(NOTE: This article was published in the INDIA TODAY edition dated January 9, 2017)
Prime Minister Narendra Modi took time off his hectic schedule to have a candid interaction with INDIA TODAY group editorial director Raj Chengappa on the burning issue of demonetisation. This was preceded by an extensive e-mail interview, where the PM held forth on the rationale and timing of the move, his assessment of the outcome so far, the next moves and the goals he has set midway through his term. Full text of the exclusive interview:
Q. Let me begin by asking you about the ‘financial Pokhran’ you set off on November 8 by announcing the demonetisation of high-value notes. There has been both praise and criticism of this historic decision. Are you satisfied with the way it has been implemented?
A. You have termed this decision ‘historic’. You have called it the ‘financial Pokhran’. You have probably used the term in the context of the water-tight secrecy that was maintained through the process. I am glad you have recognized both these important aspects of our decision and its implementation. This decision is so huge that even our best economists remain confused in their calculations. India’s 1.25 billion citizens, however, have welcomed it wholeheartedly and supported it even in the face of great personal difficulties, intuitively understanding its impact and importance. This has not abated even after so many days, in spite of the dire predictions made by our critics. This acceptance, in my view, is even more historic than the decision itself. We have made the world stand up and notice our historically inherent qualities of sacrifice, discipline, understanding and commitment to the nation.
When such a globally unprecedented step is taken, nobody has any reference point for comparison. This is understandable. I was well aware of the magnitude and complexity of the challenge we faced in implementation. And I believe we have lived up to the same. It is no small thing that no significant incident of unrest has taken place in the country. At the same time, as with every other process, there is always room for improvement, and I believe that we can, and must, always improve.
Q. Are you satisfied with the outcome?
A. About the outcome, let me recall some of the objectives I had spelt out on 8 November itself, which were to attack corruption, black money, counterfeit notes, financing of terrorism and other activities threatening national security. Decisive outcomes are clearly visible on all these fronts. Black money has all been forced out into the open, whomsoever it may belong to—whether it is corrupt politicians, bureaucrats, businessmen or professionals. Counterfeit notes, which our intelligence agencies had reported to be available in high volumes with our enemies, have been instantly neutralised. The media has extensively reported on districts famous as counterfeiting hubs being badly hit. Similarly, cash held by terrorists, Maoists and other extremists has also been neutralised. There has been a crippling impact on dangerous and highly damaging illegal activities, such as human trafficking, and the narcotics trade as well.
Q. While demonetisation has been undertaken in India before and elsewhere in the world, never has it been done on such a scale and to an economy that was growing at a healthy trot. What were your reasons, and why then?
A. Experts across the world have advocated demonetization over the years. In 1980, James Henry, the former chief economist of McKinsey, had recommended that high-value currency in the United States be suddenly demonetised to neutralise crime and mafia activities. This has also been said by Prof. Kenneth Rogoff, author of the book The Curse of Cash. Prof. Larry Summers has called for demonetising the $100 note. In a Harvard University paper in February 2016, the former CEO of Standard Chartered Bank mentioned the role played by high denomination notes in illegal activities throughout the world and called for their elimination. The European Central Bank is, in fact, phasing out the highest value denomination of the Euro.
In India, too, demonetisation has been recommended since the 1970s. The Wanchoo Committee, headed by a retired CJI and with leading economists and chartered accountants as members, had in 1971 recommended the demonetization of 85 per cent of the currency, comprising Rs 10 and Rs 100 notes. People across the political spectrum have since called for its implementation, ranging from then Congress CM Giani Zail Singh in the National Development Council to then CPI(M) MP Jyotirmoy Basu in Parliament. What we have done now is broadly in accordance with the recommendations of that committee. Thus, if anything, we are actually 40 years late in this decision of demonetisation. This step was a critical crisis-avoidance measure. Had we delayed it any further, the problem and its corresponding correction would have magnified exponentially in size and complexity.
Moreover, it would seem a matter of common sense to understand that if India’s economy was weak, this decision could not have been made. It was consciously taken when the economy is in good shape, as such a sharp correction could have only been made then to fortify its foundations and give it a further boost. You will also be aware that economic activity in India peaks during Diwali, after which there is a lull for some time. Anticipating the transition challenges post-demonetisation, we timed it accordingly to minimise disruption.
Q. Many questions have been raised on the implementation. Could you have prepared better? Couldn’t the RBI have printed sufficient Rs 500 and other notes before demonetisation was imposed?
A. While it may be okay to make such arguments to score political points, this perception is not correct. Regarding the printing of notes, the planning and strategy was based on India’s usage and requirements of currency. Very few people know that as per the RBI’s evaluation, a substantial part of the Rs 1,000 and Rs 500 notes printed never make it into everyday circulation, and are instead hoarded and stocked away. Furthermore, the common man now has access to a wide variety of alternate digital payment mechanisms, ranging from RuPay cards to online wallets and USSD payments. A basic level of scarcity during the immediate transition was anticipated. I had mentioned this on 8 November itself, urging for support during the temporary period of hardship. Use of old notes was allowed at various critical avenues and outlets to facilitate this very transition, till the pressure eased.
Q. There have been frequent modifications to the original decision your government announced, including another voluntary disclosure scheme, creating an air of uncertainty. Could these not have been anticipated before announcing demonetisation?
A. Regarding the frequent modifications, one must be able to distinguish between niti (policy) and ran-niti (strategy) and not put them in the same basket. The decision of demonetisation, which reflects our niti, is unequivocally clear, unwavering and categorical. Our ran-niti, however, needed to be different, aptly summarised by the age-old saying of ‘Tu daal-daal, main paat-paat’. We must stay two steps ahead of the enemy. You have yourself said that this is a decision of unprecedented magnitude. In my address to the nation on 8 November, I had explicitly recognised that this was a battle against strong forces. When you fight such a battle, you cannot stand still and allow your enemy to gain advantage. If the enemy runs, we will chase them. If they change their tactics, we will change ours. When the corrupt find new methods of cheating, we will identify new methods to clamp down on the same. Also, our government is responsive to feedback and suggestions from the public and the media. When problems are identified, we respond promptly and take necessary steps. Far from indicating poor implementation, this speaks of our agility in responding quickly and keeping up with the evolving situation. I know many will prefer if we issue one guideline and then allow them to walk roughshod over it. Let me assure them that no such thing will happen, and we will use all means at our disposal to prevent any sort of wrongdoing.
Q. The banks have not seemed to be up to the challenge, causing discomfort to the people. Would you agree?
A. As regards banks and post offices, the vast majority of staff has performed with great dedication. I thank them for their commitment and hard work. Yes, there have been a few rotten apples, who indulged in wrongdoing. Firm action will be taken against each one of them.
Q. Many Opposition leaders have criticised the way demonetisation was implemented. They allege that rather than an economic reform, demonetisation was a political move to ensure the BJP’s win in the forthcoming assembly polls, especially in Uttar Pradesh?
A. I pity some of our opponents, especially the Congress leadership, for the desperation they have been exhibiting. On the one hand, they say I took this decision for political dividends, and on the other, they say the people have been troubled and are deeply unhappy. How can the two go together? Maybe, as members of the Opposition, they have to conjure something up to criticise me about, however illogical it may be. I sympathise with their difficulty.
This further highlights the reality in the minds of Congress leaders—they are entirely preoccupied with just one thing, elections. This is the case while they are in Opposition, and was also the case while they were in government all these years. To illustrate my point, let me quote from former home secretary Madhav Godbole’s book Unfinished Innings: Recollections and Reflections of a Civil Servant. As private secretary to then finance minister Y.B. Chavan, he described his minister’s interaction regarding demonetisation with then prime minister Indira Gandhiji: “When Y.B. Chavan told her about the proposal for demonetisation and his view that it should be accepted and implemented forthwith, she asked Chavan only one question: ‘Chavanji, are no more elections to be fought by the Congress party?’ Chavan got the message and the recommendation was shelved.” For us in the BJP, the nation is above the party. We have always lived by the principle of keeping long-term national interest over short-term political benefit. There is nothing political in the demonetization decision. It was a tough decision taken to clean up our economy and our society. If I were guided by short-term electoral politics, I would never have done so.
Q. Your predecessor, Manmohan Singh, even described demonetisation as “monumental mismanagement” and “organised loot”, and estimated that the GDP would drop by two percentage points. What is your response?
A. Regarding Manmohan Singhji, it is interesting that the words ‘monumental mismanagement’ come from a leader who has been at the helm of India’s economic journey for around 45 years—from being the chief economic advisor to the DEA secretary, RBI governor, Planning Commission deputy chairman, finance minister and prime minister—all the while during which large sections of our society have continued to live in poverty and deprivation. What is even more interesting is how, over so many decades, he has managed to ensure that no one ever accused him of the same ‘monumental mismanagement’.
His reference to “organised loot” was perhaps a reference to the unending string of scams under his leadership, from the coal scam to the 2G and CWG scams. Demonetisation, on the other hand, is an unprecedented step to confiscate the loot of the corrupt. As regards growth, when the huge parallel economy is brought into the mainstream, it is only bound to become stronger. As money flows into the banking system and financial trails are built by people, access to credit will become cheaper and easier, spurring economic activity and job creation across all three sectors of agriculture, manufacturing and services. The multiplier effect of introduction of money—which was till now uselessly hoarded and stocked away as cash—into the active economic system will give the economy a further boost. Additional government revenues will be pushed into priority domains, such as irrigation and rural housing, empowering the poor and needy. As corruption is minimized and transparency increased, the ease of doing business will improve, attracting investments. Further, as the economy is more formalised, it will catalyse more jobs and more and more workers will receive the protection and benefits of our labour welfare measures.
Q. The Parliament session was a washout. Even senior leaders like L.K. Advani expressed disappointment. Could the treasury benches have handled it better and allowed a debate on such a major issue? People were expecting you to address Parliament and counter the critics…
A. The government tried its best to keep Parliament functioning. The finance minister appealed to the Congress on several occasions to allow the debate to proceed and assured them that I would participate. I was keen to speak in both the Houses. Yet, there was a concerted attempt by the Congress to derail the functioning of the Houses rather than have a proper debate. I am as disappointed as Advaniji about the outcome, and I hope that the Congress leaders will heed his advice, and that of the president and vice-president, and allow Parliament to function normally in the future.
While opposition in Parliament is understandable, this is the first time it is being used to support and protect the dishonest, and that too so openly. While Parliament sessions being washed out is a major concern, this blatant endorsement of dishonesty is even more disconcerting for the nation. Debate is critical in a democracy. Had they allowed a debate to take place, it would have revealed a number of dimensions of this mammoth exercise to the nation. This would have exposed the Opposition and its attempts to mislead the people. The people of India have seen through the Opposition’s strategy to not let Parliament function and then level unfounded allegations in public. It seems as if some people have still not been able to come to terms with the verdict of the people.
Q. When demonetisation was imposed, it was estimated that the total black money in circulation was Rs 3 lakh crore and this amount would be extinguished. But it appears that most of the demonetised currency will return to the banks. How much of a windfall does the government expect through taxes and penalties?
A. These figures floating around are estimates of various economists and experts, not the government. No one can deny that India suffers from a huge parallel economy. Demonetisation was certainly undertaken to deliver this black economy a body blow, forcing it into the mainstream. However, it was never expected that black money would forever remain hidden and not come back into the banking system. We were, in fact, clear from the beginning that high-value notes should return to the financial system. Why else would we give the banking system so much time and options for the return of the notes? Why else would we allow acceptance of such notes through a host of avenues, ranging from petrol pumps to government dues till 15 December? Hence, a large part of the notes not returning to the banking system was never an expectation or agenda of the government.
We, in fact, wanted the money, and especially the black money, to flow back into the banking system. This is for multiple reasons. It brings back a substantial portion of the Rs 500 and Rs 1,000 notes that the RBI estimated was hoarded and kept out of the regular transactional economy by people storing them in suitcases and cupboards or under mattresses. More importantly, this has left behind a permanent financial trail. When money returns to the bank, it loses its anonymity. Every rupee leaves a trail. This changes the game as the black money that did not have an address till now has been tagged with one. We now know who has it, where and when. Holders of black money may hide behind the bank accounts of others, but unlike cash holdings, they can be traced. In this game of hide and seek, they have a few days to hide, but the government has the time, mechanisms and, most importantly, the will to seek them out. More interestingly, with the existence of such trails, the identification of one culprit invariably leads to the unearthing of even larger sources and schemes of corruption. The media is replete with stories of how authorities on the trail of one set of bad elements have been led to the wrongdoings of many more.
Q. How will the government use the money recovered?
A. You must understand we took the demonetisation decision not for some short-term windfall gain, but for a long-term structural transformation. Our objective was to clean up our economy and society of the menace of black money, purging the distrust, artificial pressures and other ills that came with it. What we did parallelly was to offer those who wished to mend their ways and join the mainstream an opportunity through the Pradhan Mantri Garib Kalyan Deposit Scheme, wherein they will have to pay sharp penalties on the undisclosed income—a tax of 30 per cent, surcharge of 33 per cent of the tax, a further penalty of 10 per cent, besides a mandatory zero-interest deposit of another 25 per cent of the undisclosed income. The revenue collected will be used for the welfare of the poor, downtrodden and marginalised.
Q. There is concern that the recent developments may see the reversal of your promise of ‘maximum governance, minimum government’. Critics say the government’s role is likely to increase even more after demonetisation. This move would be the return of the I-T raid raj, and you are relying too much on I-T officers, bankers and babus to deliver when they are among the most corrupt. What steps will you take to tackle this menace?
A. Earlier, the income tax department used to shoot in the dark. I-T officers had the discretion to pick and choose who to raid, and when, and you know what the result of that usually was. Now, people have voluntarily come forward and deposited their money in banks. This means a financial trail has been established, how much ever someone tries to manipulate and camouflage the same. This can be easily analysed and verified through technology-driven scientific, objective and transparent systems. Contrary to your question, demonetization will, in fact, nullify the discretion of the I-T officer and remove arbitrariness from the fight against corruption. Taking this further would be the simplification of tax procedures and minimising the officer-taxpayer interface. The revenue department is building a system where the entire process of assessment is done online without any need for the assessee to appear before the officer. We are also making increasing use of modern techniques and technologies, such as big data analysis and data mining. Through this, the selection of cases for scrutiny will be based on objective evidence rather than the whims and fancies of officers. The aim is to ensure that the honest taxpayer is not harassed or inconvenienced, while the dishonest tax-evader is efficiently caught and punished. Beyond this, any erring officer or banker will be caught and punished. My government has zero tolerance for corruption.
Q. There are reports of black money being generated again using the new currency. What more measures do you propose to take to curb this?
A. I am glad you brought this up. Here again, we see the contradictions in the criticisms of some of the opponents. They have argued that black money is not in cash and is only in other forms. Yet the same people are arguing that the new notes are getting converted into black money. I am glad they are now accepting that cash plays a big role in black money. Demonetisation was not a sudden one-off move. It was but one in a series of steps we have been taking, since forming the government, to fight black money—attacking both its stock and flow. Some examples include creation of the SIT (Special Investigation Team) on black money as this government’s first decision, the foreign black money act in 2015, PAN being made compulsory, 1 per cent TCS (Tax Collected at Source) for all cash purchases over Rs 2 lakh, excise duty on jewellers ensuring sale of gold is accounted for, and powerful information exchange and tax agreements with country’s like Switzerland, Mauritius and Cyprus. Demonetisation was also timed before GST to clean up the stock of black money before it came into force. GST and adoption of digital payments will thus be critical elements of the network of checks and balances we have put in place over the past two years to curb future generation of black money. These steps reflect a transformative regime change, wherein the government is sending out a clear message to those engaged in malpractices.
Q. You have been a great advocate of digital transactions and minimising the role of cash. Will the pace of digital transactions be able to fill the gap created by the lack of cash in the system? What more needs to be done to hasten the move towards electronic payments?
A. Digital transactions should not be viewed only as a short-term substitute to help through the period of cash shortage. That is not my objective. Many have forgotten that this push to digital has been on for quite some time. As early as February 2016, the cabinet had decided to give a major thrust to digital transactions. Over the past two years, 200 million people have been given RuPay cards under the Pradhan Mantri Jan Dhan Yojana.
Digital transactions deliver multiple benefits. They facilitate proper accounting and sizing of the formal economy. They provide greater ease and security in handling of money, especially for small businesses and ordinary people. They ensure the building of financial records, which enables access to the formal financial system, including loans. They also deliver greater tax compliance, ensuring the dishonest do not escape payment of their dues. Therefore, I see digital payments as a method of cleaning up our economy in the long run.
Let me give you a few real world examples. Once informal small businesses begin to have an electronic trail of their cash flow, they will find it easier to access credit. They can expand and escape from the vicious circle of small size due to informality and lack of credit. Similarly, digital transactions will protect workers by ensuring they get their statutory benefits, which are often not paid when informal cash payment is made. Hence, digitalisation is a major reform with multiple benefits. The early evidence is very promising, with a surge in the use of digital payments by the public. For example, the use of the RuPay card has increased—in the number of transactions and value—both electronically and at the retail level by over 200 per cent and nearly 500 per cent, respectively.
Q. Many feel that politicians and political parties are responsible for generating black money. How can political corruption be rooted out?
A. Let me start with a word of caution. This fashion of reducing any talk of corruption to politics is a dangerous trap. It creates a cover for the many others guilty of the same to get away with it. But, this doesn’t mean I condone corruption in politics. On 8 November itself, I had said the malaise of black money and corruption has seeped deep into all parts of government, including politics. It is imperative that we figure out decisive ways of rooting out black money from politics. I have been regularly appealing for the same. I had asserted before the last Parliament session itself that the need of the hour is to comprehensively take a relook at and reform political funding. I have also repeatedly expressed concern about how our current system of multiple elections not only raises political expenditure, thereby hurting the economy, but also results in the nation perpetually remaining in election mode, stalling governance. We must think innovatively to break out of this continuous cycle of elections. I welcome the Election Commission’s initiative to explore the possibility of simultaneous assembly and parliamentary elections.
At a larger level, over the past few days, people from all walks of public life have experienced how much pent-up anger the people of India have against the evil of corruption. The common man has stood resolute and committed, in spite of all the hardships he has personally faced, as well as all the possible tricks that vested interest groups have tried to play to derail this war against black money. Everyone, especially our political leaders and parties, will have to recognise and accept this groundswell. The tide is fast changing. Those who don’t evolve with it and insist on sticking to their old ways will only get swept away.
Q. At the halfway mark of your tenure, are you satisfied with the progress you have made? What is the vision of the country you have been trying to realise?
A. I believe India is standing at a watershed moment, on the cusp of actualising its inherent potential as a developed nation and global leader. An India where the farmer is happy, the trader is prosperous, every woman is empowered and the youth gainfully employed. An India where every family has a house and every household has access to the basic amenities of electricity, water and a toilet. An India which is Swachh from all forms of filth.
If one does an unbiased, objective evaluation of my government’s programmes and priorities over the past two and a half years, the one thing that will unambiguously emerge is the centrality of the poor, downtrodden and marginalised. All our initiatives are structured to bring about transformational change in their respective domains. Progress along each dimension is visible on the ground for all to see. I am convinced that all of this is achievable if we resolve as a nation to do so—a resolution of not just the government but of 1.25 billion Indians. I am thus putting my heart and soul into building an enabling environment to spark a revolution that transforms India into a developed nation within one generation. I am confident the country can, and will.
(The article was published in the INDIA TODAY edition dated January 9, 2017)