On Demonetisation

Monday, January 30, 2017



On November 8, Prime Minister Narendra Modi had suddenly announced the government's decision to demonetise 500 and 1000 rupee notes, which together constitute 86 percent of our currency. He invoked patriotism and stated that this move is necessary to destroy corruption, black money, counterfeit currency and break the backbone of terrorism. All those who had questioned the effectiveness of this decision to meet the declared objectives, are branded as unpatriotic and anti-national.

The Prime Minister had asked the people to give him 50 days time and bear with the hardships. According to him this is a small price that the people should be ready to pay for ensuring that the country is cleansed of corruption and black money. It is now more than 80 days since the demonetisation of currency was announced. Not a single day goes by without the reports about people's hardships. Working people of our country are the worst affected.  People are still unable to withdraw their hard earned money from their accounts, as the government had imposed restrictions on withdrawals. Most of the ATMs in the country are greeting the people with 'No Cash' boards.

Reserve Bank of India Governor Urjit Patel told the Standing Committee on Finance that around Rs 9.2 lakh crores in new currency has been introduced for circulation as against 15.44 lakh crores that were withdrawn. This in itself means, nearly 6.24 lakh crores of currency that was earlier in circulation is yet to be introduced into the economy.

The government is choosing to remain blind to all the hardships faced by the people. It is refusing to accept that more than 100 people have died standing in queues to withdraw their money. These queues, ironically turned out to be their 'last queue', as desired by our Prime Minster! Rubbing salt on the wounds, the government had declared on December 27 that its mission has been accomplished.

One naturally believed that 'mission accomplished' means that black money is completely eliminated from our economy. Similarly, it should also mean that counterfeit currency is destroyed and financial backbone of terrorism is broken for good. But as the subsequent data seeing the light of the day points out, none of these aims are met by the government's demonetisation drive. What has in fact happened is demonetisation has opened the door for further financial loot of our economy to the corporates. It has opened the doors for foreign companies to profit from our hardships. The government has now announced that it wants to convert our economy into a cashless economy or digital economy. Digital economy is indeed a platform for the government to introduce 'big bang' neo-liberal reforms in our country. When the Prime Minister had announced that 'mission is accomplished' did he mean that he had succeeded in laying the foundation for more neo-liberal reforms? It appears so.

Fact Check

Let us do a fact check on what demonetisation has really achieved.

Elimination of black money: The latest data released by the Reserve Bank of India (RBI) {13 December 2016} stated that the banks had received deposits worth Rs 12.4 lakh crores till 10 December, after the government invalidated high-value currency notes. Alarmed at the huge deposits into the banks, the government forced the RBI to stop giving the data about the deposits subsequently made.

More than 80 days after demonetisation, the Reserve Bank of India (RBI) said it still does not know the “exact number” of junked currency notes that were in circulation and it is still “reconciling” the number of notes that were deposited. In a written submission to Parliament’s Public Accounts Committee (PAC), it stated: “The exact number of Specified Bank Notes (SBNs) withdrawn from circulation is being worked out”.

Conservative reports suggest that banks have received somewhere between 90 and 97 per cent of the Rs 15.4 lakh crores of demonetised currency. On the other hand, there are other notable reports which were commenting that nearly 100 per cent or even little more of the demonetised amount was back in the banks as deposits. The government sensing that it will lose its face if these facts come out, is not willing to share this data with the people.

Even if we take the conservative estimates into consideration, this in itself is a blow to the claims made by the government. The government had estimated that at least 20 per cent of the Rs 15.4 lakh crores of demonetised currency will not be deposited and calculated it to be black money. If that had really happened, the government can declare its mission as accomplished. But with more money deposited in the banks, than it had expected, the government is at a loss of words and face.

What had happened proves our arguments all through:

  • Black money held in cash is very small – it might be only 5-6 per cent of the entire black money in the economy.
  • The total black money in our economy is anywhere between 25-62 per cent of our GDP
  • Most of this black money (conservatively, 50 per cent) is in real estate
  • Other substantial chunk of black money is exported or laundered overseas through well-established hawala and 'layering' channels

Let's recall that all through its election campaign in 2014, BJP was talking about bringing back the black money stashed in Swiss banks immediately after coming to power. From this money, it even promised to deposit Rs 15 lakhs into the accounts of every Indian citizen. Half of its 5 year term is over, but nothing has happened yet and now it is becoming clear that nothing is going to happen.

What had happened after demonetisation is, it has given opportunity to convert whatever little black money is existing in cash into white. Moreover, it is proved once again that demonetisation does not cut at the sources of black money. In the first six weeks, of the Rs 500 crore seized by the Income Tax department after demonetisation, Rs 92 crore, or nearly 20 per cent, was already in Rs 2,000 notes!

Elimination of counterfeit currency: The Finance Ministry, in its submission to the Public Accounts Committee (PAC) of the parliament, stated that no counterfeit notes were seized by agencies from November 8 to December 30 (January 21, 2017, Indian Express) . The Reserve Bank of India too has made a similar admission in an answer to an RTI question about the number or value of fake currencies detected since the demonetisation of Rs 500 and Rs 1,000 notes. “We presently don’t have the confirmed data on this query,” said a reply from the RBI’s Department of Currency Management (Forged Note Vigilance Division). These replies make it clear that the government has failed in realising the second objective of demonetisation.

We should remember that in practice, counterfeit money in circulation in our economy is estimated at between 0.0002 to 0.0008 per cent of all notes in circulation, with just Rs 30 crore recovered in 2015-16. To demonetise 86 per cent of our currency to eliminate this small amount of counterfeit currency is similar to burning one's house in order to drive away the rats!

Elimination of terror funding

The Finance Ministry in its answer to another specific question by the PAC on how many counterfeit notes of Rs 500 and Rs 1000 denomination have been seized from terrorist groups, smugglers of arms, drugs and spies until December 30, stated. “No counterfeit currency has been seized by agencies under CBEC (Central Board of Excise and Customs) since 8th November 2016 till 30th December 2016” (January 21, 2017, Indian Express). One of the important patriotic arguments for demonetisation was that it will stop the flow of counterfeit notes from neighbouring countries, a source of funding terrorists. The reply given by the Finance Ministry once again proves that even this aim was not achieved. Demonetisation does not plug the sources of terror funding. Money in new Rs 2,000 notes recovered from the dead bodies of terrorists in Kashmir and other places exposes the failure of demonetisation in combating terror.

From the above facts, we can easily see that the government has failed to achieve any one of its three declared objectives for demonetisation. Our conclusions are not based on any other sources or alternative channels, but are all derived from government sources themselves. In spite of these clear facts, how can the government declare that demonetisation had accomplished its mission? It is for this reason we say that the mission for demonetisation is not what is stated as its objectives by the government, but is what is left unstated which indeed are the real intentions behind the entire project. To understand this more clearly let us see who had suffered from demonetisation and who had benefited from it.

The losers

The worst sufferers of demonetisation are the common people of our country. Glance at these numbers of workers who have lost their jobs due to demonetisation.

·         25 crores agricultural workers and poor peasants are affected directly, losing employment.

·         4.5 crores construction workers

·         4,00,000 workers in Surat industrial clusters

·         4,00,000 workers in Tirupur garment manufacturing units

·         50,000 workers in Palar valley leather cluster

The kisans of our country suffered. All those kisans who had invested lots of money for growing tomatoes, onions, pulses and grains could not find buyers for their crops and were forced to throw thousands of kgs of their produce in the streets. Many of them have taken debts for cultivation with the hope that a good yield will help them to repay their debts and also save for the coming season. Thanks to demonetisation, even though they had a good crop, they could not sell it in the markets and lost out in a big way. Now with the new agricultural season starting, they are once again unable to find money for their input costs – like buying seeds, fertilisers, etc. Thus demonetisation is a double whammy for the kisans of our country.

The workers of our country suffered. Many workers were denied their wages, non-availability of cash shown as a reason. Hundreds of thousands of workers suddenly lost their jobs as many small and medium enterprises got shutdown. Many people are predicting that it is not easy for these workers to regain their jobs, even if the situation hopefully improves.

·         An Assocham survey states: Demonetisation has negatively impacted job creation by hurting small and medium enterprises (SMEs) in the immediate run.

·         A recent survey of small industries by the State Bank of India shows that nearly two-thirds of the sector has suffered output loss ranging from 40 to 50 per cent.

A study conducted by the University of Washington, along with its partners in India on the effects of demonetisation found that the policy led to a drop in income, with an average drop in income during the month of November of about 10 per cent of families’ monthly incomes.

Some economists are predicting that it will take the SMEs more than one quarter to come out of the lingering effects of demonetisation.

Small businesses suffered. Due to lack of cash, many small businesses and retail traders lost their customers. A repeat survey in small towns on the Karnataka-Tamil Nadu border found that these businesses initially  witnessed a fall in the sales for up to 80 per cent. By late December sales had partially recovered, but were still down by 30 per cent.

Unorganised sector was badly hit. Livelihood of unorganised workers like fishers', plantation workers, workers in jewelery manufacturing units, silk weaving units, shoe manufacturing units are severely affected.

  • Centrum Wealth Research in its report states: “The unorganised sector is expected to bear higher brunt of demonetisation”.

Head of the Banaras Vastra Udyog Sangh, says his business has been hit by about 70 percent and thousands of weavers have lost their jobs because he has no money to pay them.Some people have lost their savings. Whatever money they had saved to meet some unforeseen exigencies, like health emergencies, deaths, etc., were lost as they do not have bank accounts.

Many are facing untold hardships due to the denial of access to their money saved in banks. They are unable to pay school fees, hospital bills, transport charges, monthly bills and even buy groceries.

Two months after demonetisation, the impact of a squeeze on cash is still severe in the tribal areas of Nandurbar. Darkhiya Pawari of Trishul village woke up at 3 am, walked 5 km and then took a state transport bus at 6 am to reach Dhadgaon at 7 am. The nearest bank is 15 km from his hut. Pawari, a tribal – and a beneficiary of the government’s Gharkul Yojana – travels daily to withdraw money to construct his house, but does not get more than Rs 2,000 from the bank.

Government had denied permission for currency exchange to the cooperative banks which cater in a big way to the rural people's needs. This has added to the difficulties of the people living in villages and dependent on cooperative banks.

  • Around 60 per cent of all deposits are in the co-operatives in Kerala
  • . Cooperative banks have an estimated deposit base of Rs 1.27 lakh crore.
  • In Kerala, 70 per cent of the agricultural credit in the state is routed through the four-layered structure of the cooperative bank structure.

Cooperative banks are democratically run and managed through people's participation. They symbolise financial inclusion in many states like Kerala. Central government has cut off access to cash for these cooperative banks. This is intended to force these banks to close their operations and make people withdraw their deposits. This is to push people away from these banks and towards private banks.

The Gainers

The Prime Minister has referred to demonetisation as 'mopping up of public savings'. And it really is. Demonetisation has forced people to deposit all the money they held in 500 and 1000 rupee notes in the banks. As a result, bank deposits saw a huge increase. Suddenly the balance sheets of the banks are looking good. This is in quite contrast to the situation of the banks in September 2016. At that time (September 2016) the gross non-performing assets in banks were over 6.5 lakh crore rupees. These non-performing assets are a result of the non-payment of loans taken by the big corporates in our country from the public sector banks. Instead of forcing the corporates to repay the loans, the government has forced the banks to write-off the loans. This has pushed the banks to a crisis.

The Credit Information Bureau of India Ltd (CIBIL) – a company set up by banks to collect defaulter information – has reported that there are 5,275 ‘wilful defaulters’ in the country and they owe the Indian banks Rs 56,521 crore which is 1.5 times the allocation Central Government has made for agriculture and farmer welfare (Rs 35,984 crore) in this year’s Union Budget.

Now with the demonetisation, the government intends to cover the losses of the banks by transferring the deposited money from the poor to the rich. Imagine, if this ever happens to the loans taken by our farmers, rickshaw drivers, or other self-employed persons. The government is refusing to write-off 70,000 crores of loans to the farmers who are suffering from severe agrarian crisis, but is willing to write-off lakhs of crores of loans taken by the corporates!

  • Between 2013 and 2015, twenty-nine State-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts, much more than they had done in the preceding nine years.

Even a casual look at the list of the defaulters will show us the who's who of Indian corporates.

  • Mukesh Ambani’s Reliance Industries (RIL), has a total debt of Rs 1,87,079 crore
  • The Anil Ambani-led Reliance Group owes Rs 1,25,000 crore of loans to the banks.
  • Anil Agarwal's Vedanta owes Rs 1,03,000 crore.
  • Shashi and Ravi Ruia’s Essar group has gross debt of Rs 1,01,461 crore.
  • Gautam Adani’s Adani group, owes Rs 96,031 crore.
  • Manoj Gaur’s Jaypee group’s debt is over Rs 75,163 crore.
  • Tata group's debt is 72,867 crore.
  • Sajjan Jindal's JSW group owes Rs 58,171 crore.
  • G.M. Rao’s GMR group owes Rs 47,976 crore.
  • L Madhusudhan Rao's Lanco group has debts of Rs 47,102 crore.
  • Venugopal Dhoot's Videocon group owes Rs 45,405 crore.
  • GVK Reddy's GVK group has a debt of Rs 33,933 crore.

Demonetisation is intended to save the banks from default due to these irresponsible loans they had given to the corporates. After the 2008 global economic crisis, Indian government had become part of a global effort to save the banks from failing at any cost. This requires the government to ensure that banks are saved from collapsing by 'mopping up' the money from the poor and transferring it to the rich. This is intended to be achieved through demonetisation.

So the number one gainers from demonetisation are the Indian corporates.

Cashless economy or digital economy – Ensuring Profits for International Finance Corporates

Finance Minister Arun Jaitley had declared on December 8, and repeated on December 29 that “obviously one of the intentions as far as Government of India is concerned is that the paper currency should shrink and a large part of businesses should be in the alternative digital or cheque mode”.

The Indian market for transition to cashless or digital economy is estimated to be worth $500 billion (Rs 3.40 lakh crores) by 2020. This is a market for the card companies like Visa, Mastercard and also many international financial institutions. It is because of this big size of the market that we find huge investments from the US and China entering digital financial transaction business.

Immediately after the announcement of demonetisation in our country, it was the Visa and Mastercard who were among the first to welcome the move. In fact, media had reported in late November that these two networks, Visa and Mastercard, have been pushing for this kind of change in our country. It is not something surprising. Both these networks gain a lot from demonetisation. According to some reports: “1.58 crore Mastercard debit cards were used during the period, up 76.84 per cent over November 1-8. Mastercard credit card transactions went up by about 24 per cent to 57.31 lakh. In the case of Visa, the increase in debit and pre-paid transactions stood at 93 per cent”. For our every purchase or use of card, the two US corporates Visa and Mastercard are getting a transaction fee of 2-3 per cent and imagine how many lakhs of crores of rupees are being drained from us to the US!

Similarly Paytm users increased by more than 17 crores during this period, earning super profits for it. Paytm itself has announced that its business expanded within the last two months. Daily seventy lakh transactions are carried through it, which is an increase of about 250 per cent. It might be to thank the government for providing them with such opportunities to reap profits that Paytm had carried a photograph of Modi in their advertisements!

Together with Paytm other digital wallet companies too have entered the markets. Mobikwik, a digital wallet powered by Japanese investors and hedge fund companies like Tree Line Asia raised Rs 155 crores to expand their operations in this same period. Freecharge, which was brought over by Snapdeal and powered by American Express, Cisco and some Chinese investors, recorded a daily increase of 12 times in its transactions!Indian government had entered into a partnership with USAID, Visa, Mastercard, Citi and various other corporates. Together this group is called as 'Better Than Cash Alliance'. As part of this group, USAID conducted a research (July-September 2015) in our country to prepare the ground for increasing the use of digital payments, particularly among low-income consumers. These indeed might be the elaborate preparations that went before the grand announcement made on November 8.

Finance Minister's budget speech (2015-16): “One way to curb the flow of black money is to discourage transactions in cash. Now that a majority of Indians have or can have, a RuPay debit card, I therefore, propose to introduce soon several measures that will incentivise credit or debit card transactions and disincentivise cash transactions”.

Further, the Finance Ministry in an open call on its website, asked for public opinions till June 2015, on its draft proposals for facilitating electronic transactions. And, the government's favourite Digital India initiative, supported by the World Bank also talks of shift towards digital economy. So what is happening today in our country appears to be a well thought out plan.

Demonetisation, together with a shift towards digital economy is also intended to discourage people from saving. They are intended to push people more towards spending or consumption.

This shift towards digital economy is also intended to help the entry of foreign corporates into our financial sector. It is seen as a first step towards further opening up of our economy for foreign capital. Growth of digital economy is also helpful for the growth of e-commerce. E-commerce giants like Amazon are bound to benefit from a shift to digital economy.

McKinsey Report, September 2016: “Digital payments could further enhance revenue by reducing the size of the informal economy...Over the longer term, digital payments can enable development of e-commerce and on-demand services...In turn, e-commerce can unlock consumer spending”.

Digital payment network is considered as one of the important feature of modern day infrastructure. It is necessary for the modern corporates to learn about how we spend our money. When the corporates know how we are spending our money and on what products, it becomes easier for them to influence our market choices. Advertisements can be prepared to suit our particular interests and desires. Corporates will use the information of the money we spend through cards to study our behaviour patterns and push us towards buying their products.

In our country, this is to be achieved by linking our bank accounts (for the majority of Indians, Jan Dhan accounts), Aadhar card and mobile connectivity. The USAID lovingly calls it as 'JAM' – where accounts will be opened for all to transfer cash in the form of bank deposits, Aadhar is used to collect the data and mobile is used to push for a digital economy – all at the service of corporates. This is the real reason behind our government's decision to make Aadhar card compulsory in spite of Supreme Court judgements against it. This is also the real reason for the government's decision to open accounts for all Indians!

So, in the name of demonetisation, the government is bending before foreign corporates and finance capital in its push towards digital economy. On the other hand, all those holders of cash, who are opposed to forced shift towards digital economy are branded as 'traitors', 'anti-nationals' or 'supporters of hoarders of black money', if not directly hoarding black money.

Of course, government too benefits from digital economy.

  • It can better control the monetary policy of the country. It becomes much easier for it to regulate interest rates.
  • It can trace the movement of money and can decide on the new taxes that can be levied through having a better feel of the 'pulse of the economy'.
  • Also it can reduce its subsidies by going for 'targeted delivery of subsidies'. Targeted delivery of subsidies as we have seen is intended to reduce the subsidies provided to the kisans and other poor people in our society. It is ultimately intended to eliminate subsidies given to the common people altogether.

Demonetisation also led to popular anger against Reserve Bank and also our public sector banks. The government had deliberately contributed to this feeling among the people. The government took all the decisions related to demonetisation, but the banks were projected as failing in its implementation. Due to the decisions and actions of the government, people are losing their trust on RBI as a guarantor of their money. It was made a laughing stock because of its constant flip-flops. RBI has failed to assert its independent views during this entire period. It emerged as an institution whose autonomy is severely compromised.

In the period of severe shortage of currency notes, it was the private banks that were receiving currency first. Public sector banks, which serve majority of the people are given second priority. As a result people's anger rose on the public sector banks. Within all such limitations, bank employees were working day in and day out to help the people. But the government and the BJP are trying to make the bank employees responsible for the people's hardships.

All these are done with a purpose. It wants to curtail the powers of central bank and its autonomy. It is also to discredit the public sector banks and institutions. This is to prepare a ground for the ultimate privatisation of our banking sector. We should not forget that international finance capital is eagerly waiting to enter into our financial sector. It is very important for the international finance capital to enter Indian financial sector. In this period of prolonged global economic crisis, they consider it as an effective way to earn more profits and as a means to come out of the crisis. Demonetisation is used by the government to serve their purpose. The government is preparing our public sector banks for their takeover by international finance capital by mopping up money from our people and by cleaning the balance sheets. Hence, demonetisation is the foundation for the big bang reforms that the government intends to introduce.

Our Role

It is our duty, as patriotic Indians to expose the game-plan of the BJP government. Demonetisation is a classic case of mixing neo-liberalism and authoritarianism. It is an attack on common people to benefit the corporates. The BJP government is forcefully pushing its case of demonetisation unconcerned about the sufferings of the common people. It is also similarly proceeding with the transition to digital economy without bothering about the concerns of the people.

Having cash, saving money and using it as we like and for our needs is not only a question of our right to take financial decisions. It is also a reflection of our culture. Demonetisation is thus an attack on our right to take our financial decisions and also an attack on our culture.

The money we have with us is our hard-earned money and it is for us to decide what we do with it. If we want to save, the government should provide safe means for our savings. It we want to withdraw our money and spend, the government should ensure that. The government does not have the right to dictate how much we withdraw and how we spend. It is our money and we will decide. Nothing less is acceptable.

It should be left to the people to decide how they intend to spend their money – either in cash or through cards. The government has not got any right to force the people to stop cash transactions. The government should provide with all the necessary opportunities for the people to decide according to their convenience. We shouldn't agree with a coercive transition towards digital economy.

Public sector banks and other financial institutions are the assets of all the people of our country. The government is only a manager of these assets. It is not the owner. It does not have the right to sell them or divest them to foreign or private corporates. It is the duty of the government to ensure that public sector banks and other financial institutions serve the interests of the people at large and not few corporates. It is the duty of the government to ensure all the loans taken by the corporates are repaid on time. If not, the assets of the responsible corporates should be taken over.

In a nutshell, we oppose demonetisation not only because of its neo-liberal agenda, but also for its authoritarianism.

We demand:

·         our right over our hard-earned money

·         our right to choose how we spend our money – through cash or card

·         safeguarding our public-sector banks and financial institutions

·         compensation to all those people who lost their lives standing in queues unable to access their money

·         compensation to all the farmers who have lost market for their crops and also those who had failed to sow crops in the new agricultural season

·         compensation to all those who had lost their jobs due to the closure of small, medium enterprises

·         immediate establishment of Lokpal at the centre and Lokayukta in all states to tackle the cases of corruption

·         immediate publishing of the names of all the Swiss bank account holders and bringing back the money that is illegally stashed abroad

·         electoral reforms to curb political corruption

We are against:

·         imposition on limits of withdrawals from our accounts

·         coercive transition towards digital economy

·         the write-off of corporate loans

·         the opening up of our financial sector to foreign capital.


January 28, 2017