had encroached into his pocket. An uncomfortable feeling: if ever there was one. The victims are the poor in whose name all this was done in the first place. They have been the miserable sufferers of the experiments unleashed by their messiahs who, armed with the authority of the State, have made the lives of the masses uncomfortable.
As a result of these measures, it is the credibility of the institutions which suffers. For instance, in the entire demonetisation drive, the Reserve Bank’s reputation has suffered a serious blow. Its credibility and competence has suffered serious damage as it constantly changed its orders to banks and came to be derisively called the “Reverse Bank of India”. However, the damage to Institutions during the Emergency was far worse. It challenged the very basis of our democratic set up and showed up many organs of the State in poor light. It takes a long time for Institutions to recover from these grievous assaults to their integrity and independence.
The common man is not ignorant but helpless. Assaults on their way of living and their liberties are tolerated to an extent. After all what is the choice? The next bunch of netas will launch an assault on some other form of freedom which suits his fads. The masses tend to get swayed by their leaders. Yet, when the assault goes too far, the voters retaliate. Their favourite weapon is the ballot box. This ushers in another set of leaders who have their own pet ideas.
The more things change, the more they remain the same. Is there hope for a liberal order where individuals are able to choose what they feel is good for them?
For part one:here
(The writer has retired from the IAS. He is former Chief Secretary of Andamans and Nicobar Islands)