On every currency note issued by the Reserve Bank of India, the following statement is printed and signed by the Governor of the RBI: “I promise to pay the bearer the sum of [x] Rupees.” On November 8, 2016, this promise was broken by Prime Minister Narendra Modi in a move that took 86 percent of Indian currency out of circulation. Modi enacted a demonetization decree which removed all 500 and 1,000 rupee bills from circulation. According to the decree, Indian citizens could slowly transfer their newly defunct bills to new 500 and 2,000 rupee notes in small amounts (4,000 rupees a day) with proof of identification. Modi also limited the amount of money individuals could withdraw from their bank accounts to 20,000 rupees per week.
Since November, the Modi government has issued several decrees imposing a litany of new requirements and restrictions. Five days after the announcement, the RBI advised banks to make separate lines for senior citizens and disabled people. Then came the Standard Operating Procedure for putting indelible ink on fingers of bank customers to track who had already exchanged cash. Two weeks later came a decree to allow up to 250,000 rupee ($3,700) withdrawals for weddings. Subsequent caveats—relaxations for expenses like agriculture, medical bills, and authentication cards—kept on coming.
Modi’s demonetization has not only unnecessarily complicated the lives of Indians, his subsequent decrees have violated the social contract inherent in any constitutional republic: that a leader rules by the popular will, within the confines of the law. The Prime Minister cannot use his grip of the former as an excuse to trample upon the latter. While the Indian Supreme Court has thus far kept silent regarding their legality, there is good reason to think that the decrees contravene the Indian constitution both in text and in spirit, by extending beyond the Prime Minister’s delegated power, and by imposing undue unilateral restrictions on the rights and freedoms of Indian citizens.
A Moving Target
Why demonetize? Amar Singh, the pro-demonetization leader of the Samajwadi party, explained to the HPR that Modi fulfilled a major campaign promise of eradicating corruption through demonetization. Singh and other supporters of the move were surprised at the amount of cash that returned to the banking system following demonetization, allowing the government to redeploy it to promote targeted industries. Singh further commented that “too much of politics should not be read into this decision, which is applicable to all the political parties.”
While Modi has changed his justification of demonetization since November 8th, the original goals he outlined were similar to those of the 1978 Demonetization Act, which also featured the phasing out of bank notes. Originally, Modi argued that his actions would rid the economy of black money and corrupt holdings. He then proclaimed that demonetization would cut off cash flows to terrorists and remove counterfeit currency. Shortly thereafter, Modi enjoyed something of a Marie Antoinette moment when his Bharatiya Janata Party (BJP) issued a press release encouraging citizens to transfer their transactions to online banking—in a country where roughly 30 percent of the population is illiterate and the Internet reaches only 26 percent of its citizens. This inspired the final goal: to begin India’s evolution into a cashless economy.
“The story keeps morphing and changing as they keep trying to maintain a positive spin,” claimed Swaminath Badrinath, the Canara Bank Professor of Finance at IIM Bangalore, in a conversation with the HPR. He explained that demonetization does not attack the biggest chunks of illegally held money, which are often tied up in real estate or dummy bank accounts. While Badrinath considers a transition to a cashless economy a more feasible goal, it still faces daunting barriers due to widespread illiteracy and a lack of access to technology in India. In his words, “Modi’s demonetization at best encouraged people to change their behaviors, moving the country slightly toward these goals, but it in no way achieves them.” It seems that while demonetization could help ameliorate some issues in theory, in practice it has resulted in a number of unforeseen negative consequences.
A Botched Execution
Take the case of Madan Ojha, a 32-year-old domestic helper, whose mother was recently diagnosed with a rare degenerative neurological disease. Ojha stood in line for several days to procure cash for medical expenses, hoping to slowly convert his savings to new currency notes to pay the 25,000 rupee medical bill. All of his savings are in 1,000 rupee notes because they are easier to store and, like many others, Ojha has to pay for the treatment entirely in cash. His mother still has not undergone the procedure. Unfortunately, Ojha’s story is one of many that reflect the botched execution of Modi’s demonetization.
Ravindra Verma, the founder and managing director of Mobility Infrastructure Group, was also greatly affected by the November 8th midnight decree. He explained to the HPR that his company invests in Indian infrastructure and makes revenue through tolls. Initially told to accept tolls with the defunct currency for two days before transitioning to the new bills, Verma geared up for this decree by procuring lower denomination notes to provide change. Later that day, the industry was ordered to allow toll-free passage for a limited (though undefined) period. This duration was later extended through December 2nd, 2016, resulting in industry-wide losses of $200 million and a subsequent government promise to repay the stakeholders.
The government’s ability to pitch demonetization as a patriotic act involving short term pain is reflected in Verma’s response. He plans to bring more infrastructure into India and is bullish about the long-term effects of demonetization on the Indian economy. Nevertheless, this story presents a reason for concern for those who hoped that Modi’s actions were taken with a great deal of forethought and planning.
Planning requires methodology, yet Dr. Badrinath was unable to think of any specific economic model that would recommend the seemingly arbitrary cash swapping and withdrawal limits that Modi enacted. He hopes that the numbers are based off of some average statistics available to the government. “Instead of explaining, they said, ‘this is the amount of money that you will get.’ They cannot be totally cavalier about it.”
Through the confusion and chaos, Modi has nonetheless enjoyed substantial support from the Indian electorate. His narrative about sacrificing now for the greater good later seems to appeal to a people well accustomed to self-sacrifice.
There are, however, prominent Indian political parties and figures against demonetization, including Raghav Chadha, spokesman and treasurer of the Aam Aadmi Party. Chadha told the HPR, “in no other country in the world do people face restrictions in withdrawing their own hard earned money from banks. PM Modi’s dictatorial implementation of demonetization has been an assault on the rights and liberties on Indian citizens. After being told by the Modi government what to eat, who to marry, and what to say, people are now being dictated on how much to withdraw and how much to spend in a month.” Chadha’s claims regarding the Prime Minister’s infringement of civil rights have been attacked by Modi’s supporters, who quickly point to the constitutionality of the 1978 Demonetization Act as legal precedent for Modi’s actions.
Following the period known as the ‘Indian Emergency’ in the 1970s, India’s government enacted a demonetization of high denomination currency in order to combat black money and to keep it out of the hands of corrupt government officials. Both the law, known as the High Denomination Bank Notes (Demonetization) Act of 1978, and its implementation were deemed constitutional after a challenge in the Supreme Court of India.
Perhaps Modi’s demonetization is also legal. However, several key differences between the 1978 and 2016 demonetizations imply that the legality of the former may not necessarily provide legal cover to the latter.
Importantly, Modi’s demonetization was done without provocation. Unlike the 1978 demonetization, there is currently no vast social and political upheaval in India that would necessitate such an action. While Modi did campaign on a promise to combat corruption, in a country where 70 percent of all transactions are done in cash, a move this drastic may have exceeded his mandate.
Additionally, this act was done as a unilateral executive decree without consultation, debate, vote, or recommendation. In the 1978 demonetization, a law was passed upon the recommendation of the Wanchoo Committee, a group of political and economic policy experts. This time, even the Reserve Bank of India, a beacon of good governance, was notified about the move only a day before it took place. Modi’s unilateral decision, and subsequent decrees, undermine the institutions of governance that are the foundation of a sound democracy. To Chadha, “it was an entirely unilateral decision by the PM without consultation with his economic advisors, the RBI, eminent economists or even cabinet colleagues. The PM is not an economist, but took this step regardless, therefore he alone can answer for the economic motivations that led him to this bold and catastrophic decision.”
Finally, unlike the Demonetization Act in 1978, Modi never passed a law before acting. His action was similar to an Executive Order in the United States, intended to bypass the legislature altogether. By restricting the amount of money individuals can swap and withdraw from their accounts each day, Mr. Modi has singlehandedly limited citizens’ access to their assets.
Since November 8th, Modi has issued several decrees modifying how Indians can access their property, and under what circumstances. Such decrees infringe on individual rights by unilaterally and arbitrarily assigning rupee values to things such as weddings, medical care, and funerals. These measures have been consistently taken without a vote and without representation of the biggest stakeholders: the citizens of India.
The legality of Modi’s actions is for the Supreme Court of India to decide. Unfortunately for the Indian people, the Justices of the highest court in the land have, so to speak, dropped the ball. In Badrinath’s words, “this is the first time since Independence that every citizen has been so affected by a government action. Unlike the previous demonetization, which only affected the richest of the rich, this is totally unprecedented. The Supreme Court has not responded in any way—the judiciary has basically choked in doing their job.” The highest court of India has refused to accept any public interest litigation against demonetization. It is not clear if or when they will permit such a case to be heard.
This refusal itself may be an indicator of a cozy relationship between the Judiciary and the Legislature, though there is no evidence that the Justices on the bench were coerced in any way into their decision. Regardless, the consequence is that Modi’s actions will remain unchecked at a time when the citizens of India are most in need of an advocate for their rights. Modi’s move also sets a dangerous precedent for the future. There is already talk, at the highest levels of government, of him instructing government officials to arbitrarily go door-to-door and demand proof of property ownership without a warrant. Possible actions like these are being justified under the pretenses of fighting corruption, and may become reality in coming months. No matter how effective such moves are in combating corruption and black money, they exemplify Modi’s predilection towards using his mandate to impinge upon the democratic rights of his citizens.
It can at once be true that Modi’s methods are effective and that they greatly expand his executive power. Yet the former does not justify the latter. Modi’s demonetization decree and subsequent modifications reflect a slow but relentless chipping away of his citizens’ individual freedoms. His disregard for the government institutions in place reveals his imperious nature, which remains unchecked as the Supreme Court silently watches. This sets a dangerous precedence for the future: as long as Modi can continue to successfully sell his autocratic actions to the electorate under the banner of patriotism, his powers can continue to grow without bound.
Image source: Wikipedia/Biswarup Ganguly