Shouldn’t Decisions Like Demonetisation Have Parliament’s Stamp?

Can a democratic polity allow its executive arm to make a decision as far reaching as demonetisation? 

(Photo: Harsh Sahani/The Quint)

A well-known columnist was of the view that the government’s talk on demonetisation was like going from the indefensible to the incomprehensible.

And, he was not the only one to hold such views. There were many others, including former Reserve Bank of India (RBI) Governor Raghuram Rajan, who opined that the short-term pain may exceed likely long-term gains.

However, with the benefit of hindsight, we could say that demonetisation may have some tangible long-term benefits. How much and after how many months or years, we do not know.

Also Read: What’s the Verdict on Demonetisation Data? Q&A With Raghav Bahl

We have no reason not to believe that the intention behind the decision was noble: to fight the menace of black money. The instrument used, though, was the most blunt one ever employed anywhere in the world.

Few Gains and Lots of Pain

What did we get in the short-term? A gain of Rs 16,000 crore, as per provisional estimates, for the RBI as the old notes worth the value did not come back to the system, a modest spike in tax base, and a welcome move towards the formalisation of the informal sector.

But, the debit side has multiple entries. Not only did we lose many precious lives directly or indirectly, there was severe dislocation in businesses across the country, putting brakes on an otherwise accelerating economy.

Also Read: Dear PM Modi, Demonetisation Worked But Could Have Spared the Poor

The direct cost of funding the notes exchange programme (printing new notes, recalibration of automated teller machines throughout the country, and logistical cost of transporting new notes on a war footing) was much higher than the gain made.

What are the likely gains in future? The most talked about is accelerated digitisation or formalisation of the country’s economy. But, didn’t we embark on that process much before demonetisation?

Digitisation Was Underway Much Before Demonetisation

I analysed RBI’s data on transactions at ATMs and Point of Sale (POS) terminals in 2014 to get a sense of changing consumer behaviour vis-à-vis cash.

I found out that the average number of transactions at an ATM fell by 26 percent between May 2012 to May 2014, while the same at POS terminals rose 15 percent in the same period. Fewer transactions at ATMs mean lesser propensity to use cash. The most immediate trigger for change then was the RBI mandate, asking banks to go for the two-tier security system, mitigating the risk of fraudulent online transactions.

If such a small step could trigger such a big change, did we need a massive demonetisation exercise to push the country to become cashless?

Rapid expansion of taxpayer base is now being given as yet another reason for demonetisation. According to the latest data, the growth in number of returns filed this year has been 24.7 percent compared to 9.9 percent last year. In fact, the growth in number of returns filed has been in the region of 7 to 12 percent since 2013-14. The growth this year has certainly been impressive and laudable.

But, isn’t the GST a better instrument towards formalisation of the economy? And we all know that tax evasion becomes extremely difficult in a formal set up. The fact that the GST was coming, did we really need demonetisation to expand the tax base?

Also Read: How Modi and Jaitley Rewrote The Demonetisation Narrative

GST Will Lead to Formalisation of Economy Any Way

Other claimed benefits of demonetisation- hoarders of black money are running for cover and sources of terror fund have dried up- are just claims and will take a long time to be proved conclusively.

Now there is a new claim that nearly 14,000 property transactions of over Rs. 1 crore are under the IT department’s scanner. Can something like this be even remotely connected to the demonetisation? How can this be touted as one of the fallouts of the November announcement?

The point I am trying to make is not whether demonetisation has been a huge success or a mega failure. Data released so far, the latest being about GDP growth rate touching 3-year low, suggests it has done more harm than good.javascript:void(0)

Also Read: There Were Better Alternatives to Demonetisation: Raghuram Rajan

While we will have to wait a while to arrive at a definitive conclusion, there is no denying that it has been hugely disruptive. From honest taxpayers to black money merchants; from upper-middle class to rural poor; from small businesses to large corporations, and from local kirana stores to large e-tailers – the decision impacted all.

Can a democratic polity allow its executive arm to make a decision as far reaching as this one? The executive arm is expected to act swiftly and decisively in case of a war or when faced with natural calamity. In case of terrorist attacks or when required to launch rescue operation in case of stampede, the government machinery has to be alert and cannot wait for wider consultation.

Also Read: It’s Official: Demonetisation May Have Hurt More Than it Helped

Can something like this be said about decisions like demonetisation, banks’ nationalisation, or the imposition of internal emergency? There are far important decisions to be left alone to the executive arm. Wider consultation ought to happen in such cases. The executive can say that secrecy is the key to such decisions. If that is the case, why not go for closed door Parliament session or an all-party meeting?

Why assume that only members of the ruling party can maintain secrecy and others are all crooks? Just imagine a well-thought out demonetisation decision fully backed by Parliament (and hence the will of the people) would have achieved much more.

Also Read: Demonetisation: The Big Event That Turned Out To Be A Non-Event

Is a rethink required here? After all, the question is not whether demonetisation was good or bad. More important issue we should be debating on now is how to make such disruptive decisions more effective and less painful. Wider consultation is the only way out.

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