A Preliminary Appraisal
Some 60 odd days into the despotic demonetisation, its inherent class bias, its organic links with international finance capital and the ways it is set to further intensify the major contradictions in Indian society, are unfolding before our eyes with greater clarity.
The Disastrous Socio-economic Impact
Corroborating the lived experience of the suffering millions hit by Note Ban, a steady stream of data have already presented a dismal picture of economic slowdown across agriculture, manufacture, services, infrastructure, real estate, trade and export. Banks are flush with funds, but credit uptake by business has dipped to the lowest level since 1960s. The all India Manufacturers’ Organisation (AIMO) sent the government as many as three survey reports stating that micro-small scale industries suffered 35 per cent jobs losses and a 50 per cent dip in revenue in the first 34 days since demonetisation. The Finance Minister, rather than acknowledging and acting upon such worrying drifts, have tried to paint a rosy picture of the economy by citing selectively from stray figures of an apparent hike in the government’s revenue collection post Note Ban. But other experts have been quick to demonstrate that he was lying to the nation by resorting to statistical jugglery.
Adding to the embarrassment of the government, India’s former and incumbent Official Statisticians, the RBI, practically all Indian (and many foreign) economists, the World Bank and International rating agencies – all have revised downwards the estimated growth rate of our GDP, putting the blame squarely on demonetisation. Shortly after Modi’s 8 November announcement, Kenneth Rogoff, author of the highly influential book The Curse of Cash (see below) wrote an article titled “India’s Currency Exchange Gamble and the Curse of Cash”, pointing out where he differed from the Indian approach: “I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges. … India has given people 50 days…
Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes. …” (The Wire 21.11.2016)
As opposed to what the Prime Minister has been claiming, it is evident that the ‘pain’ is clearly not short-term, rather the worse is yet to come.But how about the promised ‘long-term gain’ in terms of getting rid of black money and corruption?
Where Has All the Black Money Gone?
Black money is essentially a flow, a process that generates unaccounted (not necessarily illegal) income hidden from the taxman, but we can also conceive of and try to measure its volume or stock at a particular point of time. Whichever way you may look at black money, Note Ban has produced only negligible and momentary (and in some ways counter-productive) results.
In the first blush of officially orchestrated euphoria about the ‘bold move’, Modi’s drum beaters in the government and in the media proclaimed that the best part of cancelled notes would go out of circulation. This would (a) destroy most of the black money (b) impose a huge loss, i.e., a punitive cost on hoarders of black money and economically annihilate them and (c) reduce the liabilities of the RBI and thus the national exchequer would earn a hefty dividend to be used for public welfare.
Now that solid data is available, let us examine these claims, starting with the first. A news analysis published in The Economic Times (“Demonetisation: RBI’s own figures indicate return of 15 lakh crore of banned notes”, 14 January 2017) points out that, at the very least, 96.5 per cent – and most probably much more – of banned notes had re-entered the banking system by the end of the last year. In other words, only about 3 percent (if not less) of these notes have been ‘destroyed’ in the economic sense. The calculations are based on figures available from the RBI; several other analysts too have independently arrived at the same conclusion.
The first claim thus falls to pieces. Moreover, one must not forget that black money in the form of cash constitutes only 3 percent (as estimated by former JNU Professor Arun Kumar) to 6 per cent (as estimated by the IT department) of the total amount of black money (including cash, gold, securities, real estate etc.). That means,demonetization had as its target only 3 to 6 percent of estimated black money stock. And what did it actually neutralise? At most three percent – only of that meagre cash component, while 97% was laundered white.
And how was this made possible? Obviously, both small tax evaders and big players in the shadow economy proved smarter than the government and bypassed all the strict regulations, audits, etc. to unload their black money into the ‘white’ economy. Some of them might have suffered some losses and inconveniences, but they are far from finished. Barring a few (for example, the PradhanMantriGaribKalyanYojana, which was a shameless compromise with big black money holders and the advance tax payment scheme) most other methods used for the purpose were illegal. These included depositing money in benami accounts, accounts of friends and family members and Jan Dhan accounts, laundering black money through brokers for a commission, and so on. Such activities meant an expansion or proliferation of black business and the new black money generated in this process (e.g., the discounts earned by the broker who changed Rs 1000 notes for maybe Rs.800) actually pushed the old black money, across the extremely porous and largely arbitrary border, into the ‘white’ region. All this puts paid to the second claim.
The third claim was actually rendered meaningless because nearly all the cancelled currency quickly got back to the RBI’s chests. What if most of it did not? Would that mean a windfall to the government to be passed onto the aamadmi? No, even in that casethere would be no question of any special dividend to bepaid by the RBI to the Government. This was clarified by the RBI Governor himself on 7 December last year. So the third claim also stands exposed as a deliberate lie at par with Modi’s false promise of gifting Rs.15 lakh to every Indian out of the huge bounty he vowed to bring home, once elected Prime Minister, from the Swiss banks.
Meanwhile, the real fight against black money was absolutely forgotten. Thus, just three days before Note Ban, the Treaty on Mauritius Route (notorious for “round tripping”, i.e., black money of Indians travelling overseas and coming back, legalized, as FDI) was extended.
The “drive against black money” thus turns out to be a deceptive slogan designed to exploit the people’s earnest desire for effective fight against corruption, to mobilise mass support for the project and most crucially, to market the ‘chaiwala’’ as a crusader against corruption, as a trustworthy leader of the honest and hardworking poor in their struggle against the corrupt rich.
But this is not to say Modi’s flagship economic project, which is more potent (for right reasons or wrong) than his “Make in India” invitation, is a Tughlaq-style decision bereft of any long-term plan or substantial content. For after all Modi is no Tughlaq. Like Trump and Erdogan, he is a 21st-century ruler trying to serve – if in his own, often disputable ways – the interests of big capital. This becomes evident when one examines the cashless/less-cash campaign that quickly replaced the initial phrase mongering about fighting black money and all that, and revealed the real economic content of the move.
The ‘Cashless’ Idea: Origins and Stakeholders
The less-cash thing is by no means Modi’s brainchild. The overdrive for cashless society originated in the developed economies – the Scandinavian countries in particular – in the late 1990s as a spontaneous, gradual progress towards digitalization of money. It was spurred by development of productive forces (advances in technology and management techniques) and was more or less welcomed. It also started spreading to developed countries without opposition.
The push for a rapid and forced transition to cashless economy arose in the 2010s as yet another product of the growing convergence of the economic interests of capital in crisis and the political concerns of the beleaguered police state in the neoliberal era. As always, the task of aggressively marketing the strategy in the name of people’s interests was taken up by the state, with capital keeping a low profile. As Michael Snyder reported in early 2012, for various reasons (e.g., cash is expensive to print, inspect, move, store and guard; most important, a cashless society would give governments more control) “most governments around the world are eager to transition to a cashless society. They are increasingly viewing cash in a negative light. In fact, according to the U.S. government paying with cash in some circumstances is now considered to be “suspicious activity” that needs to be reported to the authorities.” (A Cashless Society May Be Closer Than Most People Would Ever Dare To Imagine, The Economic Collapse, 29 March 2012).
The coercive element was further intensified with the rise of the idea of negative interest rates on bank deposits. When lowering of interest rates down to or even less than 1% failed to induce people consume more and save less (which was necessary to pull the developed economies out of the stagnation/recession lingering since 2008) bankers started thinking of crossing the “zero lower bound”, i.e., charging negative deposit rates. Denmark’s central bank was a pioneer when it first cut its deposit rate below zero in 2012, and the trend has now spread to the eurozone and Japan. At present only in a few countries banks are charging negative interest rates (often in the name of sundry bank charges) but others also are prepared to go that way if need be. However the problem is, few people are willing to keep money in banks at a cost. The only way to force them is to abolish cash and make digital payments the only available option. This course would benefit both the banks (augment their scale of operation and earnings) and the state (helping it keep watch on the details – such as amount, time and place, purpose, persons/entities involved, etc. – of each transaction and use the data thus collected for taxation, terror watch, and various other political/policing purposes.
The political groundwork for ushering in the absolute rule of digital money is now going on in full swing in many developed countries, with economists and the media being roped in. A relatively more convincing and moderate route map toward cashless society was put forward by Kenneth Rogoff, a former chief economist of the IMF and author of the influential 2016 work The Curse of Cash, who proposes slow phasing out of all cash starting with what they call big bills (high denomination notes) even as other experts suggest more radical measures.
Against the Intrusive State:
Voices in Defence of Cash
The whole idea of depriving citizens of the right to hold cash has come up against vigorous opposition from concerned citizens. Writing in The American Thinker, Mike Konrad tells us how he thinks governments will handle the situation arising out of the people’s preference for keeping cash at home rather than paying negative interest:
“Don’t worry. Governments will rise to the occasion and soon will be making cash illegal. People will be forced to put their money in banks or the market, thus rescuing the central governments and the central banks that are incestuously intertwined with them. …
“Beyond that, cash is probably the last arena of personal autonomy left. … It has power that the government cannot control; and that is why it has to go.
“Of course, governments will not tell us the real reasons. Might provoke a reaction. We will be told it is for our own “good,” however one defines that. It will be sold to us as a benefit. …
“Side stories will inform us that mugging is down. Crime is finally being defeated. What won’t be reported will be that hacking will shoot up. Bank fraud will skyrocket. … Poor people … will be told that the rich can no longer hide their money and will be forced to pay their fair share.
“…… we will be told that criminal enterprises will have been hurt badly. Their mountains of cash are irredeemable. Don’t you believe it. Rather, there will be a spike in the price of Bitcoins during the conversion. Bitcoin’s anonymity has already spawned major illicit franchises on the darknet. These will grow.
“The real purpose of a cashless society will be total control: Absolute Total Control….
“However, it will be sold to us as expedient simplicity itself, freeing us from crime: Fascism with a friendly face.” (Here Comes the ‘Cashless Society’,February 8, 2016)
Similar apprehensions have been voiced by many others. Thomas DiLorenzo, economist and Mises Institute Senior Fellow, observed in course of an interview:
“The state will make more and more use of “threats of terrorism” to seize financial assets. It is already talking about expanding the definition of “terrorist threat” to include critics of government like myself. The American state already confiscates financial assets under the protection of various guises such as the PATRIOT Act. I first realized this years ago when I paid for a new car with a personal check that bounced. The car dealer informed me that the IRS had, without my knowledge, taken 20 percent of the funds that I had transferred from a mutual fund to my bank account in order to buy the car. The IRS (The Internal Revenue Service) told me that it was doing this to deter terrorism, and that I could count it toward next year’s tax bill.”
We in India certainly do not face such a situation at this moment.Butthe elaborate preparations already underway for quite some time, as indicated below, must be resisted and reversed now if we are to avert an Indian version of the digital dictatorship currently haunting Europe and America.
American Involvement in Digital India
Over the last five years or so, concerted effort are being made by the American digital finance lobby with full support of the US state to promote the use of plastic money and grab the lion’s share of this emerging sector. Here are some of the more important milestones.
The “Better Than Cash Alliance” (BTCA) was formed in 2012 to push back the use of cash globally. Based at the UN, it is “a partnership of governments, companies, and international organizations that accelerates the transition from cash to digital payments in order to reduce poverty and drive inclusive growth.” Its founding members include the Bill and Melinda Gates Foundation (Microsoft), Visa, Mastercard, Citigroup and Omidyar Network (eBay) the Ford Foundation and the US government’s development agency USAID. It is easy to see that most of these are ‘world leaders’ (read ruling monarchs) having a direct stake in the digital payments sector or to use a more fashionable term covering both emerging technologies and firms driving change in this sector, the fintech ecosystem.
As part of the 2014 Spring Meetings of the World Bank Group including the Consultative Group to Assist the Poor (CGAP) and IMF, a session on digital finance was held on 14 April. The forum was inaugurated by the CEO of International Finance Corporation and other participants included big names like Walt Macnee, president of the MasterCard Center for Inclusive Growth. Speaking on the occasion, Sandhya Rani, postmaster general of Andhra Pradesh, emphasized the huge potential of digital finance on rural development and the role the India Post can play with over 155,000 post offices, most of which are in rural areas. It is to be noted that such involvement on India’s part predated the installation of the Modi Government.
In 2015, USAID announced a formal partnership with the Indian finance ministry to advance digital transactions in India. In January next year, USAID presented the report titled “Beyond Cash”.
In September 2016, McKinsey Global Institute issued a report titled “Digital finance for all: Powering inclusive growth in emerging economies”. It estimated that widespread adoption of digital finance can boost the GDP of all emerging economies by as much as $3.7 trillion by 2025, a 6 per cent increase versus a business-as-usual scenario. “India could see a boost of $700 billion, an 11.8 per cent increase by 2025. This additional GDP could create up to 95 million new jobs across all sectors, 21 million of them in India,” it said.
On October 14, 2016, the partnership between USAID and the finance ministry to advance digital payments was “taken to a new level” by the creation of the “Catalyst” at a conference in Delhi. It was decided that the project would be implemented in a single city as a pilot to increase digital payments before it is taken to other cities. “India is at the forefront of global efforts to digitize economies”, USAID Mission Director to India Jonathan Addleton said in a statement.
In July 2016, a report titled “Digital Payments 2020” (one of many such reports from various US institutions) was prepared by the Boston Consulting Group and Google with “guidance” from Visa and the National Payments Corporation of India among others. It was remarkable for leaving out all the usual nice words about financial inclusion etc. and instead talking of India’s digital payments opportunity as a “$500bn pot of gold” and of what was to be done to “grab” it.
In less than a month, Modi gatecrashed into the digital arena in his characteristic style with the 8 November announcement.
We can see that the digitalisation process (including AADHAR, a vital link in the chain of the proposed mass digitisation program) was initiated during the UPA regime; now with the whip of Note Ban Modi seeks to shove the entire population and the whole economy of India into the willing arms of big banks, payment gateways, internet and mobile service providers and other stakeholders in digital finance. In the process the so-called ‘informal’ sector, actually the mainstream social and economic lifeline of “we the people of India”, is being subjected to yet another cruel bout of what Marx called the primitive accumulation of capital, as it has always been in the past. We shall come to that in the second part of this article.
What India Has Done to its Money is Sickening and Immoral
Steve Forbes, Editor-in-Chief of Forbes magazine
Dec 22, 2016
“…What India has done is commit a massive theft of people’s property without even the pretence of due process — a shocking move for a democratically elected government.
“…Not since India’s short-lived forced-sterilization programme in the 1970s — this bout of Nazi-like eugenics was instituted to deal with the country’s ‘overpopulation’ — has the government engaged in something so immoral.
“India is the most extreme and destructive example of the anti-cash fad currently sweeping governments and the economics profession.
“Countries are moving to ban high-denomination bills, citing the rationales trotted out by New Delhi. But there’s no misunderstanding what this is truly about: attacking your privacy and inflicting more government control over your life.
“By stealing property, further impoverishing the least fortunate among its population and undermining social trust, thereby poisoning politics and hurting future investment, India has immorally and unnecessarily harmed its people, while setting a dreadful example for the rest of the world. … As for the digitisation of money, it will happen in its own good time if free markets are permitted.” — Box End
[To be concluded]