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An economy without seat belt

An economy without seat belt

The declaration by Prime Minister Narendra Modi two years ago, i.e. on the night of 8 November 2018, invalidating 500 and 100 rupee denomination currencies, was perhaps the most consequential one in the history of independent India. The government and Modi fans described the move as an extra-ordinary decision that would strike at the root of parallel economy and black money.

The list of claims was long: Black money is going to disappear, extremism is going to end, the country is moving to a formal economy, and it is switching to an era of cash-less transactions. At the time of demonetisation, Rs 15,41,793 crore worth of currency in denominations of 500 and 1,000 was in circulation. When that was declared invalid, the economy would be, believed most innocent souls, purged to a large extent. The spokesmen of BJP were claiming then that at least five lakh crore rupees would fail to return to the bank, and the national exchequer would gain the strength to the value of corresponding amount . Howeer, before long things were moving in such a way as most sensible minds could easily understand that Modi was pushing the country into a major economic disaster. Lakhs of people struggled to stand in queue to withdraw or exchange currency. About a hundred people are estimated to have died while standing in such queues. The decision literally jolted the sector of small-scale and medium industries. At the same time, the decision did not in the least affect big industrialists, and exponents of crony capitalism. And that Ambani and Adani had prior knowledge about the decision, was diclosed by none other than BJP's MLA in Rajasthan Bhawani Singh Rajawat. In short, as Arvind Kejrival alleged, if one suspected demonetisation as the biggest corruption of history, it would not be out of place.

One of the objectives of demonetization was to get rid of black money. But, as per the report released by Reserve Bank of India itself, 99.3 % of banned notes have returned to the banks. In other words, unlike what Modi and his admireres would argue, the note ban did not give even the slightest hurt to black money.

If we look at it, out of the 15,41,793 crore worth of currencies in 500 and 1,000 notes in circulation, 15,31,073 crore worth of currencies came back to the bank, which means only a mere 10,720 crore rupees did not return to the banks. All this cannot be assumed to be black money. Notes in the hands of NRI's and currency that could not be produced to the banks by the deadline, may form a major part of this. The amount spent on printing of new currency, collection and disposal of banned notes, and allied measures on demonetization would run into multiple crores. Thus it turns out that it was for this mere 10,720 crore rupees that the government ventured on this folly that completely shook the country. In fact, the government and BJP should apologise to the nation for this gross mistake. And the contention that the secessionism in Kashmir would end, still remains a big joke.

When demonetisation is turning two, the Central Government is moving ahead with a still more ill-advised decision. The Centre has demanded that a third of Reserve Bank's reserve funds, i.e. 3.6 lakh crore should be released to the Centre. The indication is that the country is in a severe economic crisis and the government is a total failure in finance management. The government does not have enough funds due to its own lopsided decisions. It has to declare some populist programmes that can throw dust in the eyes of people ahead of the general election of 2019, and take action on some of them. For that, what the government plans is to kill the goose laying the golden eggs. That is the reason why it is trying to put its hands into the RBI's pocket and come out with new cash. But, the Reserve Bank has already informed the government that it cannot part with reserve funds. Earlier, Raghuram Rajan who had his disagreement with demonetisation, was unceremoniously ejected from his post of RBI Governor. Now the country is getting anxious about how the government will implement its totalitarian agenda on RBI too. The substance lies in what Raghuram Rajan said on Tuesday: " The RBI is something like a seat belt. As a driver, the driver being the government, it has the possibility of not putting on a seat belt but of course if you do not put on your seat belt, you get into an accident and the accident can be quite severe. " The measures of the central government, forgetting even the basic lessons of finance management, amount to throwing away the seat belt itself.

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