A Coercive State, in Full Flow
It was, finally, the anniversary of the currency demonetisation that brought out some truths about the source of the many goof-ups that put people through untold harassment. Ironically, the truth was told in a huge, self-laudatory article that had the temerity to dismiss the mistakes, as almost inconsequential. Before we go into it, let’s look at a couple of issues, to put into perspective how hasty decisions have thrown people and companies into turmoil. This is not limited to demonetisation (where new rules and circulars were issued almost every day), or to the ill-prepared launch of the Goods and Services Tax (GST) where, again, the government is back-peddling furiously, correcting mistakes and trying to smoothen things after it is clear that business and industry was hurting badly and struggling to cope.
The haste to trap black money credited to bank accounts has led to a decision to disqualify 300,000 directors of companies merely for delayed filing of annual accounts. This is a separate exercise from the decision to strike off 200,000 shell companies that the prime minister (PM) has mentioned in many of his speeches. Since this has not made media headlines, the government is in no hurry to find a solution. Innumerable large, medium, small and tiny companies are in deep turmoil along with a few lakh other companies where the disqualified persons are directors. Company officials crowding registrar of companies’ (RoC) offices are told that the government recognises the problem and some palliative will be offered, but nobody knows when. 
Meanwhile, companies are scrambling to find new directors to replace those who have been disqualified without so much of a warning or a show-cause notice. And, if any of our readers believes this is a criticism of this government’s functioning, it is. But let me also point out that these draconian provisions were pushed through in the Companies Act, 2013, piloted by Sachin Pilot, a Wharton School (US) alumnus, when he was minister of corporate affairs under the terrible second term of the United Progressive Alliance (UPA). Thousands of objections raised by industry associations to the oppressive and punitive provisions in the statute were ignored as the Bill was rushed through parliament. Moneylife had published a Cover Story ( Moneylife 4-19 September 2013)  on the implications of these brutal provisions. There is a lot worse in the Companies Act, 2013, which gives the government power to cripple company directors through fines and imprisonment. 
Let us return to the drastic decision to demonetise 84% of currency that first exposed this regime’s penchant for rash and harsh decisions. The best that supporters of demonetisation can claim is that the benefits will come later. The government argues that laundered money is now sitting in bank accounts and this leaves a trail which it is unearthing. The decision to de-register 200,000 shell companies (a good and bold decision), and the foolish one to disqualify directors, is a part of the attempt to bolt the stable doors. 
Whether it succeeds will depend on whether the tax machinery is able to prevent this money from being withdrawn without paying tax or even paying just 33% like other law-abiding taxpayers. Ultimately, everything is in the hands of individual tax assessing officers and, at this level, anecdotal reports indicate that there is no visible reduction in corruption or the tendency to harass taxpayers. 
We recently had the opportunity to listen to two bulge-bracket taxpayers, who are routinely harassed, despite paying tens of crores of rupees in tax. The first one said there is an improvement under this government—not because there was no attempt to harass him, but because, when he yelled back and asked a senior tax official whether he ‘seriously wanted to harass a law-abiding taxpayer?’, the officer backed off. There is fear of action, he concludes. The second one said he has no time or inclination to face harassment and humiliation, despite paying full tax (I must mention here that there is no scope anymore to fudge tax liability on income from investments). So his accountant is allowed to make reasonable payments (bribes or speed money) that are routinely demanded. Clearly, a good chunk of the money credited to bank accounts will be quietly converted in connivance with tax officials while a few raids will keep up the façade of recovery. Senior tax officials tell us that this is happening already. 
This brings us back to whether blundering officials at the Reserve Bank of India (RBI) increased our hardship by botching up the implementation of demonetisation. In a jaw-dropping claim, R Gandhi, former deputy governor of the RBI who was in charge of the demonetisation exercise, claims in an article in The Economic Times that large-scale preparation preceded demonetisation and its “execution was to the script; and unanticipated mid-course corrections were minimal.”
He also says that the many policy reversals, course-corrections, etc, were also part of the plan and even the misuse of Jan-Dhan accounts (people being used as ‘money mules’ to launder money) and corruption of bank officials was anticipated and factored in! In other words, if asked to do it all over again, the same hardship, or worse, will be inflicted on people, because RBI thinks everything went as per plan. If some lives were lost, that was mere collateral damage. In another media interview, he said, the only thing he would do differently is to print more Rs500 notes (this was done by asking the RBI security press at Mysuru to take up printing of Rs500 after public anger began to explode). The preposterousness of these claims requires some response. So here are a few quick points.
1. Mr Gandhi explains that stocking 200,000 ATM machines with 2000-rupee notes was expected to increase the number of ‘touch points’ to withdraw money. But that didn’t happen when it was needed, did it? The biggest goof-up of failing to stock ATM machines, anticipating the need to calibrate each one physically for smaller size notes is probably the biggest blunder in handling demonetisation. Mr Gandhi dismisses this as a minor issue saying, “with the benefit of hindsight, I wish we had handled it differently.” He has also claimed elsewhere, that introduction of 2000-rupee note was irrespective of demonetisation and RBI had even recommended introduction of notes of Rs5,000 and Rs10,000 denominations. If so, doesn’t it make you wonder about the timing, sequence and drama about Rs500 and Rs1,000 being declared tools of hoarding black money? 
2. Secondly, he claims, “lower denomination notes were issued in plenty.” If that were true, why were 12 billion pieces of lower denomination pieces pushed into the market in a hurry only after public anger began to mount? 
3. Had Mr Gandhi’s grand plan anticipated the large gap between Rs100 and Rs2,000, creating a void in denominations for daily transactions? If so, shouldn’t the Rs200 note have been put into circulation before the demonetisation exercise, since it was unlikely to arouse suspicion. Instead, Rs200 has been introduced last, almost as an afterthought and is still not available in sufficient numbers. 
4. Outrageously, Mr Gandhi writes: “Yet another blow to our plans was the public behaviour (or should I say non-behaviour) relating to digital payments.” He had ‘factored’ that with people’s cash vanishing overnight and stringent limits on withdrawal, people would switch to ‘RTGS/NEFT, Internet and mobile banking. Since RBI does not speak to people, he is clueless about the fact that most of these transactions need some learning and confidence level; while people did open PayTM and other e-wallets, RBI itself did not put in place digital safety regulations until Moneylife Foundation campaigned vociferously for it, long after the demonetisation exercise was over. Does this indicate meticulous planning?
5. Mr Gandhi’s article omits uncomfortable issues that are still unsettled. For instance, many non-resident Indians (NRIs) and those who were not in the country in November 2016 and deposited demonetised currency in designated RBI branches are still waiting for their money to be credited into their accounts. Why didn’t the plan consider this? Or is it okay for the State to make ones hard-earned money worthless for things beyond their control? 
Clearly, when a coercive State is in action, planning is not necessary; people are expected to put up with hardship in the nation’s moral and ethical interest.
4 years ago
I'd rather have a dynastic corrupt govt. than a crazy ( and bigoted) one.
Gopal Vangala
4 years ago
I am non-finance person ex-public sector steel industry; but as I can not avoid use of money in life, I get involved to the extent I am affected. I have a Grievance against sbicapsec(Banks Fleecing Customers-Investors)-change.org. In addition I am affected by coersive Income Tax Department, even while my Grievence is pending without Redressal for last two years(almost) by sbicapsec(Banking Ombudsmen) as promised by RBI Governor
Paul dmello
4 years ago
The word fruits to be read fruitless
Paul dmello
4 years ago
I do not want to comment on demonetization, as it is a fruits now. But the management of it's aftermath was full of flaws and looks like it was all done to put the common man in max trouble for no fault of his.
4 years ago
Ultimately, everything is in the hands of individual tax assessing officers and, at this level, anecdotal reports indicate that there is no visible reduction in corruption or the tendency to harass taxpayers.
...Couldnt agree more
Ramesh I
4 years ago
Fine article. Agree with all points and queries raised by Ms. Dalal. No Govt or RBI employee, will publicly admit to have goofed up in implementing the demonetization exercise, which eventually didn't achieve its stated goals. This was perhaps the biggest agony-inflicting scheme of any Govt since 1947. It was no gain, but enormous pain. I wish India had a Constitutional Authority like the CAG, which can vet Govt policies BEFORE they are allowed to be implemented, to prevent the excesses of the Political Executive, which, with absolute majority in parliament, inflicts such untold misery on a billion people.
Moreover, PM Modi has kept Arun Jaitley, a career lawyer, as Finance Minister purely for political expediency. Being an autocrat, who as CM of Gujarat relied more on hand-picked bureaucrats than his Cabinet Ministers, his insecurity with having a strong competent FM is obvious. Both demonetization and GST implementations have been disastrous, with the latter being atleast acceptable in principle, with long-term gains for India as a whole. Had PM Modi had a finance expert (or CA) as his FM, who would probably understand the nuances of financial system and Banking systems in particular, both demonetization and GST would have been implemented with much less 'pain' to the people.
Mahesh S Bhatt
4 years ago
Manmohan respected Economist but corrupt PM mentioned 2% loss of economical value ie Rs 12lac crores.
Do we have counter or supporting numbers by other Economists ?? Why not?
Who shall be responsible for bonafide persons deaths across the country? Cost to RBI & how much was printed 1000/500 & how much recovered ?? Unrecovered was less than 0.5% ?
How is the teror fund & its losses? Our politicians are not having relevant questions as Baba is to be President of INC so God also cannot bless Mahesh Bhatt
Who bears the loss of judgements on Black Money estimate error/corruption in exchange of currencies/estimates of flight to $ /Gold/Land etc?
Mahesh S Bhatt
4 years ago
Its senseless meaningless argument counter argument mode by fractured corrupt & collusive Opposition Vs brute 2.5 Men ( PM+President BJP +0.5 FM rest Yesmen with MODIFIED suites who darenot think even to dress different or else shall be treated as diffident by an illiterate PM auctioned suit worth 4.8 cr) GoI running fate of 1.3 billion.Well elections they say brought GST cut downs so wait till 2019 Amen Mahesh Bhatt
Madhookar Pavaskar
4 years ago
Demonetisation was a disaster for a common man. It didn't help in bringing out black money, which is not so much stashed in currency notes as in gold, real estate, and tax heavens abroad. Modi's promise before coming to power of bringing black money from abroad has still remained unfulfilled. Yet, there is no denying that demonetisation did help in gaining currency to digital transactions.
Shrikant Dattatraya Sahasrabuddhe
4 years ago
coercive state looks like overstatement although it may be partly true and partly inevitable. lethargic, insensitive and irresponsible administration is also to be blamed.
Ramesh Bajaj
4 years ago
Digital transactions need mobile phones (cell phones)? From my experience, cell phones have to replaced in a year or two. Don't you think this is expensive for the ordinary man, considering the cost of these phones.
4 years ago
Sudarshan Ghosh
4 years ago
Firstly historical facts in other nations which used Demon , are not very flattering. Secondly the aim(s) of the whole exercise , kept shifting as per whimsy....who is to say that the oodles of unaccounted money deposited in banks would not be utilised in coming elections, since campaigning does involve payoffs to supporters, crony corporates, own family members, horse trading ( already begun in Gu), freebies to aam junta, 'sting ops, against rivals, paying off legal fraternity , dirty tricks dept. etc. ..... Paytm already run by Chinese so one knows who is profiting from digital payments....the 'longterm' effects if any wud start after compensating for around Rs 2 lakh crores lost due GDP growth slippage.... Last count around 200 deaths apart from shutdown of SME and MSMEs ... Acchhe din ??
Parthasarathy J
4 years ago
Ms. Suchetha, this action by Modi Government is not about moral or ethical interest. It's all about bridging the increase inequality between the Super Rich and Super Poor. This action has been done with all good intentions, but with a corrupt government and banking machinery.
Free Helpline
Legal Credit