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Rebuttal to war on black money

By Dr. V. Raghunathan

The Oped ‘War on Black Money’ by three eminent academicians, unfortunately shows considerable lack of understanding of the issues. I had supported demonetization (in the channels and blogs of this Group) along the same lines as these authors, in the first flush of the announcement, expecting competent implementation. But a month after the move, I can hardly say the same. Let me answer their observations:

That all cash transaction is black money and all those who do not transact via banks are party to black money creation:
Hardly. With patchy (53%) penetration of banks in India, patchier penetration of internet (9% and 53% in rural and urban India), illiteracy, and 40 to 50% of the population earning less than $ 2 a day and about 24% below $1.25 a day, 70 years after Independence, it is not people’s fault they continue to eke out a living in a largely cash based economy.

Besides, black money creation remains the occupation of a very small but powerful minority of power-brokers: political, bureaucratic or capitalistic cronies of the former, who had always been deliberately allowed to ply their trade with impunity. It seems a travesty of justice that it is the poorest of the poor who must pay the heaviest price for no fault of theirs. Even dispossessing the guilty of all their ill-gotten black money cannot be justification enough for subjecting hundreds of millions of the innocent masses to loss of lives and livelihoods.

That there has been an impressive level of support at the grassroot level, because people haven’t rioted, looted or generally revolted:

Unless it can be anyone’s thesis that lack of support of public policies must be measured through the severity of riots and lootings, this seems a strange logic coming from an eminent trio. We as a country put up patiently with abysmal infrastructure, pathetic education and healthcare in government schools and hospitals, corruption et al. Are we to believe because there is no revolution in India, all is hunky dory? The patience of the people may at best indicate the political acumen of how the PM packages and presents his policies to the masses, or their implicit faith in him. But that hardly takes away from the fact that the PM’s own party is yet to embrace the cashless route for their party funds.

That to call demonetization an abrogation of contract is wrong because the policy allows for exchange of currency:
The reasoning is so untenable that it barely needs rebuttal. True, the currency is exchangeable, de jure. But de facto, when you demonetize 85% of currency, where is the currency for exchange?

That the argument that the move is despotic is incorrect because the PM represents a duly elected government! Well, surely the authors cannot be unaware, or maybe they are, that nobody is confused about the officials being democratically elected! However, questions raised have revolve around the constitutional validity of whether or not the government can take over the powers which are primarily vested in the Central Bank, and why an ordinance route could not have been taken for bringing about demonetization. These matters are now with the courts and time will tell if the government erred or did not.

That we already see an impressive switch into digital transactions:
Of course we do. If you simply take away cash from the entire system and tell people to continue living, well, they have no option but to find ways and means to go on living. Much of the spike in digital transactions is the result of many small traders using their neighbours’ card swiping facility, or lose their livelihoods. These transactions would in all probability be reversed in cash later.

Besides, if the main focus was driving India to cashless economy, the decision to demonetize two large currencies that accounted for 85% of the money in circulation, the decision to introduce a new and larger currency and the decision to take India towards cashless transactions should have been unbundled. No self-respecting economist will advocate demonetization as the answer for all three.

Much of the so-called black money seems to have been brought back thanks to Indian jugaad, with any number of big fish already having cornered huge sums of the new large currencies, leaving little real gains to the government. Has the move helped curb fake currency racket? Doubtful. After all, the banks were taking bundles of old currencies of 500 and 1000 en masse, with no time to scan each bill for its genuineness. So credits for all those bad bills are back in the formal system, reducing the impact on fake currency racket. How about printing of new fake currencies? Doubtful again. There are so many errors in the newly printed currencies, with varying degrees of shadows around Gandhi’s head in the Rs. 500 bills, that, it may make it easier for the fakers to cash in. And whether 90% cash transactions of a country of 1.3 billion can be ushered towards extremely low level of cashless transactions, well, one doesn’t even have to be an Ivy League economist to hazard.

DISCLAIMER : Views expressed above are the author’s own.

This article first appeared in Times Of India.

Dr. V. Raghunathan
Dr. V. Raghunathan

Written By Dr. V. Raghunathan

V Raghunathan is Director, India campus of Schulich School of Business, York University, Toronto & a corporate CEO. He is a former professor of IIM, Ahmedabad and former president of ING Vysya Bank. He is an adjunct professor at SDA Bocconi, Milan & Schulich School of Business. He is also an author and a columnist, with over 12 books and 500 papers and articles. His latest book is Beyond the Call of Duty (Harper Collins, 2015), others being Duryodhana; Locks, Mahabharata and Mathematics; Don’t Sprint the Marathon – from Harper Collins, and Ganesha on the Dashboard; Corruption Conundrum; and Games Indians Play – from Penguin. He is listed among the top 50 global Indian thinkers of Thinkers50.

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