What is the CPI (M)’s critique of the Modi government’s demonetisation of 500 and 1000 rupee notes.  Is it not a step to root out black money in the economy?

Raghunathan, Coimbatore

LET us examine the claims made by Prime Minister Narendra Modi when he declared the demonetisation of Rs 500 and Rs 1000 notes. He said that “corruption, black money and terrorism are festering sores” and demonetisation “will strengthen the hands of the common man in the fight against corruption, black money and fake currency”. The CPI(M) thinks that demonetisation, and in particular the way in which it has been implemented, will not help in meeting these objectives.

Regarding terrorism, the claim is that demonetisation would end the flow of counterfeit currency from Pakistan to India. Accurate estimates of Fake Indian Currency Notes (FICN) are difficult to come by, but if we add up the total number of FICNs that have been detected by the banks and the police in 2015-16, the share comes to 0.002 percent for Rs 1000 notes and 0.009 percent for Rs 500 notes. According to media reports, the National Investigation Agency (NIA) commissioned the Indian Statistical Institute (ISI) Kolkata to study the problem of FICN in 2014. News reports quote the ISI study as estimating that only about Rs 400 crore worth FICN was in circulation at any given point. Sometime back, the government had also officially stated that most of terror financing happens through electronic transfers and not using cash. Hence, the CPI(M) does not believe that demonetisation would help in reducing FICN or terror financing. 

Regarding black money, the CPI(M) has a long standing view. It has argued that strong steps need to be taken to unearth black money both within and outside India. However, in making claims regarding demonetisation, the government has taken a very narrow view, which is not helpful. The ministry of finance’s white paper in 2012 defined black money as “assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession”. Thus, there is a large black economy in the country; a part of its proceeds is stored by people as cash. Demonetisation can address only the cases where the proceeds from black economy are stored in cash form. 

How much is this stored cash? Not much. According to tax authorities, only 5-6 percent of the proceeds of the black economy are stored in cash form. The most important form of holding the proceeds of the black economy is not cash, but physical assets like land/gold/precious metals as well as financial assets like shares. Another part is used as capital in ongoing production activities. Yet another part has already been taken out to safe offshore destinations via the hawala route. According to Narendra Modi’s election campaign speeches in 2013 and 2014, more than 90 percent of the black money is not in India, but abroad. Hence, a major part of the black money is left untouched by the demonetisation initiative. 

As per its official statements, the government also wants to transform India into a cashless economy. The CPI(M) believes that even though no economy can ever be cashless, it is a good idea to gradually move towards a situation where the need to carry cash is brought down. It also would help in better tax administration and improving transparency in transactions. 

But the government should understand that India is not yet ready to become a cashless economy at its current stage of development. India has a large agricultural sector, a dominant informal sphere of small-scale production and poor penetration of rural banking infrastructure. This structural feature of the Indian economy cannot be transcended using short cuts like demonetisation. Major institutional changes – including land reforms, public investment, universal education and spread of new technologies – are required to transform our rural and small-scale enterprises into modern and highly productive units. It is only through such a larger transformative process that the conditions required for a cashless economy would organically emerge. The Modi government, however, thinks that opening bank accounts through the Jan Dhan Yojana is sufficient to usher in a cashless economy. Nothing could be more naive and misplaced. 

These are the reasons why the CPI(M) believes that the present policy of demonetisation needs urgent rethink. It has also demanded that the use of old notes should be permitted till alternatives are fully in place.