Black politics in the name of demonetisation

It is difficult not to come to the conclusion that demonetisation of of 500 and 1,000 rupee notes in the second week of November was politically motivated. It has been touted as a "surgical strike" against black money.

But just like the earlier (military) surgical strike, there is little evidence of a major haul of black money throughout the economy. If not even Rs 1,000 crore of black money has been detected and confiscated, it would appear the Union government's calculations have gone awry.

But what is more damning is the lack of thought about this major operation. The 500 and 1,000 notes amount to 86 per cent of the total value of the entire stock of currency. To demonetise such a large fraction of the economy would necessitate secret but rapid printing of new high value notes.

But though new 2,000 rupee notes are in circulation, few new 500 and 1,000 notes are to be seen. So there is a severe cash crunch, which was only to be expected. Of course, there is trading of old currency notes for new ones, at discounts ranging from 20 per cent to 30 per cent.

The most striking visual evidence of the damage and travails of demonetisation are the large queues in front of ATMs and banks. Taking two-three hours off to queue for cash, to spending the whole working day lined up has been a commonplace experience.

The lack of prior planning also shows up here. ATMs are a major source of funds. But intriguingly there are more ATMs in Delhi than in all of Rajasthan. There is much more bank coverage in urban areas than in rural areas.

To make matters worse, there are larger cash stocks and deposits in the urban financial sector, than the rural financial sector. So less money is available to the rural people than to their urban counterparts. So the system is skewed. This too was not thought of in advance before the hasty demonetisation.

Cash advances have been severely limited. ATMs that earlier facilitated larger withdrawals of Rs 4,000 have now been regulated to disburse only Rs 2,000. Further, banks have been permitted to allow  withdrawals of up to Rs 24,000 a week only for account holders.

But what about the urban and rural poor and lower middle classes?

They do not have such cash reserves in banks. With cash flows limited, the commercial sector is strapped. If you go to Chandni Chowk or Bhogal shopping areas in Delhi, you will find few customers. The customers have little cash, leading to few purchases.

The All India Motor Vehicles Congress has pointed out that 2 lakh trucks have not been able to haul supplies because of shortages of cash for diesel. The All India Traders Association (CAIT), which initially welcomed the demonetisation, is now sharply critical. With cash reserves low, purchases are down. It's worse in the rural areas, and there are no signs of revival in the economy.

The Union government has given some minor, though welcome, sops in the sense of advances for marriages upto Rs 2.5 lakh,  permission for farmers to use old Rs 500 notes to buy seeds from government outlets and agriculture universities, and Rs 50,000 per week for overdraft for firms.

But Rs 2 lakh in overdrafts is small change for medium and large private companies. In the meantime, protests are arising from unexpected quarters. The bank officers' association has demanded the resignation of RBI governor Urjit Patel for his role in demonetisation.

Bank officers would have good knowledge about how this financial disaster has slowly but surely been created through poor theory and massive inexperience.

The value of the currency released by banks since the November 8 demonetisation, through exchange of old notes and cash withdrawals, amounts to Rs 1.36 lakh crore. This is less than 10 per cent of the Rs 14 lakh crores in high denomination notes (500 and 1,000) that has become illegal by demonisation.

The 90 per cent of illegal notes are now being exchanged with legal notes in the black market. One of the fundamentals  of a stable economy is balance between demand and supply. RBI's failure to supply the demand for currency has artificially reduced demand, leading to shortages of a wide variety of services and commodities.

This demonetisation has severely ruptured this economic cycle. The damage done by it has battered the E of the Economy. The wholesale damage to the economy will have severe political implications for ruling parties and their governments.

At the end of the day, it is necessary to clear up some illusions and false theories about black money. Black money, as eminent economist Prof Prabhat Patnaik pointed out, is not a stock but a flow. In simple terms it means that black money operators do not hoard sizeable amounts of black money.

Black money is intended for investment in real estate, jewellery, in tax havens abroad and so on. It is used to create greater monetary investments in cash and in kind. But what about black money abroad?

After the Panama Papers expose, the Indian public expected that black money would be brought back to India. Because of the scam, the President of Iceland resigned, Pakistan PM Nawaz Sharif's family members were allegedly involved, so was a prominent Russian musician, and so on. So what is really going on in the corridors of power? Is it only black money, or also black politics?

Also read: Demonetisation has India on the edge