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Friday, November 25, 2016

Problematic terms in the demonetisation debate

by Anirudh Burman.

The Government's move to demonetise Rs. 500 and Rs. 1000 notes, and place restrictions on withdrawals, exchanges and deposits has attracted both appreciation and criticism. This piece analyses the framework of this discourse and its implications for the economy and society. Terms like "demonetisation", "corruption", "inconvenience and hardship", "implementation" form the basis of this discourse. Interestingly, most of these terms have originated from the Government itself. This piece argues that by confining ourselves to these terms, we fail to grasp the true nature and impact of this measure.


The economic context


The Indian government's move to withdraw the legal tender status of Rs. 500 and Rs. 1000 notes has had widespread effects on the economy. Holding these beyond a certain notified date will be
illegal. Those left with these notes after December 31 will lose their wealth by a corresponding amount. There are daily reports of the plight of urban daily wage labourers, farmers and those in unbanked areas.

The economic impact of this measure is being contested. A great piece by my colleague Suyash Rai argues that the costs of imposing this measure far outweigh the benefits are likely to affect the poor and under-banked areas disproportionately and may have a modest impact on corruption at best. Others have played down the likely impact on the poor and rural areas. They have supported the demonetisation as a courageous and bold step towards a larger effort at wiping out endemic corruption and black money.

What is already safe to assert is that for better or for worse, there has been large-scale disruption within the economy. Print and electronic media, social media, daily conversations are consumed with conversations around the principle and implementation of demonetisation, and around issues of corruption and black money. Yet, most of this discourse follows a predefined framework, using terms and nomenclatures propagated by the Government. The framework of this discourse is problematic, and this framework itself may have deleterious effects on our society.

Problematic term: "Demonetisation"


Characterising the government's move as "demonetisation" is the most problematic fallacy of the current discursive framework. In this case, the Central Government has said that the RBI will refuse to honour its promise to provide legal backing to Rs. 500 and Rs. 1000 currency notes. They will effectively refuse to honour the property rights of those holding them. Every time the RBI issues a currency note, it adds a liability to its balance sheet. By refusing to honour these notes as legal tender, the RBI will extinguish its liability towards persons holding them, in effect enriching itself. In addition, substantial restrictions have been placed on exchanging old notes for new, withdrawal and exchange of money. This is a substantial interference in the rights of people from accessing their own money. This is expropriation, not demonetisation.

In its broadest sense, expropriation refers to a taking of certain items or goods by the government by refusing to honour the property rights of those holding such items or goods. Bank nationalisation was an act of expropriation. The Indian government refused to honour the property rights of the owners of banks and transferred the ownership of the banks to itself.

Land acquisition is an act of expropriation.  The government expropriates the property rights of individuals. Land reforms undertaken in the 1940s and 1950s were acts of expropriation where property held by zamindars was transferred to the states by virtue of laws passed by them.

The Vodafone tax demand by the Indian government has been alleged to be an expropriatory action as Vodafone's income is being expropriated by imposing an allegedly unfair tax on it. Expropriation need not be an absolute taking or extinguishment of property rights in all cases.

Even a high degree of restriction or interference with property rights has been held to be expropriatory in many jurisdictions worldwide. Therefore, the Government and RBI's decision to (a) withdraw legal tender status, and (b) impose severe restrictions on withdrawals from one's own account is definitely an act of expropriation.

This act of expropriation is singular, given the nature of the expropriation and the views of the political party in power. Two of its cabinet ministers favoured a debate early last year on whether the word socialist should remain in the Preamble to the Indian Constitution and its ally the Shiv Sena demanded the removal of the word (link here)! This same Government is now justifying this expropriatory act as a moral imperative.

The nature of the expropriation is much more problematic. There are at least three ways in which this expropriation is remarkable:

  1. In most cases, property rights of certain defined individuals or classes are expropriated. The owners of banks were identifiable individuals, and so were the zamindars who were expropriated when land reform laws were passed. In this case, it is not so. Property rights across the entire economy are being expropriated without distinction. At the same time, there is no single identifiable person who is being expropriated. This is likely to have societal consequences I will elaborate later.
  2. Governments usually expropriate rights, or assets - like wealth, mineral resources, land, intellectual property (through compulsory licensing). In this case, the medium of exchange in society is asset being expropriated. This is an expropriation of cash, not wealth. This is singular in the annals of expropriatory actions by governments worldwide. Many governments have demonetised currencies to combat hyperinflation, but no one has withdrawn legal tender status on currency notes in times of normalcy, and imposed restrictions on an individual's ability to hold cash at the same time. In an economy that is almost completely cash driven, and where most households hold Rs. 500 and Rs. 1000 notes as means of exchange for sustenance, this is bound to have serious repercussions.
    Money is not just a medium of exchange and a store of value, it is also, as has been argued, a source of social prestige and psychological security. In a cash-based economy like ours, people primarily derive social capital and psychological security from money in the form of cash. This expropriatory measure has therefore arguably extinguished or imperiled the social prestige and psychological security of those who relied on cash money to provide these for them.
  3. Governments usually expropriate the rich to redistribute to the poor (at least ostensibly) or to create benefits for the public good (roads, highways, etc). Bank nationalisation expropriated the rich bank owners so that Indira Gandhi could use banks as agents of poverty reduction. Land reforms were done to expropriate zamindars and redistribute land to the poor. In other countries, governments expropriate owners of oil fields and mineral deposits so that the government can channel the benefits from such resources for the public good. Since this expropriation is economy-wide, everyone's medium of exchange is being confiscated/ restricted regardless of whether they are rich or poor. However, the main brunt of the expropriatory action is on the poor. There are two main ideas being talked about with regard to what the government might do with the windfall in order to redistribute wealth to the poor. To clarify, neither the Government nor the RBI have stated or clarified on what they intend to do, and what legislative changes will need to be made. It is however worthwhile to discuss these as the two broad ideas that are being discussed -
    1. The government may improve its fiscal situation and use the fiscal space to provide income tax relief/ loan waivers. The poor are not going to benefit from income tax relief since only 4 percent of India's population pays income tax. The Sixth Economic Census of the CSO (March 2016) finds that only 2.3 percent of non-agricultural establishments received financial assistance from financial institutions. This number is likely to be the same or even lower for agricultural establishments. Loan waivers are therefore going to have minuscule impact, and benefit only those who are well-off enough to access the formal financial system.
    2. The government may, through some legislative jugglery, recapitalise banks and kick-start lending. Again, the gains are going to accrue mostly to the rich and the middle class. It is debatable as to how the unbanked and expropriated 40 percent would reap the benefits of any bank-led redistributive measure since 40 percent of the country is unbanked (Census 2011).

This is therefore, a unique expropriatory measure that expropriates from everyone in society to benefit those who suffer the least "inconvenience" from the expropriation (more on this later).
Discussing this step as an expropriatory measure brings to the fore legal protections and requirements that are concomitant with expropriation: what is the legal authority for taking away the
property of individuals? Is compensation due to those who have been expropriated and if yes, in what form? What due process is applicable to expropriatory measures taken by the Government? Coining this expropriation demonetisation is putting lipstick on a pig in its truest sense.

Problematic term: "Corruption"


Equally problematic is the way this expropriatory action has re-defined the "corrupt" and "corruption". All preceding actions against corruption taken by the Indian State in the past have been against those who have either evaded taxes or earned money by committing illegal acts. The issue was that certain people either evaded taxes or did something they were not supposed to, and such people had to be identified and punished. The voluntary disclosure scheme followed this overarching principle by encouraging people who did not pay taxes to come forward. The same principle is at play in the issue over identifying people who have stashed their illegal money abroad, and in the identification and prosecution of officials violating the Prevention of Corruption Act.

This expropriatory measure has the potential to re-define how people think about the corrupt and corruption. For one, the focus is now on confiscating corrupt wealth and black money. Identifying the corrupt and identifying individual acts of corruption has taken a backstage. Expropriation itself has become a mode of punishment. It is being suggestively implied that society has a chance to start again with a clean slate if black money is wiped out. The complete failure of the state to act against corruption is being used as an excuse to infuse society with a new kind of morality.

Second, corruption has now become a crime without a perpetrator. Multiple people I have talked to situate themselves as victims of corruption. A landlord who has built an illegal flat does
not give his tenant a lease-deed and accepts payments only in cash told me he was proud the Prime Minister had taken this step on behalf of honest people like him. An auto-wallah who confessed to driving without a permit and did not agree to go by meter railed against the corrupt during the duration of my journey. An Uber-driver praised the expropriation repeatedly while he ferried me. Close to the end of the ride he nonchalantly told me he had to drive carefully since the police had impounded his license the previous day. While these anecdotes hardly constitute statistical evidence, they are indicative of the fact that people go to great lengths to justify their actions as moral and honest.

However, the logic goes, everyone else must be corrupt if corruption is endemic enough to justify this kind of measure. This discourse is elevating the widespread cynicism and hatred against politicians, bureaucrats, the police, big business, small business and the media. Everyone feels like a victim and everyone else is suspect. But no one is a perpetrator or an agent. Everyone wants to sock it to the rich and the corrupt though no one knows who they are. So it is acceptable to take some punches yourself if the corrupt suffer in the process. The Government is at once elevating the pitch for shared sacrifice while also (most probably and hopefully, unintentionally) exacerbating the conditions for social and institutional distrust. Issues of class envy and class conflict are already coming to the fore and may get further magnified in the future.

This, in turn, is likely to create a collective psyche where no individual or institution can be trusted. No one is deserving of empathy since their corruption might be the cause of your suffering. This is happening even though the Government is at pains to explain that this will be one among many previous and future steps against corruption. By re-framing corruption as a crime without an agent through this singular action, the Government has perhaps unwittingly created the conditions in which the nature of discourse regarding solving corruption in society changes permanently.

This is a simple expropriation at its core. The object and effect of this measure are predominantly expropriatory. The confiscation of black money is an incidental benefit by design. The rhetoric of sweeping up black money and the design of the expropriatory measure do not match up to each other.

Problematic terms: "Inconvenience"


It is inconvenient to have to switch to a mobile wallet and stand in an ATM queue for 2-3 hours once a week. Many people I have spoken to are ready to suffer this inconvenience if it helps achieve the stated objective of finishing off black money in the economy. When individuals who depend on their daily wage to feed themselves and their families are laid off, this cannot be called an inconvenience. The tribulations of agricultural workers and small entrepreneurs cannot be called an inconvenience if their enterprise fails due to the lack of liquid cash. Sectors of the economy that function largely in cash are suffering disproportionately compared to those with access to plastic money and mobile wallets. There is an attempt to normalise and standardise the way the effects of this expropriation are to be thought about by using this one word to describe the depth and diversity of suffering within the economy.

There is a breadth of literature on the impact of income shocks on those who are at the lower end of the poverty line. Income shocks push many just above the poverty line back into poverty. They also push many into debt, since their savings are not sufficient to sustain themselves. Small incidents like an unanticipated illness have an outsized impact on their long-term well-being and potential for growth. The current actions of the Government have administered just such an income shock on the poorest.

The Government should have taken much more aggressive measures to protect the worst affected economic classes in society, but calling this suffering an inconvenience allows it to paper over this failure. Had the Government instead defined the consequences of this measure as a "scarcity" of currency, corresponding actions may have been discussed, and some implemented. Government actions and popular discourse during times of scarcity are motivated by a desire to ensure everyone has adequate rations to sustain themselves.
 
Scarcity creates its own social dynamics. It creates new intermediaries in the market - when food is rationed, black marketeers emerge to supply food at above-market prices. After this expropriation, intermediaries are delivering white money for black for a commission. The war against corruption is creating new forms of corruption.

Mobile applications with horrifying names like "Book my chotu" are advertising hired help who can go stand in queues for those who can afford it. Most troublingly, scarcity changes relationships in society by creating new power dynamics. Hitherto bankers were service providers. Now they are agents of rationing. They have asymmetric power compared to those standing in the queues before them. It is a credit to them that they are still providing services under conditions of extreme difficulty. On the other hand, like any agent of rationing, they are now exposed to mob fury and mob violence. The customer has now become a beggar. His/her money is locked up in a bank. The psychological security gained from holding money that I alluded to earlier has vanished. Whereas earlier he or she could demand service, now they pray they get to exchange\withdraw money, and can suffer at the hands of a capricious banker.

Conclusion


Some have argued that even if the Government wanted to take this step, it could have been timed better. But what is a good time for extinguishing property rights? Any time is equally good and equally bad. Others have argued that the step has been implemented badly. But expropriatory actions are judged first and foremost by the validity of the expropriation itself. We have been too quick to assume the validity of this measure and debate its implementation. As long as the terms of the discourse are set by those who introduced the measure, we will also be confined to their predefined moral straitjacket of honesty versus corruption, sacrifice versus timidity and sincerity versus venality. Empathy will be a casualty.

The Government has framed this step against corruption as a moral question. Should we not ask a moral question of the Government: Is it ethical for any State to expropriate the predominant means of exchange from everyone in society, especially in a poor cash-dependent economy?



The author is a researcher at the National Institute for Public Finance and Policy.

9 comments:

  1. It makes little practical sense to judge public policy by abstract moral principles. The article appears to criticise public policy by similar abstract moral standards.

    It would be best to judge public policy vis-a-vid other practical alternatives which would have more gains but less pain.

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  2. Interesting article by Anirudh. Expropriation in the context of demonetisation can occur only if a) the state refuses to return a currency note of equal value b) returns with a time lag when inflation bites into a substantial portion of the printed value of the note. Has any of those occurred or is likely to occur in this case? On corruption as the paper by Milan Vaishnav and Sandip Sukthankar shows "little evidence to support the idea that greater transparency, information, and community based efforts have a significant impact on reducing corruption on their own". In such a scenario a state may be encouraged to bring in punitive steps. Demonetisation should be assessed if its punitive enough--and that only data from consequent seizure etc will inform us. The collateral damage to the economy in terms of reduced GDP can then be measured against it. By the way, several economists of a particular school have argued in the [ast that high GDP should be juxtaposed against evidence of rising inequality etc to make a case for showdown. Again we do not at this stage possess data to inform us if the reorganisation of the cash economy has sharpened inequality. If not, then demonetisation has succeeded

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  3. Simply superb. Alas!how many will read and understand it.

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  4. Wonderful article. Just read it on 'Scroll'. Perhaps one of the best I have read on this theme. The way you have tried to put the discourse furthered by the government on its head is superb.

    subhash gatade

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  5. Another mis-used term being used in popular culture right now: "Surgical strikes"

    Originally, this metaphor is borrowed from the medical world to the military world, to mean that you attack something "extremely precisely" without causing any collateral damage or disruption, similar to what is done in a medical surgery.
    This term was (very appropriately and intentionally) used to describe the recent military action, intended to mean that the military action was meant to be precisely on the terrorists, and not on the neighbor's territory or army. This term was used to convey to the neighbor that we are not after them, but after the terrorists. Indian folk totally mistook the meaning of this term as something of a "very smart and powerful action".

    Thus, in their new-found wisdom, they are using it in this case, where it is totally inapplicable.

    This monetary action is absolutely not a "precise action" on anything. In fact, it is 180 degrees opposite of the intended meaning of the term.

    In this case, a more appropriate metaphor from the medical dictionary would have been a "chemotherapeutic strike". A chemotherapy and a surgery convey the opposite meanings of the metaphor. Because chemotherapy affects all cells in the body using chemicals, only to kill a few cancerous cells.

    Hashtag: #chemostrike

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  6. Even though I used the term #chemostrike in my previous comment, I do not totally agree with using the term "expropriation" of property to describe this action.
    I only partially agree.
    That's because of a technicality. My arguement is that, the RBI says that it will pay the bearer the amount of 500 on each 500 note. That's exactly what they are doing, no?
    So they are not totally expropriating the property, but setting some time limit on exchange of exactly the same property. Technically, they never promised any time-frame on the note.
    Sure, setting the time-limit on exchange is expropriation of some intangible right. But not total expropriation of the property. For example, what is a person is in a coma and could not exchange the notes in time.
    But this expropriation is similar to taxation or inflation, not similar to land acquisition.
    A person in a coma will still lose a large portion of value of his/her cash to inflation after 10 years. Is that expropriation? Yes, to some degree but not absolutely.
    - Raghav Rajaraman.
    D-47cg0l3k46z@maildrop.cc

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  7. Why Narendra Modi's Demonetization measure violates the RBI Act and creates financial anarchy http://seemasapra.blogspot.in/2016/11/why-narendra-modis-demonetization-law.html

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  8. Thought provoking article. When a reformatory measure is taken, different people in the society feel its impact differently. Unfortunately, sometimes innocents get trapped and suffer. Success of a reformatory measure lies in its impact on those towards whom it is directed. Even if 60-70% impact is felt by such people the measure may be called a success. After all we live in an imperfect world where one may suffer badly for smaller offense and other may get away lightly with a major offense. Even the law which provides smaller punishment for smaller offense and larger punishment for greater offense, does suffer from lack of implementation, inefficiency of implementing agencies and so on. When all other means of tackling the menace are exhausted, the unfortunate drastic measure is the only hope.

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  9. I am of the view that the implementation has been mismanaged. But one question that bothers me is how does the exercise amount to expropriation? Someone has one crore in cash in 500 and 1000 rupee notes. Govt asks for the amount to be deposited in the bank account. Use this amount. If the income cannot be justified, tax is to be paid on the amount. If someone has 50000 in cash, same thing. Deposit in bank and then use it. The Govt is not taking the money away from the individual as long as its source can be explained to be legal. So how is this expropriation? I am curious to learn. Maybe I missed something or have not understood this well from the post.

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