The Myth of Demonetization and Its Relationship With Black Money

Before the reader moves through the other lines in this article, I would like to clarify that this is nothing political. It is a general research on the government’s idea of demonetization from the economic perspective.

“The most dangerous man to any government is the man who is able to think things out… without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, intolerable.” – H. L. Mencken

It was a normal night for most Indians. But that was until we received news of 500 and 1000 rupee notes being scrapped. I was confused and I did not understand what was happening at first. Moments later, I tried to figure something out. It was still a mystery to me. The next day, I spoke to many of friends. Friends who worked in banks, friends who are economists. I also looked up a lot of articles on the internet and researched verified sources. I could not understand how this would work at first. But later, I did. The next night, I messaged my close friend on Facebook, telling him that I predicted something bad.

I wish it never happens; I really do. But to my worst fears, some of these predictions are coming true. In the next few paragraphs, I will explain these ‘predictions’ clearly. I am not an economist, but this is something a normal person can easily understand.

What is Demonetization?

When this plan of demonetizing 500 and 1000 rupee notes was introduced, many ‘educated’ people claimed that it was a ‘bold move’. Some said that it would eradicate black money. This was minutes after the news flashed on mass media. I repeat. Many people said this ‘minutes’ after they came to know about it.

For some reason, I believe that a few minutes are not enough for a person to think about something this big. It is just that when someone came out and spoke in front of a mic that this is going to happen and it is a move to eradicate black money, people began to believe it blindly. Honestly, I believed so too. But when I did some research, I felt that it would not eliminate black money. Even if it did, it would just eliminate an infinitesimal part of the black money, which would again be only for a while.

This is the definition of demonetization. It is simple to understand. The real meaning of demonetization is rendering a currency or a part of a currency useless. The idea proposed in India is the latter. However, demonetization cannot be  imposed like a “surgical strike” as it was mentioned. People still have the opportunity to exchange or deposit currency notes in banks. That means that 500 and 1000 rupee notes are not completely demonetized yet. As long as a currency is accepted in banks, it is not demonetized. To put it in a gist, these notes are under the process of demonetization, and they are not yet demonetized completely.

So, for example, if a person has 500 and 1000 rupee notes with him, he could go to a bank, fill a challan, and deposit it in the bank, until December 31, 2016. Though, it might sound on paper that demonetization resembles a “surgical strike”, it can never be done that way practically.

This Demonetization is Nothing but History Repeating Itself

Once the idea of demonetization was announced, there were claims that it was a “historic” decision by Narendra Modi. Honestly, it isn’t. It is just history repeating itself. Demonetization has been effected in various countries internationally, and even in India, it is not the first time.

The first demonetization in independent India took place in 1978, when the Janata Party coalition decided to scrap high denomination notes on the 17th of January that year. I.G. Patel was the RBI governor then. He mentioned that the demonetization, which was then carried out by Morarji Desai, was politically motivated and aimed at the previous Congress government. The RBI did not approve of the move, but had no other option than to cooperate with the government.

What is more identical here is that Morarji Desai took the same action to gain more political fame. It did not work too well, and Desai resigned in 1979. Later, the Janata Party (Secular) formed a coalition with the Indian National Congress and Charan Singh later became the PM in 1979. The Congress then withdrew their support for Singh and he resigned again in 1980. Indira Gandhi became the Prime Minister again for the second time.

The 1978 demonetization was a huge menace to the public, but given the value of the currency and the population then, it was easier to pull it off. However, the 1978 demonetization had no significant role in the elimination of black money.

What happened in 2016 is a repetition of the 1978 demonetization, with a few more rules. It is nothing that was conceived from scratch or nothing innovative.

The RBI Conspiracy

The Reserve Bank of India is a Central Bank, which denotes that it functions as an independent body. While it was clear to many that ex-governor Raghuram Rajan resigned his position due to disagreement with the government, it now raises a lot of questions. In a press interview to the TOI, Rajan mentioned that the RBI’s right to say “No” to the government must be protected. Maybe he said that, and hence was pressurized to resign.

His successor, Urjit Patel is not related to the Ambanis. There is no solid proof for that at the moment. However, it could be understood very well that he was chosen to support the government’s idea of demonetization. Therefore, there is a very good chance of this being conspired.

Where is All the Black Money?

The first huge mistake in this move is the idea that many people have black money hoarded in the form of cash in a secret locker at their houses. While some people are foolish enough to do this, not all are. Black money is the currency that does not come under the Income Tax scanner. In most cases, this is converted to foreign currency or dispensed as a form of investment.

Technically speaking, the amount of black money available in India in the form of cash is too small. The amount of money spent by the government on demonetization and reprinting/scrapping of currency notes will definitely go over the amount of black money. The revenue earned from the confiscated black money would also be too less.

The Economic Aftermath of Demonetization

While demonetization might seem to a be a good idea on paper, there many practical problems to it. Let us take the current scenario into consideration. Initially, the government announced that ATMs and banks will be operating normally in a few days. They then said that it would take a few more weeks. Now, economic experts say that it would take a minimum of 4 months for the economic situation to get back to normal.

When cash is scrapped, business slows down. Trade is hit terribly. Tourism suffers. Businesses might not be able to pay their employees. When employees are unpaid, they will protest and boycott their jobs. One of the worst mistakes made by the government and the RBI were the introduction of higher denomination 2000 rupee notes.

Where there is cash, there is always a problem of change. This was prevalent even before demonetization. Now with these higher denomination notes around, it becomes more difficult for people and businesses to transact with cash.

Now that the government will take more time to print new 500 and 1000 rupee notes, there will be a huge time interval needed for the cash to fill the gap. With the Bank Officer’s Union already not happy with the move, protests from other labor unions and trade unions are also happening across the country. This is just the beginning.

It could go either way. If these problems are nipped in the bud, then the country’s economy could be safeguarded. But once the banks start protesting, that means civilians and traders are hit, and hence, the economy will be rattled. There is a fair chance for this to happen because bankers are already sustaining multiple times the workload. That cannot continue for long.

Did Black Money Shift its Location?

Before Modi had become Prime Minister, one of his election manifestos was to “bring back black money to India”. It is also believed that he also promised to pay 15 Lakhs to each Indian after doing that, though the words used by him in the speech are not clear enough to support the claims. While he and his government then believed that black money was outside India, how is it that all of a sudden, the black money migrated here?

The Relationship Between Banks, Black Money and Corruption

“Give a man a gun and he can rob a bank. Give a man a gun and he can rob the world.” – Anonymous

Even when the idea of demonetization was announced, many bankers conspired to secretly help their customers, provided they were commissioned accordingly. A very few of these fraudulent attempts were foiled, but there are still many at large.

Reports of bankers “cashing in” on the cash crunch are being published, and there is a very high chance it could happen. A few SBI bankers were even caught red-handed in the act. Banks can pre-date transactions easily and save their customers. Meanwhile, many ‘non-operational’ accounts are also being used.

At the end of the day, the loyal bankers work hard, while the fraudsters walk away with extra cash. Now, if you had watched The Shawshank Redemption or Catch Me If You Can, you will understand how banking systems can be cheated.

The idea of eliminating black money will not even slightly help in eradicating corruption. Technically, black money can never be eradicated. Even if the current demonetization plan completely eradicates black money in India, it will only take a few months for it to regenerate.

The Consideration of Population

It would be logical to say that this idea of demonetization to eliminate black money would have worked if the size of the country and the population was small. A smaller population is easier to track and the currency change can also be done without much hassle. But in a country with such a huge population, it is never going to work.

Initially, the government announced that it would take a few days to complete the process. Later, they said it would take a few weeks, and now, the entire duration of the process is extended to a few months.

Why Was the Government Forced to do Rollbacks?

In fact, the Indian economy is one of the most sustainable economies in the world. The number of tax payers in India is too small because a huge majority of the population earns a very low income that cannot be taxed.

By demonetizing higher denomination notes, trade slowed down. Banks were not able to carry out their normal activities. The personal lives of many people were affected badly. There were deaths. It is not easy to exchange 2000 rupee notes with a smaller denomination.

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Source: xe.com

The value of the rupee kept falling against the dollar ever since demonetization was effected and then reached an all time low. Initially, there were rules and limits for cash withdrawal. Slowly, the limits were relaxed.

India does not have enough infrastructure for a cashless economy. Even the European and American economy has still not gone completely cashless.

In the End, Demonetization Is Just Exchange of Old Currency to New

This will continue, and in the end, demonetization will live up to its original meaning. That is, the exchange of old currency to new. Black money hoarders will find a way to evade the tax system, either by hiring an auditor or by bribing the income tax officer.

The other news about raids and people being questioned will subside after a while. The economy will take a while to recover. GDP might fall. The government will consider itself removing the rules and getting banks to function normally in order to compensate for the deficit.

While there would be a talk of black money being found or people being held by the income tax department, it would only be for a while. In the end, the new currency will just replace the old and the same tax evasion will continue. The working class will continue to pay tax, while the business class and politicians will keep finding ways to evade it. The sanctions forced people to deposit cash into their bank accounts, while it prevented them from withdrawing the cash. This accumulated the income for banks.

If things could get worse, the unwanted sanctions would only put a hole in the economy. From an economist’s view, demonetization, even with a few sanctions, cannot eliminate black money. It is just a drama well-staged. All money is black. All banks are thieving agents and no money is yours.

Finally, we only inferred that we are slaves of a reckless system that could kill us anytime. A ruthless decision by a single person is all it takes. All money is black. All banks are thieving agents and no money is yours. Apparently, we are clever enough to be easily fooled with economic terms and refrain ourselves comfortably from doing our research.