By Sadhan Mukherjee*
One of the tactics used by ruling circles to wean away poorer people from their financial worries and inflationary pressure is to demonetise the high value currency in the name of attacking black money. This method has been used in several countries on the promise of making their life smoother and hassle free from the effects of a parallel economy. People are told that this will eliminate black money and terrorist funding. They are assured, this might entail some “temporary difficulties” but the end result would be good. But in reality this does not happen.
The results of demonetisation in recent times in different countries are quite interesting depending on the vigilance exercised by people. But it has not met the stated reasons of fighting black money anywhere.
Venezuela went in for demonetisation on 16 December by withdrawing its most popular 100 Bolivar note and replacing the same with higher denomination notes, just like what India did with its most popular Rs.500 and Rs.1000 notes on 8 November. The reason for it, the Venezuelan government said, was to fight inflation raging at 475 times, according to IMF, and to curb black money.
Like India, Venezuela was unable to supply the requisite amounts of replacement notes to the population. It had to withdraw the step faced with strong popular anger. In India public anger seems to be growing only now after the realisation that this step was not going to do much to unearth the black money except to heap misery on ordinary people.
Venezuela has postponed its demonetisation till 2 January 2017 while India is going ahead with it claiming that by December 31, things will be all right. Just a few days ago, however, the Indian government has said that the process might take some more days. That could as well be the understatement of 2016. Unlike India, Venezuela is a sharply divided country. On one side are the land barons, the military, big merchants and conservative clergy while on the other are the masses of people, white collar workers, organised labour and landless peasantry. The mass consciousness level there seems to be more acute than in India.
The experience of other countries in this field is also quite illustrative. In 1982, Ghana ditched its 50 Cedi notes to tackle tax evasion and cut down excess liquidity. This led to the people of that country support the black market and start investing in physical assets as well as to buy foreign currency which obviously made the economy weak. In 1984 Nigeria also tried demonetisation and its economy collapsed.
In 1987, Myanmar’s military invalidated around 80% value of money to curb black market. The decision led to economic disruption which in turn gave rise to mass protests against the military rule, resulting in the killing of many protesters.
In 1993, Mobutu of Zaire introduced demonetisation. It was a failure and Mobutu was ousted in 1997.
Mikhail Gorbachev ordered withdrawal of 50 and 100 rouble notes in USSR in 1991 to wipe out the rampant black market. That move didn’t go down well with the citizens and resulted in a coup attempt which overthrew him and ultimately led to the break-up of the Soviet Union and end of socialism in Europe. In 1998 re-denomination of rouble was done knocking off 3 zeros from rouble value, followed another 2 zeroes being removed in 2010. But the economy remained in a mess.
In 2009 Zimbabwe demonetised its Zimbabwean dollar which was introduced in 1980 following its independence. Then its value was set at par with Rhodesian and US dollar. The country was soon beset with hyperinflation. Revaluing was done in 2006, 2007 and 2009. But the situation did not improve. Zimbabwe used to have even one hundred trillion dollar notes!
Its economy went for a toss when President Robert Mugabe issued edicts to ban inflation through issuing laughable value notes. After this demonetisation, the value of a trillion dollar dropped to 0.5 dollar and these were also put up for sale on eBay. The country went in to adopt other currencies and Zimbabwean dollar was virtually abandoned in 2009. In 2015, a new demonetisation was done with a basket of currencies including US $ and Indian rupees – all which are valid currencies in that country.
In 2010, demonetisation in North Korea was effected. North Korean boss Kim-Jong ll knocked off two zeros from the face value of the old currency to get rid of the black market. But it left people with no food and shelter. So much so that Kim apologised to the people for his reform and reportedly executed his finance head.
Pakistan had decided through a gazette notification dated 4 June 2015, that existing banknotes of rupees 10, 50, 100 and 1,000 would cease to be legal tender from December 1, 2016. But on 11 June 2015 a notification issued by the State Bank of Pakistan clarified that the old notes would remain exchangeable at banks till 20 November 2016. However, field officers of the central bank would continue to accept the notes of older design till December 31, 2021.
On 19 December Pakistan’s Senate passed a resolution seeking withdrawal of high denomination Rs 5,000 currency notes “in a phased manner” to curb the flow of black money. The resolution said that the withdrawal of Rs 5,000 notes will encourage the use of bank accounts and reduce the size of the undocumented economy. It said the withdrawal of the currency notes should take place within three to five years in order to purge markets of the notes.
But Pakistani government now feels that the withdrawal of these notes will create crises in the market and the people will resort to foreign currencies in the absence of Rs 5,000 notes. Currently 3.4 trillion notes are in circulation in Pakistan of which 1.02 trillion notes are of Rs 5,000 face value. Pakistani government on 26 December has opted out of this move.
It is clear that demonetisation requires a lot of preparations and consultations. It cannot be done in a hurry and by whims and fancies putting the life of ordinary people in great difficulty. The only successful process of demonetisation in recent times has been the change over from national currencies of 12 countries to Euro.
For this gigantic operation, work was started a couple of years ago before its introduction in 2002 to replace the national currencies. When Euro was actually introduced, the banks and ATMs had over 90% of the required cash for the changeover. The transition was therefore smooth with the people in participating countries being educated beforehand about it. The local currency also remained valid for quite some time as legal tender.
Here in India 86% of the 16.5 trillion currency notes in circulation were done away with in one go but the required replacement currency was not ready nor were people educated about it. Even after 50 days when these are being written, banks do not have enough money to pay those who deposited them in the banks in good faith. Euro currency changeover was a success but even then it did not solve Europe’s economic problems. Of course, black money is not so much of a parallel economy in Europe, unlike in India where it is a gigantic problem.
As Wikipedia quotes: “According to the data provided by the Swiss Banking Association, India has more black money than the rest of the world combined. Indian Swiss bank account assets are worth 13 times (1300%) the country’s national debt, and, if this black money is seized and brought back to the country, India has the potential to become one of the richest countries in the world.”
But so far this black money and also the black money in the country has remained untouched and despite the bombastic claims of Modi government of bringing back the Swiss bank deposits in 100 days, nothing has come so far.
Even in Europe, there is now a lingering fear that Euro is on the verge of a third recession and as debt burdens grow from Italy to Greece, investors will take fright, populist politicians will gain ground and –sooner rather than later—the Euro will collapse. Money managing is no easy job, one may conclude but the point is how much must ordinary people suffer.
Now the Indian government is not talking much about unearthing black money. After 62 changes since inception of demonetisation and consequent mess, it is stressing cashless economy and switching over to digital payments with all sorts of incentives and lolly pops. But that again is a Tughlakian concept. There is nothing like a cashless economy so far. Bloomberg has given some figures quoted by former finance minister P Chidambaram (Indian Express, 25 December 2016) which is highly informative.
The Table below shows the use in percentage of forms of payments for purchases in some developed countries:
Which world Prime Minister Narendra Modi and his aides are living in? They cannot even stop the inflow of unaccounted money. The Income Tax department has so far seized some Rs 500 crore in cash of which as much as Rs 92 crore were in new Rs 2000 notes! You may seize some unaccounted for money but it’s almost impossible to stem the generation of black money. How much the government uses “the Big Brother is Watching You” methods, India cannot become a cashless economy or a society shorn of black money and corruption by these moves.