The generation of black incomes is a continuous process. Black incomes re-enter the ‘white’ economy in a laundered form. A businessman’s aim in life is not to live in a house with gunny bags of notes, but to keep multiplying his money, for which he needs to buy ‘white’ assets. For example, builders take part of their payments in cash, but they don’t keep storing cash in underground pits; rather, they redeploy the cash in real assets on a continuous basis. At any given time, therefore, of the accumulated wealth generated through these processes, only a portion is in the form of notes, which is the amount needed for circulation. (Imagine a game of musical chairs, with notes as the person left standing.)
While demonetization may inconvenience traders to the extent to which they happen to have it in note form at the time, it is an interruption, not an eradication. Necessarily, the State has to reintroduce legal tender to replace the demonetized notes, whereupon the process can start again, as long as the activities themselves are not eliminated; and the State cannot keep on repeating demonetization, as it would destroy faith in the currency.
Capital flight from the country is not touched at all by demonetization (except for a day’s transaction), since it takes the form of receiving cash here, and crediting it abroad without any physical movement of currency out of the country. Capital flight has risen very steeply in the period of liberalisation, since it has (i) increased inequality very sharply, and it is the rich who have the capital to send out of the country; (ii) multiplied the financial entities and links operating in the country which can facilitate capital flight; and (iii) multiplied the ‘legitimate’ external financial and physical transactions in which such flight can be hidden.
This has been corroborated by Global Financial Integrity reports (which estimate illicit financial flows from India to have risen from 1.5% of GDP in 2002 to 4.5% in 2011). A GFI report on India says: “liberalization of trade and general deregulation led to an increase in illicit flows rather than their curtailment…. It seems that trade liberalization merely provided more opportunities to related and unrelated companies to misinvoice trade.” More importantly, as inequality grows, so do illicit financial outflows: “more rapid economic growth in the post-reform period has actually led to deterioration in income distribution… A more skewed distribution of income implies that there are many more high net-worth individuals (HNWIs) in India now than ever before. Based on the capacity to transfer substantial capital, it is the HNWIs and private companies that are the primary drivers of illicit flows from the private sector in India (rather than the common man). This is a possible explanation behind our findings that the faster rates of growth in the post-reform period have not been inclusive in that the income distribution is more skewed today, which in turn has driven illicit flows from the country.”[1] Correspondingly, the checking of illicit flows would require measures counter to the entire thrust of neoliberal economic policy.
As for foreign accounts, with which this whole drama started, the world’s wealthy (including the Indian elite) do not transfer wealth to secret accounts abroad with the aim of getting negative rates of interest. They re-invest the amount in businesses and properties around the world, including very heavily in India. (Hence there would be no Rs 15 lakh per Indian sitting in foreign accounts to be ‘brought back’ to India.) Anil Ambani, one of the present Government’s biggest backers, has actually been named in a U.K. court judgment for its round-tripping capital back to India through London, the world’s centre of illicit capital.[2]
True, relatively small/medium traders must have been caught with their pants down, by what they thought to be their own party. Some people have wondered why the BJP, which once was identified as a party of traders, would harm its own constituency. The notion that the BJP is a party of small traders is rather outdated. More importantly, it is a characteristic of fascistic politics that, taking advantage of myths about money, it distances itself from ‘dirty’ moneybags (somehow associated with dark anti-national forces or communities), appeals to the ‘little man’, and diverts attention from the real lords of property. This may be the real significance of the present demonetization.
One wonders which genius coined the phrase ‘surgical strike’ for this operation. Is it ‘surgical’ to bomb the whole of your own population, especially the innocent and helpless, in the name of catching that one per cent who are criminals? Rs 500, or even Rs 1,000, is not a large sum of money today, and vast numbers of ordinary people have now to waste a working day, or a precious day of rest, on changing notes. One has only to stand in a line outside a bank to see that these lines are made up of the poor and middle class.
If all these travails were to some useful end, they would be gladly tolerated. But the stunt of demonetization will not stop the black economy, which has deep roots in India’s political economy. At the same time, in the short term, demonetization will contribute to depressing demand and employment even further.
[1] Dev Kar, The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, Global Financial Integrity, November 2010.
[2] http://www.thehindubusinessline.com/opinion/columns/vidya-ram/anil-ambani-an-fii-investor/article3512356.ece
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