Putting lipstick on a pig: This is expropriation, not demonetisation

The government’s move to demonetise Rs 500 and Rs 1,000 notes, and place restrictions on withdrawals, exchanges and deposits has attracted both appreciation and criticism.

This piece analyses the framework of this discourse and its implications for the economy and society. Terms like “demonetisation”, “corruption”, “inconvenience and hardship”, “implementation” form the basis of this discourse.

Interestingly, most of these terms have originated from the government itself.

This piece argues that by confining ourselves to these terms, we fail to grasp the true nature and impact of this measure.

Costs and benefits

The Indian government’s move to withdraw the legal tender status of Rs 500 and Rs 1,000 notes has had widespread effects on the economy. Holding these beyond a certain notified date will be illegal. Those left with these notes after December 31 will lose their wealth by a corresponding amount. There are daily reports of the plight of urban daily wage labourers, farmers and those in unbanked areas.

The economic impact of this measure is being contested. A great piece by my colleague Suyash Rai argues that the costs of imposing this measure far outweigh the benefits, are likely to affect the poor and under-banked areas disproportionately, and may have a modest impact on corruption at best. Others have played down the likely impact on the poor and rural areas. They have supported the demonetisation as a courageous and bold step towards a larger effort at wiping out endemic corruption and black money.

What is already safe to assert is that for better or for worse, there has been large-scale disruption within the economy. Print and electronic media, social media, daily conversations are consumed with conversations around the principle and implementation of demonetisation, and around issues of corruption and black money.

Yet, most of this discourse follows a predefined framework, using terms and nomenclatures propagated by the government. The framework of this discourse is problematic, and this framework itself may have deleterious effects on our society.

This is expropriation, not demonetisation

Characterising the government’s move as “demonetisation” is the most problematic fallacy of the current discursive framework. In this case, the Central government has said that the Reserve Bank of India will refuse to honour its promise to provide legal backing to Rs 500 and Rs 1,000 currency notes. They will effectively refuse to honour the property rights of those holding them. Every time the RBI issues a currency note, it adds a liability to its balance sheet. By refusing to honour these notes as legal tender, the RBI will extinguish its liability towards persons holding them, in effect enriching itself.

In addition, substantial restrictions have been placed on exchanging old notes for new, withdrawal and exchange of money. This is a substantial interference in the rights of people from accessing their own money. This is expropriation, not demonetisation.

In its broadest sense, expropriation refers to a taking of certain items or goods by the government by refusing to honour the property rights of those holding such items or goods. Bank nationalisation was an act of expropriation. The Indian government refused to honour the property rights of the owners of banks and transferred the ownership of the banks to itself.

Land acquisition is an act of expropriation. The government expropriates the property rights of individuals. Land reforms undertaken in the 1940s and 1950s were acts of expropriation where property held by zamindars was transferred to the states by virtue of laws passed by them.

The Vodafone tax demand by the Indian government has been alleged to be an expropriatory action as Vodafone’s income is being expropriated by imposing an allegedly unfair tax on it.

Expropriation need not be an absolute taking or extinguishment of property rights in all cases.

Even a high degree of restriction or interference with property rights has been held to be expropriatory in many jurisdictions worldwide. Therefore, the government and RBI’s decision to (a) withdraw legal tender status, and (b) impose severe restrictions on withdrawals from one’s own account is definitely an act of expropriation.

This act of expropriation is singular, given the nature of the expropriation and the views of the political party in power. Two of its cabinet ministers favoured a debate early last year on whether the word socialist should remain in the Preamble to the Indian Constitution and its ally the Shiv Sena demanded the removal of the word. This same government is now justifying this expropriatory act as a moral imperative.

The nature of the expropriation is much more problematic. There are at least three ways in which this expropriation is remarkable:

1. In most cases, property rights of certain defined individuals or classes are expropriated. In the case of bank nationalisation, the owners of banks were identifiable individuals, and so were the zamindars who were expropriated when land reform laws were passed. In this case, it is not so. Property rights across the entire economy are being expropriated without distinction. At the same time, there is no single identifiable person who is being expropriated. This is likely to have societal consequences I will elaborate later.
   
   
2. Governments usually expropriate rights, or assets – like wealth, mineral resources, land, intellectual property (through compulsory licensing). In this case, the medium of exchange in society is being expropriated. This is an expropriation of cash, not wealth. This is singular in the annals of expropriatory actions by governments worldwide.
   
   Many governments have demonetised currencies to combat hyperinflation, but no one has withdrawn legal tender status on currency notes in times of normalcy, and imposed restrictions on an individual’s ability to hold cash at the same time. In an economy that is almost completely cash driven, and where most households hold Rs 500 and Rs 1,000 notes as means of exchange for sustenance, this is bound to have serious repercussions.
   
   Money is not just a medium of exchange and a store of value, it is also, as has been argued, a source of social prestige and psychological security. In a cash-based economy like ours, people primarily derive social capital and psychological security from money in the form of cash. This expropriatory measure has therefore arguably extinguished or imperilled the social prestige and psychological security of those who relied on cash money to provide these for them.
   
   
3. Governments usually expropriate the rich to redistribute to the poor (at least ostensibly) or to create benefits for the public good (roads, highways, etc).
   
   Bank nationalisation expropriated the rich bank owners so that Indira Gandhi could use banks as agents of poverty reduction.
   
   Land reforms were done to expropriate zamindars and redistribute land to the poor.
   
   In other countries, governments expropriate owners of oil fields and mineral deposits so that the government can channel the benefits from such resources for the public good.
   
   Since this expropriation is economy-wide, everyone’s medium of exchange is being confiscated/ restricted regardless of whether they are rich or poor. However, the main brunt of the expropriatory action is on the poor.

There are two main ideas being talked about with regard to what the government might do with the windfall in order to redistribute wealth to the poor. To clarify, neither the Government nor the RBI have stated or clarified on what they intend to do, and what legislative changes will need to be made. It is however worthwhile to discuss these as the two broad ideas that are being discussed.

1. The government may improve its fiscal situation and use the fiscal space to provide income tax relief/ loan waivers.
   
   The poor are not going to benefit from income tax relief since only 4% of India’s population pays income tax. The Sixth Economic Census of the Central Statistics Office (March 2016) finds that only 2.3% of non-agricultural establishments received financial assistance from financial institutions. This number is likely to be the same or even lower for agricultural establishments. Loan waivers are therefore going to have minuscule impact, and benefit only those who are well-off enough to access the formal financial system.
   
   
2. The government may, through some legislative jugglery, recapitalise banks and kick-start lending. Again, the gains are going to accrue mostly to the rich and the middle class. It is debatable as to how the unbanked and expropriated 40% would reap the benefits of any bank-led redistributive measure since 40 percent of the country is unbanked (Census 2011).

This is therefore, a unique expropriatory measure that expropriates from everyone in society to benefit those who suffer the least “inconvenience” from the expropriation (more on this later).

Discussing this step as an expropriatory measure brings to the fore legal protections and requirements that are concomitant with expropriation: what is the legal authority for taking away the property of individuals? Is compensation due to those who have been expropriated and if yes, in what form? What due process is applicable to expropriatory measures taken by the government? Calling this expropriation “demonetisation” is putting lipstick on a pig in its truest sense.

Corruption: A crime without an agent

Equally problematic is the way this expropriatory action has re-defined the “corrupt” and “corruption”. All preceding actions against corruption taken by the Indian State in the past have been against those who have either evaded taxes or earned money by committing illegal acts. The issue was that certain people either evaded taxes or did something they were not supposed to, and such people had to be identified and punished. The voluntary disclosure scheme followed this overarching principle by encouraging people who did not pay taxes to come forward. The same principle is at play in the issue over identifying people who have stashed their illegal money abroad, and in the identification and prosecution of officials violating the Prevention of Corruption Act.

This expropriatory measure has the potential to re-define how people think about the corrupt and corruption. For one, the focus is now on confiscating corrupt wealth and black money. Identifying the corrupt and identifying individual acts of corruption has taken a backstage. Expropriation itself has become a mode of punishment. It is being suggestively implied that society has a chance to start again with a clean slate if black money is wiped out. The complete failure of the state to act against corruption is being used as an excuse to infuse society with a new kind of morality.

Second, corruption has now become a crime without a perpetrator. Multiple people I have talked to situate themselves as victims of corruption. A landlord who has built an illegal flat does not give his tenant a lease-deed and accepts payments only in cash told me he was proud the Prime Minister had taken this step on behalf of honest people like him. An auto-wallah who confessed to driving without a permit and did not agree to go by meter railed against the corrupt during the duration of my journey. An Uber-driver praised the expropriation repeatedly while he ferried me. Close to the end of the ride he nonchalantly told me he had to drive carefully since the police had impounded his license the previous day. While these anecdotes hardly constitute statistical evidence, they are indicative of the fact that people go to great lengths to justify their actions as moral and honest.

However, the logic goes, everyone else must be corrupt if corruption is endemic enough to justify this kind of measure. This discourse is elevating the widespread cynicism and hatred against politicians, bureaucrats, the police, big business, small business and the media. Everyone feels like a victim and everyone else is suspect. But no one is a perpetrator or an agent. Everyone wants to sock it to the rich and the corrupt though no one knows who they are. So it is acceptable to take some punches yourself if the corrupt suffer in the process.

The government is at once elevating the pitch for shared sacrifice while also (most probably and hopefully, unintentionally) exacerbating the conditions for social and institutional distrust. Issues of class envy and class conflict are already coming to the fore and may get further magnified in the future.

This, in turn, is likely to create a collective psyche where no individual or institution can be trusted. No one is deserving of empathy since their corruption might be the cause of your suffering. This is happening even though the government is at pains to explain that this will be one among many previous and future steps against corruption. By re-framing corruption as a crime without an agent through this singular action, the government has perhaps unwittingly created the conditions in which the nature of discourse regarding solving corruption in society changes permanently.

This is a simple expropriation at its core. The object and effect of this measure are predominantly expropriatory. The confiscation of black money is an incidental benefit by design. The rhetoric of sweeping up black money and the design of the expropriatory measure do not match up to each other.

Inconvenience is a convenient term

It is inconvenient to have to switch to a mobile wallet and stand in an ATM queue for two to three hours once a week. Many people I have spoken to are ready to suffer this inconvenience if it helps achieve the stated objective of finishing off black money in the economy.

When individuals who depend on their daily wage to feed themselves and their families are laid off, this cannot be called an inconvenience.

The tribulations of agricultural workers and small entrepreneurs cannot be called an inconvenience if their enterprise fails due to the lack of liquid cash.

Sectors of the economy that function largely in cash are suffering disproportionately compared to those with access to plastic money and mobile wallets.

There is an attempt to normalise and standardise the way the effects of this expropriation are to be thought about by using this one word to describe the depth and diversity of suffering within the economy.

There is a breadth of literature on the impact of income shocks on those who are at the lower end of the poverty line. Income shocks push many just above the poverty line back into poverty. They also push many into debt, since their savings are not sufficient to sustain themselves. Small incidents like an unanticipated illness have an outsized impact on their long-term well-being and potential for growth. The current actions of the government have administered just such an income shock on the poorest.

The government should have taken much more aggressive measures to protect the worst affected economic classes in society, but calling this suffering an inconvenience allows it to paper over this failure. Had the government instead defined the consequences of this measure as a “scarcity” of currency, corresponding actions may have been discussed, and some implemented. Government actions and popular discourse during times of scarcity are motivated by a desire to ensure everyone has adequate rations to sustain themselves.

Scarcity creates its own social dynamics. It creates new intermediaries in the market – when food is rationed, black marketeers emerge to supply food at above-market prices. After this expropriation, intermediaries are delivering white money for black for a commission. The war against corruption is creating new forms of corruption.

Mobile applications with horrifying names like “Book my chotu” advertised hired help who could go stand in queues for those who could afford it. Most troublingly, scarcity changes relationships in society by creating new power dynamics.

Hitherto bankers were service providers. Now they are agents of rationing. They have asymmetric power compared to those standing in the queues before them. It is a credit to them that they are still providing services under conditions of extreme difficulty. On the other hand, like any agent of rationing, they are now exposed to mob fury and mob violence.

The customer has now become a beggar. His/her money is locked up in a bank. The psychological security gained from holding money that I alluded to earlier has vanished. Whereas earlier he or she could demand service, now they pray they get to exchange or withdraw money, and can suffer at the hands of a capricious banker.

A moral question

Some have argued that even if the government wanted to take this step, it could have been timed better. But what is a good time for extinguishing property rights? Any time is equally good and equally bad.

Others have argued that the step has been implemented badly. But expropriatory actions are judged first and foremost by the validity of the expropriation itself.

We have been too quick to assume the validity of this measure and debate its implementation.

As long as the terms of the discourse are set by those who introduced the measure, we will also be confined to their predefined moral straitjacket of honesty versus corruption, sacrifice versus timidity and sincerity versus venality.

Empathy will be a casualty.

The government has framed this step against corruption as a moral question. Should we not ask a moral question of the government?

Is it ethical for any State to expropriate the predominant means of exchange from everyone in society, especially in a poor cash-dependent economy?

Anirudh Burman is a researcher at the National Institute for Public Finance and Policy.

This article first appeared on Ajay Shah’s blog under the title: “Problematic terms in the demonetisation debate” on November 25.