Currency Ban: Corporate Elites Laughing All the Way to the Bank

Modi’s ill-conceived plan to demonetise is a blow to the informal sector and India’s economy, writes Sridhar Raman.

12 min read
Hindi Female
If you can’t dazzle them with brilliance, baffle them with bull.
WC Fields
You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.
Rahm Emanuel, Former White House Chief of Staff in the Obama administration

Naomi Klein in her bestselling book The Shock Doctrine: The Rise of Disaster Capitalism wryly observed, Extreme violence has a way of preventing us from seeing the interests it serves. Perhaps the small coterie of advisers close to Prime Minister Narendra Modi, driven by the ideology of disaster capitalism, took Klein’s observation seriously.

Also Read: Rs 500 Note Printing Halted, Operation Will Shift to Mysuru Press


Disaster for the Labour Force

On 8 November, the shock to the financial system was administered by Modi who demonetised the 500 and 1,000 rupee notes. India is an overwhelmingly paper currency country: some 90 percent of transactions are done in cash. India's cash-to-GDP ratio is 12 percent. More than half of all Indians still don't have a bank account and some 300 million don’t have a government-approved ID.

The two scrapped denominations -- Rs 500 and Rs 1,000 -- account for more than 86 percent of the value of cash in circulation. By this diktat the government effectively neutralised around 86 percent of the currency. The staggering implication for the informal sector, which employs close to 94 percent of the labour force, was disastrous.

The daily wage earners, farmers, small traders and small businessmen were left helpless, clutching dud Rs 500 and Rs 1,000 notes. Even economist Lawrence Summers, author of the infamous World Bank Memo, was driven to write, “Most free societies would rather let several criminals go free than convict an innocent man. In the same way, for the government to expropriate from even a few innocent victims who, for one reason or another, do not manage to convert their money is highly problematic....

Also Read: Exclusive: Urjit Patel On Indian Economy Post Note Ban, Trump

Modi’s ill-conceived plan to demonetise is a blow to the informal sector and India’s economy, writes Sridhar Raman.
(Infographic: Lijumol Joseph/ The Quint)

Perils of ‘Note Bandi’

  • With note ban, the government neutralised 86 percent of the currency, impacting informal sector which employs 94 percent of the labour force.
  • Around 50 percent of people don’t have bank accounts, yet note ban was justified by Modi government as a patriotic duty to curb black money.
  • Cash constitutes a minimal fraction of black money with major tax frauds being committed in sophisticated cashless financial environment.
  • Election campaigns that attract huge sums of unaccounted money have been left untouched.
  • Demonetisation has coerced people to join the digital platform that has its share of ills, which include privacy-related issues.

The Marie Antoinette Moment

The RBI had its own Marie Antoinette moment a few days later. In 12 November press release it said: “Public are encouraged to switch over to alternative modes of payment, such as pre-paid cards, RuPay/Credit/Debit cards, mobile banking, internet banking. All those for whom banking accounts under Jan Dhan Yojana are opened and cards are issued are urged to put them to use. Such usage will alleviate the pressure on the physical currency and also enhance the experience of living in the digital world .”

Statements such as this make one wonder whether the RBI is living only in the digital world. Surely the worthies in that institution have some idea of the conditions under which banking and money exchange occur for most Indians?
Jayati Ghosh, Economist

For some families, for whom getting a square meal is a luxury, the mocking advice of the Modi government was if you don’t have food, eat plastic cards.

ATM machines became cashless and long queues formed outside banks to exchange the old notes for the new ones. From this inane compliance ritual of standing in endless queues outside banks, heart-wrenching stories emerged. A number of senior citizens died of exhaustion.

Children and the elderly who were sick died as they were refused admission to hospitals as they could not pay with the old notes. Farmers could not buy seeds for the sowing season as they did not have the new currency to pay for it. For the first time in post-independent India the financial system went into lockdown.

The collective punishment inflicted on India’s poor and the informal sector, where millions eke out a miserable livelihood, was severe, as close to 50 percent of them do not have bank accounts and formal identification papers to open bank accounts. However, this draconian measure was justified by the Modi government as a patriotic duty to eradicate the twin evils of black money and counterfeit currency used by terrorists.

Also Read: Note Ban at Mid-Term: PM Modi Changes the Script at Interval

Modi’s ill-conceived plan to demonetise is a blow to the informal sector and India’s economy, writes Sridhar Raman.
(Infographic: Lijumol Joseph/ The Quint)

In the Name of Sacrifice

True to form, the mainstream TV channels -- with the exception of NDTV (Hindi) -- which largely serve as the PR agencies of corporate houses, spewed patriotic drivel about pain, sacrifice and stoicism as national virtues.

Tall and ludicrous claims were made by the BJP ministers that terrorism was dealt a death blow by the surgical strike on the two currency notes. Demonetisation critics were shouted down as unpatriotic with the passionate fervour of McCarthyism. Donning the mantle of a messianic prophet, Modi exhorted the poorest of the poor to move towards a cashless society.

Cutting beneath the masochistic hysteria of pain and national sacrifice whipped up by the propaganda machine of corporate media and the Modi government, one discerns fundamental flaws in the argument that demonetisation eradicates black money and counterfeit currency. It is as absurd as arguing that to prevent bank robberies one has to completely shut down the banks.

First, all black money is not held as hoarded cash. At best it constitutes 6 percent of the black money. A bulk of it is spirited away in tax-free havens like Switzerland and Panama and from there it is invested through mailbox corporations in equity, real estate and bullion across the world. It is a matter of utmost irony that a number of celebrities who endorsed the demonetisation scheme figure in the list of names of people who used illegal offshore accounts in places such as Panama.

Also Read: Fundamental Rights Violated in Note Ban, but Will SC Take on Modi?


Tale of Tax Frauds

Moreover, elaborate tax frauds are committed by corporate giants in squeaky clean cashless financial environments. As I explained in my article, Inside the Spiders Web: Tax havens and Dirty Money, “In an elaborate charade called transfer pricing, corporations with their army of accountants and lawyers create a maze of shell companies (i.e. companies which have no real business activity) in tax havens which have secrecy laws concealing the ownership and the source of the funds. The tax strategy is fairly simple: book the profits in shell companies located in tax havens having low or nil rates of tax and show reduced or better still zero earnings in countries which have higher rates of tax.”

Then there is another game called capital round-tripping played by big corporate businesses which bring back their black money through bogus companies which have no real business. These funds are invested in the economy as foreign direct investment. There have been no efforts by the government to clamp down on these activities. At the Mahesh Buch Memorial Lecture in Bhopal on 5 October, 2016, former Reserve Bank of India Governor Y V Reddy said, There is a subsisting interest in influential policy circles to keep a window for round-tripping open.”

Also Read: Modi’s Obsession With No. 8 & What It May Have to Do With Note Ban

Modi’s ill-conceived plan to demonetise is a blow to the informal sector and India’s economy, writes Sridhar Raman.
(Infographic: Lijumol Joseph/ The Quint)

Engines of Black Money

The Indian stock market is also rigged through the route called the participatory note where black money of Indian origin is parked in Mauritius in a shell company from which there is flow back as investment in stock markets, causing share prices to go up. It is no secret that demonetisation is a wrong policy instrument to handle such sophisticated chicaneries. It is like slicing a loaf of bread with a hammer.

Secondly, the engines of black money are left intact, especially since election campaign contributions are often accepted in cash and unaccounted for. The BJP, which is now supposedly on a moral crusade to eradicate black money, has been guilty of accepting large sums of unaccounted money as campaign contributions. Moreover, bribes taken by government officials and the political class would continue unabated even after demonetisation. There are already reports that government officials are taking bribes in freshly printed notes. It was reported that in Gujarat some government officials demanded bribes in freshly printed Rs 2,000 notes.

And lastly, counterfeit notes circulating in the economy is estimated to be around Rs 400 crore out of a total of Rs 16 lakh crore. In percentage terms it amounts to a mere 0.03 percent of the entire currency. A sensible policy practiced by most governments is to gradually phase out certain notes with certain serial numbers to reduce the dangers of counterfeiting instead of firebombing the currency.

Also Read: Votes/Notes/Polls: Has PM Won or Lost the First Note Ban Round?


Quixotic Venture

There is no gainsaying that by rendering the two currency notes as paper trash and carpet bombing the informal sector dependant on cash, Modi’s demonetisation can best be described as a quixotic venture. Or is it a dress rehearsal for something more ominous in the form of draconian capital controls preventing physical withdrawal of cash from banks? Is the lack of availability of currency on account of “poor planning” a manufactured crisis for the government to push its agenda for a war on cash?

Before we discuss this issue we must take a look at how the Indian economy is faring on various fronts.

Beneath the rosy headlines of robust GDP growth rates, the fact remains that the growth is fuelled by expansion of credit and not incomes from steady job growth which is in a state of decline. The top corporate elites have borrowed heavily from public sector banks without any hope of paying off the debt. The public sector banks are groaning under the weight of corporate loans which may never be paid. The real estate sector is primed up with bank loans and credit expansion.

Crisis Emanating from Cash Crunch

The stimulus to the economy is through easy access to credit for consumer spending. Thus an illusion of prosperity is maintained on a mountain of credit.

The crisis point in the Indian economy has reached as credit-induced asset bubbles are in imminent danger of imploding unless there is fresh induction of credit into the system. The Indian economy is in danger of deflationary spiral and the credit Ponzi scheme has to be maintained through the expansion of demand of new credit money. But limit to credit expansion is hitting the proverbial road block as there are few lenders and few takers of credit as business confidence is low and the much lauded animal spirits is in short supply.

Natural limits for both borrowing and lending threaten the capacity to prolong the credit boom any further, meaning that even if central authorities are prepared to pay almost any price to do so, it ceases to be possible to kick the can further down the road. Negative interest rates and the war on cash are symptoms of such a limit being reached. As confidence evaporates, so does liquidity. This is where we find ourselves at the moment — on the cusp of phase two of the credit crunch, sliding into the same unavoidable constellation of conditions we saw in 2008, but on a much larger scale.
Nicole Foss, Economist

Dormant Cash

Given the scenario of deflationary spiral and a lull in the credit offtake, the access to interest free money (bank deposits with zero rate of interest) and worse with negative rates of interest (where the bank deducts a fee or bank charges from the deposits made with it) become an imperative policy push for the coterie of financial elites and their political friends in the government.

But the constraint to monetary expansion is the engendered tribe of savers and the hoards of cash lying dormant in lockers or under the proverbial mattresses. On them the war on cash must be declared to achieve the big push for credit expansion. There must be a moral crusade against physical cash which is hoarded and not available for the orgy of borrowing and spending. To prise open the cash hoard there must be the shock of demonetisation and laws against physical withdrawal of cash which ensures that the physical cash is corralled and sequestered in the banks for further credit expansion. The mirage of prosperity is maintained by kicking the can down the road.

However, to nail down the escape hatch for bank customers who may become uneasy with deposits not earning any interest or worse, negative rate of interest and withdraw cash physically, it is necessary to put in place draconian capital controls which prevent withdrawals of cash and also prevent the messy spectacle of bank runs. Once locked in the bank account the depositors can get a surgical scalping to take care of the messy NPAs of banks caused by profligate lending to corporate elites. The entire class of savers such as senior citizens, deposit holders belonging to the lower middle class would be thrown under the bus.

Also Read: PM Modi, Gloating Over Black Money Stash Isn’t Helping Economy

Modi’s ill-conceived plan to demonetise is a blow to the informal sector and India’s economy, writes Sridhar Raman.
(Infographic: Lijumol Joseph/ The Quint)

Shock and Awe Factor

The winners of the demonetisation shock therapy would be the corporate elites who caused the debt crisis for the banks in the first place. For them the loans would be written off at the cost of bank customers. Following the dictum that every disaster offers a windfall they would appear once again as saviours after getting the licenses for starting digital banks or wallets. Here the shell-shocked ordinary people would invest their capital without returns whatsoever for the joy of walking cashless in the digital space. It is de rigueur that animal spirits should be rewarded handsomely in the business friendly environment of the NDA government.

The demonetisation of the currency has also a shock and awe element to it: the shock of losing real money and the awe of being herded in digital pen. Cash carries a bad odour. Are you using cash because you are engaged in drug trafficking or are you a terrorist wanting to buy arms and explosives? Should you be flagged for suspicious activities for questioning by the national security state?

Apart from the searing stigma that cash is associated with criminality, there is immense pressure on the denizens of the informal sector to tread the virtuous path to digital- “you pay- we play” pens like Paytm. Also comfortingly called digital wallets they offer bleating sheep solace and comfort from the ordeal of cash transactions. Once secure in the pay pen the sheep can be burdened with transaction costs which swells the profits of the digital banks and also the ubiquitous service tax can be imposed by the government which swells the coffers of a state hostile to social spending.To sum up:

1. Every financial transaction can be taxed

2. Every financial transaction can be charged a fee

3. Bank runs are eliminated

Also Read: Note Ban: Govt Can’t Decide How Much Money We Can Withdraw


Digital Mirage

In this digital pen we shall serve with docility and endure “the stifling hygiene of the digital panopticon being constructed to serve the needs of profit-maximising, cost-minimising, customer-monitoring, control-seeking, behaviour-predicting commercial bureaucrats” and tax officials.

Don Quijones at the website Raging Bullshit is more blunt when he says..” The reality is a whole lot darker. The war on cash is being waged for the exclusive benefit of those who already wield an inordinate amount of power and control over the economy and the people that are struggling in it. And they want more. By slowly, quietly killing cash, they seek to seize the last remaining thing that offers people a small semblance of privacy, anonymity, and personal freedom in their increasingly controlled and surveyed lives. And the way things are going, they’ll get it...”

Imprisoned within the narrow confines of this digital panopticon from which there is no exit, we will lose our freedom over our money. We will no longer have the choice of withdrawing cash from banks plagued with bad debts or withdrawing from irrational credit orgies as the risk of losing our money is too high.

Facing the signs of no cash and no exit we shall be agitated at the first signs of Financial Meltdown but we shall be pacified by the handlers of the pen. We will be reminded of our patriotic duty to the state to pay taxes. Ultimately calm will return.

After all the handlers imbued with the wisdom of Jean Baptiste Colbert the French finance minister to King Louis XIV know, "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing."


(The writer is a lawyer from Bengaluru, he writes for the Economic and Political Weekly and has contributed to websites with alternative views. His writings are available at and can be reached @sapientpen. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

Also Read: Not Just Note Bans, State Funding of Parties Needed to Fight Graft

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Topics:  Demonetisation   Rs 500 note   Currency Ban 

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