Demonetisation wasn't initiated only by Narendra Modi, says new book

In his memoir, former president Pranab Mukherjee writes that the idea had been discussed in Parliament and raised mainly by non-Congress parties several times, particularly from the 1970s to the '90s

PM (Narendra) Modi had not discussed the issue of demonetization with me prior to his announcement on 8 November 2016. I learnt of it along with the rest of the country when he made it known through a televised address to the nation. There has been criticism that he should have taken lawmakers and the Opposition into confidence, before making the announcement. I am of the firm opinion that demonetization could not have been done with prior consultation because the suddenness and surprise, absolutely necessary for such announcements, would have been lost after such a process. 

Therefore, I was not surprised when he did not discuss the issue with me prior to making the public announcement. It also fitted in with his style of making dramatic announcements. According to reports, he spoke of it at a cabinet meeting and got the cabinet’s consent just a short while before he went on air to tell the nation that high-value currency notes had been demonetized. 

However, after delivering his address to the nation, the PM visited me at Rashtrapati Bhavan and explained to me the rationale behind his decision. Modi outlined three main objectives of demonetization: tackling black money, fighting corruption and containing terror funding. He desired an explicit support from me as a former finance minister of the country. I pointed out to him that while it was a bold step, it may lead to temporary slowdown of the economy. We would have to be extra careful to alleviate the suffering of the poor in the medium to long term. Since the announcement was made in a sudden and dramatic manner, I asked the PM if he had ensured that adequate currency was there for exchange. 

Following the meeting, I issued a statement extending support to the principle of demonetization. I maintained that it was a bold step taken by the government that would help unearth unaccounted money as well as counterfeit currency. Incidentally, Bihar CM Nitish Kumar agreed to extend full support to the demonetization decision after I had endorsed it. 

But demonetization wasn’t an exercise initiated only by PM Modi. It had been discussed in Parliament and raised mainly by non-Congress parties several times, particularly from the 70s to the 90s. I remember in the early 70s, I had sent a note on demonetization to the PMO after the successful implementation of the Voluntary Disclosure of Income and Wealth Ordinance, 1975. A large amount of concealed income and wealth was declared by defaulters who stood in queues for long hours before officers of the Income Tax Department, in the last three days before the scheme was scheduled to close. It was regarded as the most successful one among several such schemes announced earlier by ministers like Mahavir Tyagi, T.T. Krishnamachari and Morarji Desai in the late 50s and 60s. 

The Presidential Years: 2012-2017 

Author: Pranab Mukherjee 

Publisher: Rupa

Price: Rs 695; Pages: 216

 

Indira Gandhi, however, did not accept my suggestion, pointing out that a large part of the economy was not yet fully monetized and that a substantial part of it was in the informal sector. Under these circumstances, she argued, it would be imprudent to shake the faith of people in currency notes. After all, currency notes issued by the Reserve Bank of India (RBI) represent the commitment of a sovereign government. Except for the one-rupee note, which was signed by the finance secretary, all other currency notes above that value were, and are, signed by the RBI governor. 

A similar sentiment seemed to have been echoed when, even after joining the European Economic Community—also known as the Common Market—the British government had not disturbed the faith of the citizens of its country, as well as international customers, in the currency notes issued by the sovereign government. In other words, lack of confidence in currency notes leads to lack of confidence in the credibility of the sovereign government. 

Clearly, the problems associated with the demonetization policy were all well-known and the sufferings in the informal sector were also understandable. It was, therefore, natural for the decision to be questioned. Such decisions also shake the confidence of the people in the banking system. Former PM Manmohan Singh observed that as a result of demonetization, the impact on GDP growth would be at least 2 per cent negative growth—this has been established by the GDP growth numbers during the subsequent weeks of the government’s dramatic decision. He used very strong words, describing it as ‘organized loot and legalised plunder’, with regard to the limitations of withdrawal of cash from the bank. The strong expression he used was because of the fact that genuine customers of the bank deposit money in good faith so that, in case of need, they would be able to withdraw the money. That facility had been denied in the immediate aftermath of the exercise. 

Demonetization had been discussed in Parliament off and on for 17 years. And yet, when the announcement came, it brought with it a good amount of shock. Let us not forget that everyone is impacted by unaccounted cash in daily life, and unaccounted cash is amassed through the non-payment of taxes. Adequate measures were not taken to obviate the attendant problems that people faced. Further, large parts of the country continue to remain unmonetized and the practice of barter system continues in tribal areas. There is no doubt that demonetization and the consequential decisions of the government have had an adverse impact on the economy and GDP growth, resulting in an increase in unemployment in the medium term. The informal sector of the economy, which dealt with cash, was hurt severely.

However, it is difficult to assess the exact impact of demonetization, close to four years after it was implemented. But perhaps one thing can be stated without fear of contradiction: that the multiple objectives of the decision of demonetization, as stated by the government, to bring back black money, paralyse the operation of the black economy and facilitate a cashless society, etc., have not been met. 

Reprinted with permission