DeMo was ethically flawed

‘ There are three kinds of lies: lies, damned lies, and statistics .’ – Benjamin Disraeli

After the RBI’s latest revelations — of 99 per cent of the extinguished currency having returned to the banks — media pundits and economists have wasted no time in saying that efforts to obliterate black money have failed. However, the question that really needs to be asked goes beyond the economic merits of DeMo. It lies in the realm of ethics. Even if we concede that demonetisation did have some positive effects (arguably raising the level of tax compliance), can that justify the enormous pain it inflicted on those who are not responsible for the black economy? Couldn’t it have achieved its goal of smoking out black money by inflicting less pain on people?

Often, the discourse of the state is couched in a cost-benefit mindset. The ‘developmental’ benefits of a dam are seen to offset the displacement of lives and livelihoods of those in its command area. On each such occasion, the state persuades the mainstream to buy into this cost-benefit framework, where pain goes unmeasured. And so this time the spiel was that of the people being urged to make a “sacrifice” in the larger interests of the nation. Sacrifice is associated with far more onerous issues — such as winning independence, or saving lives. But here, a ‘war on black money, a surgical strike, had whipped up a surreal, distinctly militaristic fervour.

All this while, we were seeing top-down statism at work: the Centre was non-transparent, the RBI even more so. There were no explanations on offer in Parliament, even after the event, on why demonetisation was the preferred course of action.

When society is herded to accepting that some people will inevitably suffer for the greater common good, it lets the Government off the hook. The victims of demonetisation — those who lost their jobs or lives — have not been compensated. They went from pillar to post, from bank branch to bank branch, from ATM to ATM, from medical shop to medical shop. There were instances of Adivasis in the interiors of Chhattisgarh losing their lives because, stranded with useless currency, they could not reach hospitals on time. The Government displayed insensitivity towards the concerns of a society where a quarter of the population is officially illiterate and a greater number financially so.

According to a June 1, 2016, press release of the finance ministry announcing the setting of India Post Payments Bank: “All citizens, especially 40 per cent of the country’s population that is outside the ambit of formal banking in the country will benefit from this project.” (The RBI annual report is silent on the extent of financial inclusion.) The push for debit cards is predicated on a greater share of the population having active bank accounts — whether Jan Dhan accounts have become active after DeMo is difficult to say.

In this sense, digitisation poses an additional hardship on individuals locked into cash, even if one accepts that it provides a trail for the taxman. Indeed, small self-employed businesses dependent on the cash economy, such as agriculturists, small-time retailers and contractors, do not seem to have recovered from the impact of the disappearance of cash, and of demand for their services. Underlying the push from cash to card is the subtle criminalisation of all users of cash.

Yet, the RBI annual report claims that the demand for cash has reduced, stabilising at a new normal, at 87 per cent of its pre-demonetisation peak. The Economic Survey seems to take a subtle dig at the RBI here, saying: “Assuming — and this is a critical assumption — that remonetisation has happened fully and that the supply of cash is now fully reflective of demand, then today’s level of cash can be compared with pre-demonetisation levels.” If the RBI has not printed the requisite notes, the demand cannot be said to have fallen.

The virtues of a cashless society are questionable. For one, everybody knows we spend less when we use cash than when use cards. And unlike in countries such as the US or Australia, families in India which tend to be extended and supporting several dependents need to spend less and save more. Therefore, why would the majority want to use plastic money?

According to Economic Survey 2016-17 , “...the growth of taxpayers post-demonetisation...amounted to about 5.4 lakh taxpayers or 1 per cent of all individual taxpayers in just a few months. The addition to the reported taxable income (of these new payers) was about ₹10,600 crore”. While this might be true, the question is whether it is more than a drop in the ocean. How DeMo has played out for the property sector is uncertain, with the Economic Survey reporting a recovery in prices after an initial blip.

If tax compliance is very important, the erosion of competition with the small sector being pushed to the wall is perhaps even more so. The organised sector was not as hurt by DeMo; this is borne out by the fact that the markets during that period were not unduly affected. However, a slump in jobs, demand and growth, post DeMo, has hit everyone.

DeMo was an assault on the economic rights of ordinary people, with an all-knowing state offering no explanation. At another level, the same imperious tendency was in evidence when the attorney-general argued against the right to privacy in the Supreme Court saying that for the poor it was not relevant.

An alternative approach that attacks the flow of black money would not have lent itself so well to populism and raw state power — it is one that simply entails the tax administration doing its job better. DeMo as a move acknowledges the failure of the tax machinery on the one hand, and yet relies ever more on it after the event.

Coming back to Disraeli: No analysis of anything concerning the human condition will stand scrutiny without taking into consideration the human condition. Which means, to rely on numbers to tell you the story of the economy which is based on transactions conducted by sentient, emotionally-charged human beings and not robots, is to miss the story altogether.