Another DeMo? When will we learn?

No other major nation has ever undertaken the kind of demonetisation – 85% of currency in circulation – we saw in India in 2016

On May 19, the government treated us to two engaging financial announcements: One, TCS (tax collected at source) of a whopping 20 per cent on foreign currency transactions; and two, the withdrawal of the Rs 2,000 note -- introduced during the November 2016 demonetisation -- from circulation.

The first announcement sent the media into a frenzy, painting a grim picture about how the TCS levy would make foreign travel and the living expenses of students studying abroad significantly more expensive, at least in the short run (and even in the long term if you took the time-value of money into account, given that the TCS would be adjusted against taxes only about a year later). And then came the merciful clarification, sometime later that day, as an afterthought, that expenses up to Rs 7 lakh would be exempt from the TCS. Phew! Clearly, someone had jumped the gun on the half cock, announcing the initiative without thinking the move through to its logical conclusion.

Also Read: DH Deciphers | All you need to know about Rs 2,000 note ban - amount limits, deadline and procedures

The second announcement was by the RBI on the withdrawal of the Rs 2,000 note from circulation. The RBI circular has some inexplicable provisos, which suggest the move is half-baked and not comprehensively thought through. Here are some reasons.

The RBI requires people to deposit or exchange their Rs 2,000 notes with the banks before September 30, 2023, but says in the same breath, the note shall remain legal tender even thereafter! So, if it is going to remain legal tender, why should one surrender the notes by this deadline, unless the people are expected to live under the Damocles’ sword of demonetisation of that note at random any time after September 30?

What does it even mean, that it will remain legal tender, which by definition, no one can refuse to accept? What happens if someone pays me in these notes, or I deposit one of these in a bank after September 30? Are we within our rights to refuse? If not, what’s the sanctity of the deadline? If yes, how’s it a
legal tender?

Also, if the note is being discouraged from being in circulation “with immediate effect”, why would any vendor or recipient even accept it in the first place, not knowing when an erratic government may demonetise it in two shakes of a lamb’s tail? And even if nothing drastic were to happen, it is still a lot of inconvenience asking one to make umpteen trips to the bank to exchange them, thanks to the limit of Rs 20,000 at a time (and strangely, for bank correspondents, Rs 4,000 per day!). So, is the note not legal tender for the rest of the day after one has extinguished one’s quota?

Also Read: The ripples from the withdrawal of Rs 2,000 notes

But why the circus at all? If according to authorities themselves, the Rs 2,000 notes account for only about 5-7 per cent of money in circulation, and have run out their average life of 5-6 years, what then is the urgency for this move? Why not just stop replacing the worn-out notes with new ones, or even quietly remove the soiled notes, instead of scaring the wits out of the public?

No other major nation (or even a minor one, to my knowledge) has ever undertaken the kind of demonetisation – 85 per cent of currency in circulation – we saw in India in 2016. While the objectives for the DeMo in 2016 were three, namely, curbing black money, counterfeit money or terrorism financing, and corruption, it is extensively documented that none of these objectives were effectively achieved. DeMo merely succeeded in dishing out a body blow to small and medium enterprises and those eking out a living pushing carts, and daily wagers.

The pro-DeMo pundits may argue that it paved the way for digitalisation in India. It is true that India is significantly ahead of the rest of the world on digitalisation, something we should all be proud of. But this was the proverbial playing out of the law of unintended consequences, entirely un-spelt and unspecified at the time DeMo was implemented. It forced the poorest of the poor – all mostly legitimate non-taxpayers – to use UPI as a payment gateway, but that was at ‘gun point’: they had no option but to fall in, since they simply did not have any cash to do business with. Even if they largely comprised only of cash economy, their cash did not represent the bulk of black money in the economy. The truth is, the DeMo followed no theory known to economics scholars anywhere. And, the widespread use of UPI was never an objective of DeMo, and even its ‘success’ was at an enormous cost to the poor
of the land; and this needs to give us some pause.

Speaking of the Rs 2,000 demonetisation playing out now, one cannot help but recall how terribly the implementation of DeMo itself played out -- from the very introduction of the Rs 2,000 note, which did not fit the trays of the ATMs, and which were printed way more slowly than the demands of the economy required, and the long queues it caused in front of the banks for weeks! Besides the very logic of introducing a higher value note like Rs 2,000, while demonetising the smaller denominations, was a first in itself!

We can all be tolerant of the mistakes of any government, provided the mistakes do not come cloaked in arrogance, and provided one learns from those mistakes. Sadly, this measure is a clear indication that we have chosen to learn nothing from past stupidities. “Act first, think later” seems to be the government’s credo.

The point of revisiting of DeMo in this article is because another ‘demonetisation’ – howsoever gentle – of yet another currency within six years of the first one makes India look like a country whose currency cannot be trusted. Worse, a country that does not trust itself. A country where demonetisation of any currency, anytime, is par for the course. And this, when India aspires for its currency to be counted as an international currency, if not in the world, at least in the Asia-Pacific.

(The writer is a former Professor of Finance, IIM, Ahmedabad, and a former president of ING Vysya Bank)