Report submitted by a high level committee to the Ministry of Finance in 2012, had castigated demonetization as ineffective and troublesome.

It has been over a week since the Indian Prime Minister Narendra Modi announced, that Rs. 500 and Rs. 1000 currency notes will be demonetized. His reason, as explained to the public, was to curb the flow of black money in the country.

The move was soon defended by some economic think tanks, and was seen by the general public as a bold move to fight black money in the system. But that was only till the people realized that their government was highly unprepared to support such a demonetization scheme.

The resulting economic disruption has reportedly caused the deaths of about 33 people in the country. Small scale businesses and daily wage earners, which constitute a huge majority of the population are crumbling. Altercations have broken out throughout India, as hospitals and funeral homes are unwilling to offer services. The monetary exchange systems have collapsed.

Image: AP

In view of this mass hysteria, one pertinent question must be asked. Could the Government have prepared better if they knew the effect that an immediate demonetization would have on the public?

In a report titled, ‘Measures to Tackle Black Money in India and Abroad’  submitted to the Ministry of Finance, a committee led by the Charmain of Central Board of Direct Taxes (CBDT), said that demonetization would turn out to be counter-productive. The report explained;

“Demonetization will only increase the cost, as more currency notes may have to be printed for disbursing the same amount.

It may also have an adverse impact on the banking system, mainly logistic issues, i.e. handling and cash transportation may become difficult and may also cause inconvenience to the general public as the disbursal or payments of wages/salaries to the workers will become difficult.

Besides, it may also adversely impact the environment as more natural resources would be depleted for printing more currency notes.”

Not only does the committee think that demonetization would be a logistic disaster which disrupts public life, it also explained in the document that demonetization may not be a solution for controlling black money.

“It is observed that demonetization may not be a solution for tackling black money, which is largely held in the form benami properties, bullion and jewellery, etc.”

The committee, citing another study (NIPFP & Gupta reports), also noted that, demonetization has a history of failure.

“Demonetization undertaken twice in the past (1946 and 1978) miserably failed, with less than 15% of high currency notes being exchanged while more than 85% of the currency notes never surfaced as the owners suspected penal action by the government agencies.”

CBDT is the premier government body under the Ministry of Finance, assigned to deal with black money. It is then a responsibility upon the CBDT, to explain as to why such a demonetization plan was executed under their watch. Especially, when they were fully aware, that demonetization cannot solve the issue of black money, as per their own report submitted in 2012.

Before the general elections in 2014, then Chief Minister of Gujarat, Narendra Modi claimed that 90% of black money is stashed away in foreign accounts.

He boldly said, that as Prime Minister, he would bring back all black money from illegal foreign accounts. This turned out to be a ‘Joomla’, a Hindi word for bluffing. A word used by Modi’s second in command, Amit Shah, when he was asked in an interview about the PM’s claim on returning black money.

Promises such as these, should not be a surprise in India, as the two major political parties, the Congress and BJP, thrive on black money to fund their elections. This was confirmed in a 60-page submission, prepared under the chairmanship of former CBDT (Central Board of Direct Taxes) Chief, M C Joshi.

It was observed in that report, “while the country’s two major national parties claim to have incomes of merely Rs 500 crore and Rs 200 crore, a calculation shows that this would not even be a fraction of their expenses. It is estimated that these parties spend between Rs 10,000 crore – Rs 15,000 crore annually on election expenses alone.”