With sharp fall in GDP growth rate and deposit of 99% immobilized currency notes : Demonetization proved a big hoax



On 8 November, 2016, when Prime Minister Narendra Modi announced to the nation that Rs. 500 and Rs. 1,000 currency notes would cease to be legal tender from midnight, he was unequivocal in asserting that the measure was aimed at breaking “the grip of corruption and black money”. There were hints that the windfall gains made from the scrapped currency notes that would not be deposited in banks, estimated at anything between Rs. 3 lakh crore to Rs. 5 lakh crore, would be deployed for larger purposes — social welfare schemes and infrastructure projects. Alongside, it was claimed that the cutting-edge of the move to scrap the old 500 and 1,000 rupee notes would eradicate corruption, curb terror-funding, herald cashless economy and widen the tax base. It was indicated that a sizeable part of the Rs 15.44 lakh crore (Rs 15.44 trillion) of the two high-value banknotes were held by as black money and would not be tendered back into the banking system due to fear of punitive government action. To make it amply clear what the government was expecting, the Attorney General of India told the Supreme Court on 23 November, 2016: “We expect people to deposit Rs 10-11 lakh crore in banks. The rest, Rs 4-5 lakh crore, were being used in northeast and Jammu & Kashmir to fuel trouble in India. That will be neutralised.” The Prime Minister is even on record to have said that he should be “hanged in public” if proved wrong.

 Reality check

Let us go for a reality check. Annual report of Reserve Bank of India (RBI) published on 30 August, 2017 reveals that reality has been far from what had been claimed. The report shows that Rs.15.28 lakh crore out of 15.44 lakh crores, i.e.  98.96 percent of the immobilized cash has come back to the banking system. Only about Rs 16,000 crore worth of demonetized notes has not been deposited. Even this may be an overestimate, as the notes to be received from District Central Cooperative Banks and Nepalese citizens and Financial Institutions are yet to be added to the total value of notes returned. Moreover, there have been some honest people who could not meet the deadline for turning in their old currency notes. Taking cognizance of that, even Supreme Court told the government last July to give one more chance to people with genuine reasons to deposit banned notes.

Secondly, in its submission to the Public Accounts Committee, the Finance Ministry has said no counterfeit notes were seized by agencies from 8 November to 30 December, 2016. Now RBI says that the fake notes detected in the total deposit amounts to only Rs 42 crores which is only 0.0013%.   The estimate of the total fake currency in the system was Rs 400 crores. Moreover, periodic interception of counterfeits of new Rs 500 and Rs 2,000 notes clearly proves that elimination of fake currency has remained a far cry. As regards cashless transaction or increased digitization of transactions, it is reported that it went up in the November-December period when cash was hard to come by but has then steadily shrunk from that high afterwards. In our article on much-trumpetted switch to cashless economy (Proletarian Era dated 01-01-2017), we clearly stated that in India, only 14.3% of the citizens keep money in banks meaning the rest have either no surplus to save or are more comfortable in cash transactions given the ground reality. Moreover, only 11% of the 22% debit card holders use the cards. At best, 5 to 6% of the bank account holders transact online. Computer literacy rate is just 6.15% and only 25% of the mobile sets in use are smartphones but all of them do not have internet. India ranks 96th in terms of internet speed. But when it comes to cybercrime, India is 6th in the world. Most prone to cyber-attacks like raid of ‘ransomware’ etc., India has a very poor rate of prosecution and conviction of hackers. In view of this, overnight switch to cashless economy is nothing but a myth. Now, that is corroborated by facts. We also pointed out that by raising bogey of cashless economy, the ruling quarters were trying to befool people with another falsehood. Cashless transaction does not mean that money ceases to be in existence. Hence, shift to cashless mode, even if such is assumed for argument’s sake, would not mean end of the ‘rule of money’ and hence abolition of black money. Rather, this cashless mode in its different variants is purported to exacerbate the economic oppression using latest technological developments albeit under the garb of modernization and ease of operation. So long as capitalism-imperialism is in vogue, there is no escape from this ‘rule of capital’ or ‘rule of money’.

Thirdly, the government spoke of widening tax base through invalidation of old currency and detection of  tax evaders. The finance ministry says the number of income tax returns filed in 2016-17 was almost 25% higher than in the previous year. But this is hardly unprecedented. In 2011-12, for instance, the number grew by over 80% and in the next year by over 30%. Clearly, that happened without the shock and awe of a midnight demonetization.

Next is about the weird claim of some of the fertile brains belonging to the quarter of bourgeois economists that RBI would make a windfall gain after demonetization. While holding brief for government’s move to scrap currency notes, they had argued that roughly Rs 3 lakh crore out of Rs 15.44 lakh crores of invalidated currencies would never be exchanged for new notes and hence would be deemed to be the “extinguished or disappeared black money”. That ‘extinguished black money’ would be a ‘bonanza’ to the RBI and transferred to the central government as dividend. But, the outcome is just the reverse. Deposit of 99% of the invalidated currency has eroded RBI’s earning.  Adoption of all available conventional steps like reverse repo auctions (an exercise to remove excess cash from the banking system), hike in incremental Cash Reserve Ratio (the percentage of cash deposits that banks must keep with the RBI) at 100% on deposits accrued between September 16 and November 11, 2016 and increasing ceiling of issue of securities under Market Stabilization Bonds (which would suck out excess cash with banks), have been proved abortive. Additionally, expenditure of RBI on printing of currency doubled from last year. It is reported that while the printing and ancillary expenses have been Rs 21,000 crore, the invalidated cash not deposited with banks is just Rs 16,000 crores. Overall, while the income of RBI for the year decreased by 23.56%, its expenditure increased by 107.8% resulting in a sharp decline in the RBI’s surplus cash. So, those who said that RBI would transfer hefty sum to government treasury now find that the RBI has given a dividend of just Rs 30,659 to the government, half of what it paid in the previous year.

Finally, let there be a word on the status of lowering corruption. During the time of demonetization, reports poured in from across the country that money meant for release to the public in exchange for the old notes were being siphoned off to the influential and those with the capacity to pay for this. So, while the ordinary citizens including the aged and women queued for hours over days to have old currency replaced, India’s handful of rich and powerful have had the newly issued currency notes in multiples of crores delivered at their doorstep. Could this happen if the system was in the process of being cleansed of corruption? We also mentioned in our early write-up (P Era dated 01-12-16) that demonetization move has precipitated newer forms of corruption. For example, a group of vendors were in the field to buy out old notes at hefty discount so that when they deposited the notes in the bank, they could make some quick income which obviously is also not accounted for and hence black. These two instances are enough to prove how deeply entrenched is corruption in the system and who are the indulgers, aides, abettors and beneficiaries of this ongoing as well as growing malpractice, and who are shielding the truth from the suffering masses by indulging in palpable falsehood couched in customary sweet-coated words.  And now a survey reveals that India is the most corrupt country in Asia-Pacific region where almost seven out of ten people have to pay a bribe to access public services. Compare all these with what the Prime Minister had said on the eve of demonetization: “this step will strengthen the hands of the common man in the fight against corruption, black money and fake currency”. Also relate the findings with his claim on 27 December, 2016 that his move has destroyed “in one stroke the worlds of terrorism, drug mafia, human trafficking and underworld.” Incredible indeed!

Who paid the price of demonetization?

The Centre for Monitoring Indian Economy (CMIE) estimated the transaction cost of demonetization to be Rs 1.28 lakh crore. As our Party had categorically stated during demonetization, the worst sufferers of this hoax have been the common toiling people and small businessmen where cash accounts for 90 per cent of the transactions. Facts corroborate that. As many as 103 priceless lives of innocent honest citizens were lost because of the ordeal of standing in queues for hours and days for depositing as well as exchanging banned notes. Incidents of suicide for not being able to make both ends meet due to sudden invalidation of currency notes kept at home by a pittance earner for meeting family needs is also reported. Among the more marginalised sections such as small peasants, brick kiln workers, small vendors, construction and casual labourers as well as migrant workers the effects were magnified and severe. Poor peasants and agricultural workers have been hit most by the twin blow of sudden ban of notes followed by a continuing   cash   crunch   and rising cost of crop inputs such as seeds   and   fertilizers   coupled with rock-bottoming of the prices of the produce. Cash shortage had led to   vegetable   prices   crashing, delay in wheat sowing and inadequate inputs for winter crops as well as a fall in wages. Deflationary winds continued to blow in the kharif or summer crop season as well.

A study conducted by the All India Manufacturers’ Organisation (AIMO), which represents over 3 lakh of mostly micro, small scale, and medium scale industries engaged in manufacturing, shows a drop of 60% in employment and loss of 55% in revenue March 2017. The study stated that almost all industrial activities have come to a standstill, with the Small and Medium-sized Enterprises (SMEs) sector worst-hit.  Another report by the Centre for the Monitoring of the Indian Economy (CMIE) stated that of the workforce who suffered most, 25 per cent are daily wagers, 8 per cent comprised self-employed entrepreneurs, small traders and hawkers. For example, the ‘labour chowks’ or designated areas where men and women are picked up by contractors for work in industry or by individuals as daily wagers wore a deserted look. Daily wagers lamented that hardly 10 days job was available and also at very low wage and that too being delayed abnormally.  Unorganized sectors complained that there was no money to pay wages to around 46% of the workers who were either casual or contractual. Around 65% of daily wage earners went without work in urban areas in the wake of demonetization and returned to their villages. Corporate media also could not but admit the loss of 1.5 million jobs. The actual figure would be much more than what the official media has reported. The situation has not changed that much even today.  When the cash economy suddenly shut down, consumer spending was subdued as evidenced in the fading footfalls in the shopping arcades and malls. The shock to the cash economy continues to be felt even in the current financial year as household consumption remains sluggish. So, the entire brunt of this demonetization has been borne by the common oppressed people tormented day in and day out by repeated bouts of economic onslaughts by the bourgeois government at the behest of the ruling monopolists. Expectedly, the wealth of the top industrialists increased by leaps and bounds during the same period. 1% of the super-rich now own more than half of the total wealth of the country. The Prime Minister had said after demonetization that “because of his ‘bold’ move, the poor is having sound sleep while it is sleepless night for the rich.” Does reality bear out these words of his?

However, that it would create havoc in toiling people’s life was only to be expected. Immediately after notice of demonetization, our Central Committee had warned that the move would put entire economy in chaos and worst sufferers would be the common people, particularly the poor peasants, small traders, vendors, contract and unorganized labourers.  Now, the fallout reality check makes that abundantly clear and confirms our prognosis. Even those who initially were carried by the deceptive propaganda and thought that demonetization would strike at the root of black money are also coming to realize how they were bluffed.

Slowdown of economy

On the other hand, despite all possible steps on the part of the bourgeois government and its pliant quarters, the further slump in already crisis-ridden Indian capitalist economy could not be kept under the wrapper either.  It is known that GDP (Gross Domestic Product) measures the economic output of a nation. The GDP growth rate measures how fast the economy is growing. This is done by comparing one quarter of the country’s GDP to the previous quarter. The GDP growth rate is driven by the four components of GDP. The main driver of GDP growth is personal consumption (C). The second component is business investment (I).  Government spending is the third driver of growth (G). Fourth is net trade (export minus import) or NT. Exports add to GDP while imports subtract from it. To put it simply: GDP= C +I+ G+ NT. So if C declines, or I plummets whereas G is not increased and NT is negative (i.e. Import is more than export), GDP will fall and reflected in slower growth rate.

It bears recall that in order to inflate GDP growth figure and project it to be more than the growth rates of other countries, the bourgeois think-tank on the payroll of the government declared a new methodology of calculating GDP a year back with lot of changes in the parameters of calculation including changing   the  base  year  from 2004-05 to be 2011-12. This new methodology overnight inflated a growth  rate  of  4.7  to  6.9  in 2013-14  meaning  a  jump  by 50%. But even that revised methodology could not suppress a sluggish growth. GDP (Gross Domestic Product) growth of the country has been reported to be only 5.7% in the last quarter (April-June) as against a much higher rate the governments and its apologists had projected. In the previous quarter also, it was 6.1% much  lower than what was projected by the government. In other words there is successive fall in growth rate despite revised methodology.  If reverted to old method, the growth rate of 5.7 would be around 2.8%.

What is the implication of this fall in GDP growth? It means there is recession or slowdown of economy. A fall in GDP is typically reflected in economic indicators such as fall in industrial produc-tion, dip in investment, lowered public expenditure, plummeting household income and rising unemployment. If employment falls and wages decline, purchasing power of the people goes down. If purchasing power goes down (dip in consumer spending), produced goods stagnate and entail recession. Employment falls further during a recession, as with general spending plummeting, the capitalist owners seek to preserve their cost margins by firing employees and reducing wages and also turn away from making any fresh investment in industries. Slow economic growth typically corresponds to a fall in spending in the economy, as unemployment rises, wages deplete and household incomes fall. As per official admission, all these features are glaringly manifest in post-demonetization period. So this fall in GDP  growth  is  undoubtedly the fallout of the disastrous step of note ban.

Well-known economists also opposed demonetization

It is also pertinent to mention that everybody except the bourgeois government and a few of economists-commentators on the payroll of the ruling capitalism are holding that a major cause of this slowdown of economy has been the demonetization drive. Even the seasoned economists who are known to be in favour of the capitalist system also could not but express their disapproval of the move. Raghuram Rajan, former RBI governor who was replaced on the eve of demonetization has revealed that he was never in favour of the government’s move of demonetizing the legal tender of Rs 500 and Rs 1000. He further stated that RBI during his tenure even cautioned the government about adverse fallout of demonetization. Bimal Jalan, another former RBI governor has also said that the move would not have been approved under his watch. According to Kaushik Basu, former Chief Economic Advisor (CEA) to the Government of India demonetization was a very big mistake and it has had a big negative fallout on the economy. Nobel Laureate Amartya Sen had held demonetization move to be a “despotic action that has struck at the root of economy based on trust.” Clearly, the BJP government ignored the opinion of such persons and went ahead with de-legalizing high value currency notes.

Shifting goalpost

The BJP government and its heads have been on a spree of hoodwinking people by pretending to be doing this or that ‘big, new and unprecedented’ for “economic development of all” (deceptive slogan of sabke saath, sabke vikas). But when people find that boasted measures or reforms have brought more misery and penury to them, the government high-ups immediately shift goalpost and start talking differently. For example, pushed to the corner because of devastating fallout of demonetization, the Finance Minister is now singing a different tune. He says that “It’s global slowdown, not demonetization that is responsible for slower GDP growth” and the aim of note ban “was not confiscation of money” but “to alter the high cash economy”, “the positive benefits would be evident on a long term basis” etc. The mismatch between what is now being said and what had been thundered from the rooftop on the eve of demonetization is so glaring. This is nothing but another shrewd attempt to befool people and divert their attention.

Once more on black money

Earlier, quoting a source, we had shown that as high as Rs 72 lakh crore (Rs 72 trillion) of black money was reportedly lying in the personal accounts maintained by Indian industrialists, politicians and bureaucrats in the Swiss Bank five years back. Even World Bank, an organization of imperial capital, could not but admit, of course after a lot of exercises to suppress truth, that  23.2% of GDP or roughly Rs 37.5 lakh crore (Rs 37.5 trillion if GDP is estimated to be Rs 160 trillion ) of black money was in circulation in India in (as in 2015-16). Of late, another report estimate puts India’s black economy at about Rs 93 lakh crore. It is larger than the income generated by agriculture and industry put together and larger than the size of the government (Centre plus States) spending. Because of so much of black money, the country’s economy has been losing on an average 5% growth (when compared to official figures) since the mid-1970s.  Another study indicates that fraudulent trade invoicing accounts for 100 per cent of Illicit Financial Flows (IFFs) [i.e. overinvoicing of exports and underinvoicing of imports]. Black money stashed abroad through notorious hawala route is estimated to be anything between $4.2 trillion (Rs 286 trillion) and $9.8 trillion (Rs 666 trillion) over the decade. (Frontline-26-05-17) But, the government has no intention to unearth this huge black wealth or stop the black means to unaccounted money in the country. On the contrary, as per latest ratification the global convention on automatic exchange of information on financial transactions, the information-sharing deal with Switzerland will come into effect from September 2019. (Economic Times—19-06-17). Why after two years? Why not now? Even if for argument’s sake, it is assumed that there might be some select leak of that information after the stipulated date, Indian black money holders would immediately shift illegal money from their Swiss bank accounts to other safer tax havens. It is clear that so called demonetization could never and can never touch a figment of the problem.

Rotten obsolete capitalist system is generating black money and breeding corruption

While dwelling on black money, we had also shown (vide Proletarian era dated 1 December, 2016) that that the real beneficiaries of this much-trumpetted demoneti-zation drive are the top monopolists, unscrupulous businessmen and a section of ever-sprouting middlemen who trade in the plight and misery of the common masses. There would hardly be a scratch on the black money holders. Because black money is generated not outside but within the prevailing capitalist economic system and the driving force is the avid greed for money, more and more money by any means and evading tax at will by conniving with the corrupt tax collecting machinery. It is this greed for money which is to be satiated through avid pursuit of money making, no matter what the means or source of earning is, what low of degradation, deception, deceit, derision or defalcation is to be stooped to for that. This debased mentality is giving birth to thriving generation of black money. The more privileged one is in the rotten obsolete system, the more apt one is towards accumulating ill-gotten wealth. Obviously capitalism not only breeds but also nurtures black wealth. How can then the government which serves and abets the capitalist system be a crusader against black money?

Similarly, corruption is not just the handiwork of a bunch of privileged crooks, a group of crooked ministers-politicians-bureaucrats or a few industrialists-businessmen wielding stupendous money power to skirt punishment. The question of corruption like black money is inseparably linked with the existing rotten capitalist system. In decadent moribund capitalist system, corruption is institutionalized. Those who are making illicit gains through corrupt routes are also extending the sphere of corruption, making it all-embracing, all-pervading. The system itself is corrupt and survives on corruption. So, corruption cannot be eradicated simply by some eyewash like demonetization or showcasing booking of one or two crooks, that too small fries, possessing paltry sum of black money, foe playing to the gallery. These are all hoodwinking of the people by the protectors, abettors and beneficiaries of the system, like the present BJP government or the erstwhile Congress government and the likes.  The BJP came to power by promising among other things recovery of black money and even going to the extent of promising crediting bank account of every citizen with Rs 15 lakhs out of the recovered black cash. Since, that was never to be, the BJP leaders needed a stunt to bamboozle questioning people particularly before the impending crucial Uttar Pradesh Assembly election.

Lessons to be drawn from this demonetization fiasco

This fiasco of demonetization once more brings to the fore a few objective truths. First of all, it is futile to expect that those who are tied to this capitalist system, serving the system and the interest of its helmsmen would cleanse the system of black money, corruption and such other aberrations. The whole and sole objective of the ruling bourgeois parties is to squarely pass on the burden of the growing insolvable crisis of capitalism on the people at the behest of their masters in the name of so called economic reforms, prudent fiscal policies and surgical strike on economic offenders. Till the time capitalism is overthrown by revolution, such malpractices, corruption and other maladies would continue to be bred. In order to survive in this continuously degenerating, decaying capitalist system and try to stem the rot to the extent possible, it is imperative to build up united, organized, powerful mass movements on the burning problems of life, against the policies and practices wreaking havoc in life. Only a surge and intensification of such a massive movement can create an ambience which would provide deterrence to prolific rise of corruption and scourge of black money and thus give some relief to the oppressed suffering toiling people.

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