While it is easy to tweak models on a software to try and achieve projected outcomes, rebuilding what has been an erosion of a lifetime of trust in the monetary and banking systems after a failed rollout of a demonetisation scheme is going to take decades of work.
“THIS planet has—or rather had—a problem, which was this: most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn’t the small green pieces of paper that were unhappy.”
– English author Douglas Adams, ‘The Hitchhiker’s Guide to the Galaxy’
Yesterday, the Supreme Court in a 4-1 decision ruled that the 2016 demonetisation exercise in India was constitutional. Though there was a dissenting judgment, even it was cognisant of the fact that not much can be done about demonetisation now. Like a natural event, demonetisation is something that happened and it will be something that remains in our psyche going forward as a people.
We must remember that money is a measure and not a store of value. This makes money inherently a psychological concept. Amongst psychological concepts, money perhaps ranks among justice, truth, liberty and fairness. As a society, we have expressed these fundamental values in these simple but powerful words.
When you “shock” the monetary system by demonetising currency overnight; when there are days of uncertainty following the event as the government has no plan in place to roll it out properly; when people die waiting in queues to preserve their life savings; what does it lead to?
Also read: Dissecting the majority and minority opinions in the demonetisation judgment
Belief in banking system eroded by demonetisation
In a democratic society, people control the purses of the government. There is a relationship that is expressed and measured in money. The amount the government may tax is the amount the government may spend. Money, therefore, like language, is something that is used to interact with the State, which is perhaps why the most stable currencies globally have one thing in common: their control is independent of the political branch of the government. If you are going to have a capitalist State that relies on the enterprise of the governed to maintain its coffers, you need to make sure that money remains sacred.
In bygone empires, before the era of fiat money, the independence of money was preserved in the rarity of gold and other precious metals. Now it is preserved by the impartiality of banking regulators and currency institutions. A society which witnessed a shock like demonetisation will suffer when the independence of money is sacrificed at the altar of expediency by the political class.
I remember a story my late father told me about the time when he had just joined the State Bank of India as an officer in the 1970s. He was posted in a remote area in the Northeast. The local people had little idea about banking operations. This was when India was making a conscious effort to introduce banking among under banked populations. One night, he was woken up at around one in the morning. He opened his door to find a tribal person, sickle in hand, demanding that the bank be opened. The person wanted to make sure that the cash he had deposited the previous morning at the bank was still in the branch, and had tracked down my father to ask him to open the branch at night so he could inspect and count his cash.
Thankfully, my unarmed father managed to persuade his neighbours to intervene and calm the gentlemen down without having to undertake an ad hoc lecture on the virtues of fractional reserve banking. The next morning, when the branch opened, the tribal person came over, withdrew all his cash, sat on the floor of the branch, promptly counted it and, once he was convinced the bank wasn’t stealing his life savings, put his money back in the bank and went home, still carrying his sickle with him.
It was a mammoth undertaking for this country to convince people to gain faith in monetary and banking systems. Most of India would put their savings in gold and bury it in an undisclosed corner of their house. People gaining trust in the little pieces of paper printed by the Reserve Bank of India was key to driving the growth that India has witnessed over the last few decades. More small savings means more money for investment in things like infrastructure and innovation. Things a nation needs if it wants to continue to rise.
If something is legally correct, it does not automatically become constitutionally sound. The verdict of the Supreme Court has shown that, legally, the Reserve Bank of India’s independence is on shaky ground, and the government has near-total control over your wealth to the point that it can even invalidate it.
When you “shock” the monetary system by demonetising currency overnight; when there are days of uncertainty following the event as the government has no plan in place to roll it out properly; when people die waiting in queues to preserve their life savings; what does it lead to? Gold — that you can lock in a household locker — suddenly becomes a far more attractive way to save wealth.
Also read: Six years later, the adverse impact of demonetisation persists
What was the point?
Whether demonetisation was the right call given the problem is a question I will refrain from answering. This is for two reasons. Firstly, because we still don’t know exactly what problem the government was trying to fix. There is no tangible reason that formed the basis for this decision, only political talking points. Secondly, even if it was the right call, it should not have been done the way it was done.
So many people suffered. People have a constitutional right to expect planned governance. While it is easy to tweak models on a software to try and achieve projected outcomes, rebuilding what has been an erosion of a lifetime of trust in the monetary and banking systems after a failed rollout of a demonetisation scheme is going to take decades of work. Time that this country can seldom afford. We took a step backwards when the 2016 demonetisation was done.
If people can’t put their trust in money, the mechanism by which money is used to communicate with the political class will also be damaged. People won’t take taxes seriously and they won’t take government expenditure seriously either. After all, if with a stroke of a pen, all of that can be erased, what is the point? This is where the Constitution suffered when demonetisation was done in that manner. The legitimate exception of being able to live an orderly life was attacked for no proximate cause. It is this legitimate exception that inspires faith in the government, it is why we obey laws and trust that others will ordinarily observe them as well.
Also read: RBI affidavit on demonetisation obfuscates rather than clarifying
If something is legally correct, it does not automatically become constitutionally sound. The verdict of the Supreme Court has shown that, legally, the Reserve Bank of India’s independence is on shaky ground, and the government has near-total control over your wealth to the point that it can even invalidate it. We may have to rethink the scope of constitutionally guaranteed freedoms like property, if these fundamental freedoms are treated the way 500 and 1,000 rupee legal tenders were in 2016.