EPW

A Correspondent Writes:

VAGUE REPORTS of a possible demonetisation of the currency are again floating about. Demonetisation could mean one of a number of things, each with its own purposes and implications. The most painless form of demonetisation would be that implemented by France a few years ago, when one new 'heavy' franc was exchanged for 1,000 old francs and prices, wages, exchange rates, etc, were all correspondingly adjusted. Such a measure is completely neutral in its real effect, though it may make a psychological impact in an inflationary situation. The German demonetisation after the last war was of another type.

In Germany a part of all bank deposits was confiscated by the Government on a graded basis, leaving depositors with reduced savings and liquidity. This really boils down to a special type of capital levy. How-ever, it is difficult to envisage such expropriation being tolerated in a normal peace-time economy, not to mention the legal hurdles in its way. Moreover, demonetisation of this type is bound to result in loss of confidence in the currency and the banking system and will be an inducement to prefer real assets to money balances in future.

Yet another type of demonetisation is that enforced in this country in 1946 to bring out concealed in-come held in the form of hoarded currency. Then 1,000-rupee notes were withdrawn as legal tender and holders had to exchange them at the Reserve Bank after explaining how they came to be in possession of the notes, The 1946 demonetisation has, however, made tax evaders cautious and 1,000-rupee notes are no longer used as a store of value. Demonetisation today, if at all it were contemplated, would have to extend to 100-rupee notes. The administrative problems which would arise in exchanging the whole lot of 100-rupee notes in circulation — their number is unlikely to be less than 10 to 15 crores — bogs the imagination.

This apart, what exactly will demonetisation achieve? Only a small proportion of hidden wealth at any point of time is likely to be held in the form of currency notes. Currency is the medium for continuously financing illegal transactions and converting illegal income into various assets such as real estate or gold, whose declared value is lower than the actual price, the difference being paid for in undisclosed currency notes.

Moreover, 'white' money is being constantly converted into 'black', and vice versa. Much of conspicuous consumption is paid for in unaccounted money which, however, in the hand of the recipients becomes perfectly legal income. 'Benami' deals on the stock exchanges and commodity markets make it difficult to trace the transactions to the ultimate buyer or seller. Evenif the existing stock of illegal currency is wiped out by demonetisation, it will be soon replaced as long as such points of contact exist between legitimate and illegitimate deals.

Ultimately the problem of undisclosed incomes and wealth has to be tackled at the source. The major requirement is for the Government to reduce the opportunity for such transactions by generally reducing the gap between the market valuation of goods and the officially-fixed prices. Again, in areas such as real estate, where price increases are endemic to a growing economy and where there is no unique market price, the solution would be to abolish private ownership of these assets. Above all, a check on inflation would be more effective than anything else in eliminating opportunities for speculative profits and black-market deals. there is little doubt that Zakir Husain will maintain it. Radhakrishnan himself may insist that he is retiring. But a scholar never retires; his task is never done. We may only hope that from his book-lined study Radhakrishnan will once in a time emerge to point out our erring ways and put us back on our tracks. The country will need him for his wise and disinterested counsel.

— M K

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