Demonetisation: A Draconian Drive Or A Developing Device

India’s demonetization drive, intended as an embargo on the persistent corruption practice prevalent in the administrative horizon, as a caveat on the funding of terrorist and trans-national armed conflicts, as a stricture on reduction of the counterfeit currency notes already in circulation and as a master-stroke to unearth black money or parallel economy stashed in currency notes, has, in reality, led to a diabolic financial tragedy having corroded the fundamental pillars of the pyramid of Indian Economy and propagated a new protracted corruption within the centralised sectors.

“Demonetisation” is “the art of stripping a currency unit of its status as legal tender”. Currency includes coins and paper notes of different denominations issued by the Central Bank of a country, hereto, the Reserve Bank of India, duly authorised by the Sovereign. Every bank note in a country is a promissory note by the government and acts as a legal tender duly signed by the head of the Central Bank. To demonetise means to take away the promise of it being the legal tender of the said bank notes, and thus, depriving it of its monetary value by the sovereign authority.

According to Section 26 of the Reserve Bank of India Act, 1934, statutorily establishing “legal tender character of notes” in its sub-Section (2) envisages the following: “On recommendation of the Central Board, the Central Government may, by notification in the official Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender, save at such office or agency of the Bank and to such extent as may be specified in the notification. ”

In 1971, the Wanchoo Committee headed by Justice K. N. Wanchoo had submitted an interim report in which it had recommended, among other reforms, the demonetisation of high-value currency notes. 2Walking over the lane of history, India has witnessed three instances of demonetisation. One, being in January, 1946, when the Reserve Bank of India discontinued ₹1, 000 and ₹10, 000 notes; another, being in 1978, when the Morarji Desai Government demonetised the high denomination bank notes of ₹1, 000, ₹5, 000 and ₹10, 000 and the historic one, being on the 8th day of November, 2016, when the Prime Minister Narendra Modi announced the demonetisation of 86% of India’s currency in circulation by taking away the legal tender of ₹500 and ₹1, 000 bank notes.

The Supreme Court in a number of cases has interpreted the word ‘any’ to mean ‘every’, based on the context and the subject matter of the statute. For example, the Apex Court in Sheikh Mohd. Omer v. Collector of Customs, Calcutta & Ors. 3, interpreted ‘any prohibition’ in Section 111(d) of the Customs Act, 1962 to mean ‘every prohibition’. Similarly, in Lucknow Development Authority v. M. K. Gupta, the Apex Court interpreted ‘service of any description’ in Section 2(o) of the Consumer Protection Act, 1986 to mean service of ‘every’ description.

Previously in the case of Jayantilal Ratanchand Shah v. Reserve Bank of India & Ors. 5, the constitutional validity of the High Denomination Bank Notes (Demonetisation) Act, 1978 and the legality of certain orders passed thereunder were under challenge by invoking the powers under Article 32 of the Constitution of India.

Despite the sovereign sanction, constitutional mandate and legality of demonetisation as a machinery of the Union Government in collaboration with the Reserve Bank of India, the past experiments of demonetisation have ended in failure as per the inference taken from the Report of 2012 titled “Measure to tackle Black Money in India and Abroad”. The Black Money Committee headed by the Chairman of the Central Board of Direct Taxes (CBDT) in 2012 noted that demonetisation is impractical, despite its noble aims. It is clear that Section 26(2) of the RBI Act empowers the government to demonetise, that is, to declare any series of notes as illegal tender. But neither the RBI Act, nor the Banking Regulation Act, 1949, empower the government to impose restrictions on cash withdrawals or deposits in the manner it has been done, and to discriminate between holders and non holders of bank accounts, as the present notification has done. Such actions require an authorising legislation, either an Act of Parliament or an Ordinance. Both in 1946, and in 1978, similar actions were authorised by an ordinance. The failure to issue an ordinance to provide the legal basis for the demonetisation notification this time renders the demonetisation exercise illegal. Even if the act of demonetisation is severed from the restrictions placed on people’s access to their cash and bank accounts, the latter stipulations are both illegal and unconstitutional on several counts.

Demonetisation, in the way of currency purge, has deregulated the basic structure of the Economy; outraged the economic wellbeing of modern or contemporary, developed or developing economies; monopolised the functioning of the Central Bank and has led to economic depression, hyper- inflation and financial anarchy, across the Globe. Instances being:

1. In 1969, at the United States (U. S. ), wherein there was demonetisation of $10, 000 and $1, 000 bills;
2. In 1982, Ghana ditched their 50 cedis note to tackle tax evasion and empty excess liquidity;
3. In 1984, the Nigerian Government introduced new currency notes and banned the old ones;
4. In 1987, Myanmar invalidated around 80% of currency to curb or circumscribe the blackeconomy;
5. In 1991, the Soviet Union (Russia) withdrew large ruble bills from circulation;
6. In 1993, at Zaire massive demonetisation took place;
7. In 1996, Australian Government issued complete demonetisation;
8. In 2010, at Zimbabwe and North Korea, wherein certain currency units were demonetised torestrain hyperinflation, rather it gradually led to great economic depression.

The entire India society was caught in the demonetisation crossfire of 2016. India’s demonetisation initiative witnessed serpentines queues of innocent people as well as illegal couriers to exchange notes; struggle in numerous sectors of the Indian Economy; revolution of grassroots businesses; cashless economy; upsurge in digital transactions and online banking system; downfall in Gross Domestic Product (GDP), People’s Purchasing Power (PPP), Human Resource Development Index (HRDI), Consumer Price Index (CPI) and inflation; streamlining unaccounted amount of money; uproar among innocent citizens, far away from the shock-doctrine economics; deaths due to such a ‘draconian drive; orphaning of livelihoods of rural India; illicit character of bank employees leading ti money laundering, corruption and fraudulent liasoning; and widowing the basic foundation of the Indian Economy. The most vulnerable sites of such a new protracted corruption are petrol pumps, e- commerce websites, banking system in toto, and the centralised agencies owned and controlled by the Union Government. India’s demonetisation initiative in 2016 caused a sudden breakdown in India’s commercialecosystem. Trade across all facets of the economy was disrupted and cash-centric sectors likeagriculture, small scale enterprises, labour and industry and the voluminous informal market werevirtually shutdown, with many businesses and livelihoods distorted and orphaned. This created animmediate cash crunch in the economy and paralysed all economic activities. The major sectors ofthe economy which shall bear the brunt in the short-term with long-term ripples in economicstandards are agriculture, small scale enterprises, unorganised sector, unbanked areas, real estate6and gold, tourism, District Central Co-operative Banks (DCCBs) and Primary Agricultural CreditSocieties (PACs). The nullification of 86% of India’s currency in a great demonetisation effort has completely disrupted the social, political and economic spheres of the world’s second largest emerging market and the world’s fastest growing economy of 2016.

In a developing and fastest growing economy like India, wherein 60% of the economy is agro- based, 78% of transactions in commercial markets takes place in cash, 7 10% of informal or black money stashed as currency notes, 70% of Indian population being miles and miles away from the basic infrastructure of formal institutions like banking system, 75% of population rural and backward and non-accessibility of the poor to structural and cultural resources to adapt to shock- doctrine economics, 86% of currency notes being demonetised has led to a great hustle in the Indian as well as Global Economy as well as in the commercial-institutional-market economy.

Demonetisation, coupled with the tune of cashless economy by the promotion of digital transactions and online banking system, has failed in developed countries like USA, China or France, and the situation in our developing economy is even precarious with even dire consequences like cyber piracy, cyber frauds, internet hacking and breakdown in the economic structures of the formal banking institutions.

Demonetisation has a negative impact on “INFLATION”. Consumer spending activity fell to a near halt. Activities in the real estate sector, which happens to the cash-centric and of undocumented transactions, slowed down significantly. The fall in the Consumer Food Price Index and the Consumer Price Index (CPI) exerts more downward pressure on inflation. Fast Moving Consumer Goods (FMCG) industry sales have dropped by one-third along with decrease in the People’s Purchasing Power (PPP). Cash stringency has compelled firms and employers to reduce wages, leading to insufficient income of the poor working class and therefore, resulting into a poor Human Resource Development InDEX (HRDI). The biggest failure of6 “Modi’s demonetisation to hit real estate, jewellery sectors hardest”, Hindustan Times, November 18, 2016. Government of India (2016), “Medium Term Recommendations to Strengthen Payments Ecosystem”, Report of the Committee on Digital Payments (Chairman: Shri Ratan Watal), New Delhi, December. A change in CPI year-on-year inflation between any two months is the difference of the current month-on- month change in the price index (momentum) and the month-on-month change in the price index 12 months earlier (base effect).

Article titled “Demonetisation: A Draconian Drive or A Developing Device?”demonetisation is the slowing down of Gross Domestic Product (GDP) by 2% back by at least a decade. 10The first indication of the devastate demonetisation had caused came from the fourth quarter, 2016-17 GDP numbers. The growth during that quarter was only 6. 1% with sectors such as manufacturing and construction slowing down. The private economy, leaving out government and agriculture, grew by a mere 3. 8% in Q4, 2016-17. For the same quarter last year, it had grown by 10. 7% – showing just how incredible the effect of demonetisation had been.

“Amartya Sen”, eminent economist, noble laureate, recipient of the Bharat Ratna calls the move authoritarian causing undignified misery to the innocent people of India. Recently, he proclaimed this note-ban is an unguided “missile” fired “unilaterally” by the government without adhering to the democratic conventions.

“Dr. Manmohan Singh”, former Prime Minister, profound economist, former R. B. I. Governor calls demonetisation as an “organised loot”, a “legalised plunder” and a “monumental mismanagement”.

“Kaushik Basu”, Senior Vice-President and Chief Economist at the World Bank exclaimed that the demonetisation drive is a political gambling which has trumped economics. Large amounts of illicit cash were broken into smaller blocks and deposited by teams of illegal couriers.

“Arun Shourie”, Former Economist at the World Bank, recipient of the Padma Bhushan, acclaimed the non-accessibility of the noble objectives of demonetisation to the rural India and stressed upon the tangible and intangible assets of black money.

Demonetisation on this scale is thus, a huge gamble with the Indian Economy and Indian Polity. The full-fledged consequences are difficult to predict. The best-case scenario is that economy will stay the course, after the initial disruption, by the neutralisation of black money. The worst-case scenario is a prolonged economic slowdown, economic depression, financial paralysis, and of an economic insurgency disrupting all the financial institutions and economic structures and derailment of the economic growth’s trajectory.

Though the Nation stands divided on the impact of demonetisation of Indian Economy, past experiments across the Globe and in India have ended in failure, being impractical, despite its noble aims. Such a huge step always comes with a cost and this time, unfortunately, the cost was borne by the common man. The Apex Court of India, while addressing the Public Interest Litigations (PILs ), and the Former Chief Justice of India, Justice T. S. Thakur opined that “what is actually portrayed as a ‘surgical strike’ on black money is actually a ‘carpet-bombing of the common man’ and warned the Union Government a recent mass riot if it fails to take immediate measures to alleviate the hardships of the traumatised common man”. Thus, demonetisation has had some negativemacroeconomic impact in India, implicative of being a draconian drive by the Union Government rather than being a developing device.