An Arthakranti Member Explains How the Government Should Have Implemented Demonetisation

By Kedar Nagarajan | 23 November 2016

Even those from the Arthakranti Pratishtan, a Pune-based think-tank that has widely been hailed as the brains behind the demonetisation announced by Prime Minister Narendra Modi on 8 November 2016, appear to think that the move was hasty. “We acknowledge that the implementation has caused a lot of problems in the short term,” Amod Phalke, a senior member, told me over the phone. “But any attempt to correct such a flawed system will take time and some compromises will have to be made.” Phalke added: “Our stance is simple: we urge the government to be responsive and sensitive to all the problems being faced by the common people currently.”

Since demonetisation was announced, Anil Bokil, Arthakranti’s founder, has stated on several occasions that the policy adopted by the Modi government is not in line with the proposals made by his organisation. “The government has only taken one part of the five-point plan,” Bokil told the journalist Shailesh Menon, referring to Arthakranti’s proposed changes to the economic system, according to a report published in the Economic Times on 22 November 2016. “We had proper transition plan from large currency denominations to smaller ones… They should have stuck to our transition plan at least.” In a report that was published in the Business Standard on the same day, Bokil told the journalist Anup Roy that if the government had “prior knowledge that the high value notes were being used for an imminent terrorist activity,” then Arthakranti had to accept its “overnight banning of high value notes.” “I am saying accept, not that this is what we preferred,” he told Roy.

On 22 November 2016, I spoke to Phalke about the transition plan that Arthakranti had proposed. He explained that a key part of the Arthakranti proposal was not demonetisation, but “currency compression”—bringing down the value of the highest-denomination note that was available in the country. Arthakranti’s proposal, Phalke told me, emphasised the need to move away from higher currency denominations, and recommended that the highest currency in circulation should be Rs 50.

Bokil, a mechanical engineer, founded the Arthakranti Pratishtan—whose name translates to “economic revolution”—in 1995. “Most of us are entrepreneurs from engineering, finance or legal backgrounds that do our independent jobs and also collectively work for the organisation that we set up with a common goal in mind,” said, Adarsh Dhavan, a member of Arthakranti.

The common goal is an economic rejuvenation: Arthakranti believes that India’s current economic system is flawed. To remedy this, it proposes a five-point plan aimed at correcting India’s complex taxation system. The proposal suggests, among other things, the demonetisation of high-denomination notes, and a cap on cash transactions. “The Arthakranti proposal is a well-researched scientific approach designed to completely transform the current Indian socioeconomic scenario,” the think-tank’s website states. “This proposal is politically neutral, it is open for adoption by any political party at national level.”

According to its website, Arthakranti’s proposal includes five steps:

  1. The complete withdrawal of the existing taxation system, including all direct and indirect central, state, and local government taxes, except for customs and import duties.
  2. A tax on or deduction from every transaction routed through a bank (say, 2 percent). This Bank Transaction Tax, or BTT, would be a single-point tax deducted at the source. It would be affected only on credit accounts, and the deducted tax would be then shared between the central, state and local governments, as well as the transacting bank.
  3. No tax on any cash transactions
  4. The withdrawal of high-denomination currency, say above Rs 50.
  5. A cap on legal cash transactions, say Rs 2,000

“A tax system should bring back money to the government,” Phalke said, by way of explanation. “Our tax system encourages evasion and allows for many transactions to be made outside of the banks, leading to a generation of a parallel economy.”

Arthakranti’s purported role in shaping the policy that was adopted by the Modi government has been widely reported. The organisation reportedly approached several political leaders with their rejuvenation proposal, but few exhibited any enthusiasm for it. “We met with several political leaders from the central government and different state governments over the years,” Dhavan said. “We met with Rahul Gandhi, P Chidambaram and even Arvind Kejriwal, but none of them expressed much interest. Some even dismissed our proposal on the basis of the fact that it was too impractical and that it would never work.” In 2013, Bokil and his team met Narendra Modi, then the chief minister of Gujarat. “It was at that time that he was impressed by our proposal and said that he would implement the points he felt would be good for the country,” said Dhavan.

“When we formulated our proposal in 1999, the Rs 1,000 note was not in circulation. The note came into circulation in 2001 and has since assumed 38 percent of the total notes in circulation,” Phalke said. He added that the 500-rupee note accounts for 47 percent of the total notes in circulation. This, he told me, effectively means, that the highest three denominations—Rs 1,000, Rs 500 and Rs 100—account for nearly 95 percent of the total notes in circulation. According to government figures, Phalke added, about 30 percent of the country’s population was below the poverty line. “The poverty line for urban and rural areas respectively is estimated Rs 47 spent per day and Rs 32 spent per day respectively,” he said. “Therefore, what is the need for the higher-currency notes to occupy this much of the total notes in circulation?”

Phalke said that Arthakranti proposes that the highest currency note in circulation be proportional to the per-capita income of India, which is currently nearly Rs 90,000. “The USA’s per-capita income is $53,000 and their highest currency is $100, similarly the UK’s per-capita income is £25,000 and their highest denomination is 50,” he added. “For an economy to be stable and not plagued by black money in this situation, you can either increase the per-capita income or decompress currency. Increasing income is not possible overnight, therefore decompression is the only sensible move.”

He said that the transition plan formulated by Arthakranti proposes getting rid of the higher currency notes gradually, over the course of 18 months. According to some documents that he later shared with me over e-mail, Arthakranti proposed that the currency should be withdrawn in three phases:

Phase 1: First Six Months

  • Withdrawal of 1000-rupee notes
  • 500-rupee notes to be supplied in calculated additional numbers

Phase 2: Next Six Months

  • Withdrawal of 500-rupee notes
  • 100-rupee notes to be supplied in calculated additional numbers

Phase 3: Next Six Months

  • Complete transition is put in place and monitored meticulously

  • Withdrawal of 100-rupee notes

  • 50-rupee and lower value notes to be supplied in calculated additional numbers

I asked Phalke several times why, if the aim was currency compression, the government had introduced the 2000-rupee note. I pointed out that the introduction of a higher denomination seemed to oppose Arthakranti’s recommendations. Although he stressed that the implementation of this proposal was not in line with the vision of Arthakranti’s proposal, he did not address the issue of the 2000-rupee note directly. Echoing Bokil, Phalke added that there may have been reasons for the government to implement this move hastily. “The cost of making the 500-rupee note and the 1000-rupee note are Rs 3.58 and Rs 4.06, respectively,” he said. “Whatever we do, anti-national elements in this country also do. Therefore, the government might have implemented this in haste to stop the counterfeiting of these notes that in turn are used to finance terrorist activities within the country.”

Phulke said that the members of Arthakranti were hopeful that more of their recommendations would be taken into consideration in the coming days, and that this government was “the first to have taken any steps.” “That is our only aim here at Arthakranti,” he said. “We want to see our vision become a reality.”

Kedar Nagarajan is a web reporter at The Caravan.

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