Supreme Court Went Wrong In Saying Demonetisation Had Reasonable Nexus With Eradicating Black Money : Professor Arun Kumar|Interview

Economist Professor Arun Kumar has opined that the Supreme Court went wrong in holding that the demonetisation had a "reasonable nexus" with the objective of eradicating black money.

On January 3, the Supreme Court, by a majority of 4:1, had upheld demonetisation as a legal and valid exercise. While holding the measure as satisfying the test of proportionality, the majority judgment authored by Justice BR Gavai had held that "there is a reasonable nexus between the measure of demonetisation with the purposes of addressing issues of fake currency bank notes, black money, drug trafficking and terror financing".

In an interview with Manu Sebastian, Managing Editor of LiveLaw, Professor Kumar - who is known for his extensive research on the black economy and demonetisation- questioned the rationale of the Supreme Court's finding.

"I think this idea that there is a nexus between demonetisation and ending black income generation is not a reasonable thing at all. Even the dissenting judgment said that the decision to demonetize was well intentioned.  How can we judge a policy on the basis of somebody's intention? It has to be on the basis of whether it could at all have achieved the purposes", he said.

Black money does not mean cash, demonetisation does not affect black income generation

"The premise itself that demonetisation could remove black income or black money is incorrect. That's based on the wrong premise that black means cash. Black money is only one part of the black wealth of a person, because you can hold your black wealth in a variety of ways and you'll hold it minimum amount in the form of black money, because on money, you don't get a return. So you would like to invest it. So my estimate is that, less than one percent of the black wealth is in the form of cash. So you would have got rid of only one percent of the black wealth and the remaining 99 would still be there. We know that all the cash got returned. As the annual report of the RBI, 99.3 percent of the cash came back to the banks and the remaining 0.7 must have been in foreign countries or with old people or others who could not exchange. So none of the black got removed, it got converted into new notes. Therefore not even point zero zero one percent of the black wealth got affected by this measure of demonetisation".

The fact that demonetisation will not eradicate blackmoney was very well known from the experience of the 1978 demonetisation, he added. At that time, the then RBI Governor IG Patel had given in writing that demonetisation would not have the intended effect. Therefore, had the government consulted independent economic experts, it would have been cautioned against the move.

"Now the the government says that we have consulted the RBI over six months eight months. But Mr. Raghuram Rajan(who was the RBI Governor til September 2016) is on record saying that he has advised the government not to go in for this measure because it would not achieve the target of removing black money", he said.

Black money not the same as black economy

He added that black money is not the same as black economy. "Black economy means black income generation. So how do I generate black income? I do under invoicing and over invoicing.  Suppose I'm a doctor, I see 50 patients I declare the income of 30 but not of the remaining 20.  So neither black income generation stopped nor black money got out of the circulation".

"Therefore, it was a complete failure and this was known. I've been writing on this since 1984. In my book in 1999, I've written that why this would not work and why it would damage the economy. If you do it suddenly without full preparation, it would damage the economy.  So in other words, this idea that black means cash is completely erroneous and the idea that demonetisation would get rid of black money is also completely erroneous.  So how could it be well intentioned? How could it be that there's a nexus between what the policy was and what the objective was. There was no nexus. It wasn't well intentioned and we cannot have policies based on intentions. Otherwise I can do something wrong as a policy maker and then say my intention was good and therefore it was all right".

Democratic process undermined

Professor Kumar also spoke about how the decision had the result of undermining democratic processes and the autonomy of institutions.

"The other point that I think needs to be made in this context is that the process in democracy is very important. What is the process by which you have arrived at a decision? It should not undermine democracy, it should not undermine institutions.  I can say for the sake of a form that I've consulted but you know the consultation does not mean concurrence.  

If you undermine the process, you undermine democracy also and you undermine RBI.  Because RBI's credibility went down when all the money came back and I had written an article in Economic and Political Weekly in June 2017 showing that by January 10 itself, 98.8 percent of the currency had come back.  

The process was also important. The process was not properly followed, as we know that the the Government proposed 24 hours in advance to the RBI Board.  The board met for just a few hours at 5.30 PM few hours before the decision was announced at eight o'clock.  So all the steps that were to be taken were already ready and the board simply put a stamp on it rather than discuss it. Where was the time to discuss it? Where was the time for the cabinet to discuss such an important thing or to work out the modalities of what should be done?.   

If you are in a democracy and if you don't discuss such an important step, then quite clearly you are likely to go wrong. It undermined the cabinet, it undermined the board of the RBI, it undermined the credibility of the RBI. So democracy itself got hurt as a result of this". 

No independent stand by the RBI, problems were not anticipated

He opined that there was no independent stand taken by the RBI in the decision making  process.

"We know that after the demonetisation was announced there was mayhem. The banks opened after two days. The ATMs had not been set right. The full amount of currency was not available. Think about demonetisation of the European currencies when the Euro was introduced. It took three years of printing and of minting coins. They were fully prepared and in Germany you could exchange your old notes for the new notes for five years after it was announced. So there was no mayhem. Now when you do the demonetisation in the manner in which it was done, then currency becomes short. In fact the Prime Minister said that even the banks did not know that this was going to happen. So how could Banks prepare? RBI was also not fully prepared. That's why there were 104 changes that were introduced in 52 days during the process of demonetisation. That is roughly two changes a day. That's because problems had not been anticipated. If consultation was full, then consultation should have been also with the Ministry of Finance, with the banks, with the others. Simply one or two people in RBI, two three people in the Ministry of Finance, they cannot plan such a big step. That's why the process got fouled up".

"There were huge queues in front of the banks. You had people who died in the queues. In a report of NDTV, a beggar woman said that one of her children died because she was doesn't have money to feed the children. She used to get 300 rupees as alms every day and she was getting only 20 rupees because people didn't have cash to give her. Such reports have not come out much. Only those reports have come out about people dying in queues. But many others may have also died because of lack of food and so on and then. The other problem is that marriages and so on got postponed because people didn't have money. So there was social implications of the whole process. In other words, this step had huge political social and economic implications".

Demonetisation had no proportionality, it affected people who never generated black money

"Therefore, it is not right to say that we need not look at the the implications of what the steps taken were. You have to look at what was the proportionality. 
The step had no nexus with the black economy.  Instead, it damaged the economy, it damaged those people who never generated black money, who never saw black income at all in their life. So bulk of the people don't have it so.

In my analysis, three percent people generate black income. You should have taken care of those three percent and seen that their black was eliminated. But we know it didn't happen. But the 97 who never generated black they are the ones who suffered. So all this suggests that even proportionality argument is incorrect".

Cancellation of the currency denomination required Parliamentary Act.

While Professor Kumar did not disagree with the Supreme Court's view that all series of notes could be withdrawn using the powers of Section 26(2) of the Reserve Bank of India, he added that cancellation of a denomination of currency required an Act by the Parliament.

 "You can remove all the series but still have the denominations there. But removing the denomination itself should have been through the act of Parliament. So that is where I think the distinction should have been made that.  Yes, "any" could mean "all"  but when the denomination itself is removed, that should have been by the act of Parliament. That's why in 1978 and 46 there was an act of parliament through which demonetisation was carried out".

It was important for Parliament to discuss the matter

In his 2017 book "Demonetisation and Black Money", Professor Kumar had said that demonetisation required discussion in the Parliament. The dissenting judge Justice BV Nagarathna also expressed a similar view.

In the interview also, Professor Kumar reiterated the importance of Parliamentary discussion :

"Demonetisation should have been discussed in the Parliament. The decision should have been based on a more democratic discussion. From 16 November, the Parliament did meet but there was no discussion on this issue. After the Parliament was over, an ordinance was brought on 30th December, the last day for the change of currency. It was later replaced by an Act in February 2017. The parliament never got to discuss it while demonetisation was taking place, whereas it could have been brought as an Act in 16 November when the Parliament met and a discussion could have followed on on the thing.

But the government tried to avoid this kind of discussion while the step was being taken. That, I think is undermining democracy. The ordinance and the Act passed later on merely ratifies what have been done". 

Argument of secrecy is baseless

"If the objective is not going to be achieved then secrecy didn't matter. The argument that secrecy was needed is baseless. Suppose I had black money and I got to know that now these notes will be demonetized, what would I do with it? I would have to pass it on to somebody. So if I had black money, I would would have wanted to convert it to something else. So when I converted it to something else, then I would have to pay that person. Then the questions could have been asked to that person where did you get the money. So he would have to show transactions. Then through those transactions, you could trace it back to wherever the money was paid from. You could ask that person how it was done.

So what did secrecy achieve? Secrecy only disturbed the economy, whereas there was no need for secrecy. Government anyway was saying that when the people deposit the money in the bank then the income tax department will be able to track them. But what has happened? No prosecution has taken place. You know, only one thousand cases were filed and only 28 prosecutions took place much later. Because you have to prove that the the money that was deposited was black and that is not an easy exercise. So therefore you know even though you did it in the secrecy, you could not prove anything".

Supreme Court should have laid down the law for the future

It is true that the Supreme Court could not have undone the act but it could have laid down the law for the future, he opined.

"I think that the main purpose of the Supreme Court judgment should have been to analyze it and say what should happen in such a case in the future.  Now first thing is that it will not affect the black economy.  So it should never be done.  But even if there is some reason why you want to do it - and usually it is done when there's hyper inflation like in the U.S, USSR or Venezuela.  So at least those things could have been clarified but to check black economy it is very clear it doesn't work. So demonetisation under what circumstances it should be done, under what circumstances Section 26(2) should be used,  the Judgment could have clarified".

Government is also conscious that demonetisation failed

He shared the feeling that the government is also aware that demonetisation has failed. 

"I think so because that's why the government or the party in power has not used the issue of demonetisation any time after the UP election in 2017.  Journalists reported at that time that when they went to the villages in the UP,  the poor people said we were hurt very badly but it's a good decision because the black money of the rich people came out. Later on they realized that no rich person stood in the queues and they managed to go through the back door and convert their black into white. So they didn't lose anything. So the losers were only the poor people. So therefore the government doesn't want to remind the public about demonetisation and whether it was successful or not. So therefore this issue has not been raised at all in any of the campaigns after 2017. This means that the government has realised. I don't think anybody would go in for demonetisation in future. It is only if there's hyperinflation that some government may go for demonetisation and not to check black income generation".

The interview can be watched here :