NOVEMBER 23, 2016

By Naresh Minocha, Our Consulting Editor

PROVIDE 100% insurance cover for bank deposits

"The Scheme of compulsory deposit is somewhat novel and unorthodox, which we have had to undertake in the situation created by the Emergency."

This is not a peek from our beloved Prime Minister Narendra Modi 's wished-for reply to Rajya Sabha debate on demonetization. This quote is from the speech given by Late Morarji Desai, Finance Minister, in Lok Sabha during April 1963 while moving the Compulsory Deposit Scheme (CDS) Bill.

The difference between the previous CDS' (1963 & 1974 ones), and the present one, is as big as the gulf between democracy-cum-cooperative federalism and dictatorship-cum-State trickery.

Demonetization of Rs 500 and Rs 1000 notes is a fig leaf for unannounced compulsory deposit of citizens' all savings, implemented without imposing emergency of any type. This open-ended CDS is not provided for by any law, unlike the two previous ones for which specific laws were enacted.

Moreover, the Government has inflicted a surgical strike of austerity that has left millions underfed. It has rendered millions jobless. It has reduced vibrant life to a battle for survival. The Demonetization-induced deaths and injuries has no parallels in the modern history.

The cumbersome procedure for withdrawal of Rs 2.5 lakh for meeting marriage expenditure by either groom or bride family reeks of Guest Control Order of the sixties & seventies.

Imposition of austerity on masses under the garb of fighting black money is a masterstroke. It has enabled Government to abdicate its responsibility to cut its own expenditure and delay further disclosure of reports of Expenditure Management Commission (EMC).

Modi Government has cleverly packaged informal CDS as an integral component of demonetization. This has emboldened its supporters like Baba Ramdev to dub any criticism of banking mess as anti-national, pro-black money and pro-corruption.

Demonetization-camouflaged CDS has put public savings at gravest risk in India's history. If any bank where demonetized notes have been deposited fails or is de-registered by RBI, the depositor would get paltry refund of Rs 1 lakh, even if his all deposits including fixed ones aggregate to Rs 1 crore.

This ceiling applies to depositor's different accounts in all branches of the same bank. This ceiling has not been revised since 1993!

Modi regime has not even implemented UPA Government's belated decision to double the deposit insurance cover ceiling to Rs 2 lakh per depositor per bank. While maintaining deafening silence on this issue, NDA Government speeded up its agenda to sell dreams to Aam Aadmi, the latest being illusionary benefits that would accrue to poor because of demonetization.

The flaws in CDS, including its brutal assault on fundamental rights of citizens, can be grasped well by recalling the previous CDS'. During 22 years of CDS ending 1 April 1985, neither economic growth accelerated nor society got reformed. Nor poverty got eradicated. Nor people developed special saving habit.

Announcing the intent to introduce CDS in his budget speech for 1963-64, Mr. Desai stated: "Like taxation, compulsory saving will restrain demand in the immediate future; whereas unlike taxation, it would provide an earning asset to the people and generally help in inculcating the saving habit in the country."

He added: "Once the Nation imbibes the habit of saving regularly, it would have laid the foundation for its future prosperity and well-being. In fact, I would seek savings not only as an individual but as a national virtue."

The scheme was applied to different sections of society including the ones with income below the threshold income tax level. The citizens were thus required to deposit a small part (3% in most cases) of monthly income in CDS accounts. The 4-percent interest bearing CDs were fixed deposits of five-year duration.

The Centre shared proceeds of CDS with the States, which were consulted in advance for their approval for the proposed scheme.

The Congress Government even sought Attorney General of India's (AGI's) opinion on CDS. In his opinion dated 28 th April 1963, the then AGI C. K. Daphtary, steered clear of issue regarding breach of fundamental rights by limiting his conditional opinion only to compulsory acquisition of money by the Government as violation of the Right to Property.

AGI appeared in Lok Sabha to answer questions put by MPs but was not invited to appear before Rajya Sabha, where some MPs from legal profession wanted to grill him.

The issue here is not AGI's outdated opinion but the fact that the Government of the day followed democratic procedures and conventions before launching CDS.

The 1974 CDS was introduced through two diktats - The Compulsory Deposit Scheme (Income-tax Payers) Ordinance and The Additional Emoluments (Compulsory Deposit) Ordinance.

The later Ordinance was dubbed as "most obnoxious" by BJP veteran, L.K. Advani during July 1974 while condemning ordinance spree resorted to Mrs. Indira Gandhi Government. When will Mr. Advani speak on Mr. Modi's informal CDS, which is hurting law-abiding citizens thousand times more the pain caused by legal CDS.

This brings us to core issue: Which law the Government has invoked to introduce deemed CDS and public expenditure control? All gazette notifications relating to banking restrictions and rationing of people's hard-earned money to public have been issued "In exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934."

This sub-section reads as: "On recommendation of the Central Board the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender."

This provision does not envisage rationing of depositors' money. There might be other provisions under different banking laws under which such restrictions could be imposed.

This and several other legal complexities are expected to be clarified by the Government in its submissions to the Supreme Court and High Courts that are flooded with petitions against botch demonetization.

Coming back to demonetization-enhanced risk to public's savings, the percentage of protected bank accounts to total accounts has declined from record 96.5% in 1991 to 92.35% in 2015-16, according to RBI subsidiary, Deposit Insurance and Credit Guarantee Corporation (DICGC).

It is surprising that neither Mr. Modi nor Finance Minister Arun Jaitley have spoken on the need for providing full protection to all bank accounts during their regular sermons on financial inclusion.

NDA Government must explain to the Nation its reluctance to double the insurance cover cap to Rs 2 lakh, a decision taken by UPA in 2012-13.

NDA washed its hands off from this decision. Answering a question in Lok Sabha on 8 th May 2015, the Minister of State for Finance stated: "At present, there is no proposal to increase the existing deposit insurance cover of Rs.1 lakh."

Keeping in view grave danger posed to banking system, Modi Government should enhance deposit insurance cover from present ceiling of Rs one lakh to 100% insurance cover for the deposit of any value.

The issue of hiking insurance cover for hapless depositors has been studied by a few committees over the years. The last panel named Committee on the Differential Premium System for the Banks in India, observed: "In India, there has been a persistent demand from stakeholders and public representatives in the recent past for a hike in deposit insurance cover from the current level of Rs.0.1 million."

In its report submitted during September 2015, the Committee stated: "A hike in cover without calibrating the premium rates to the risk profile of the insured banks only exacerbates the moral hazard. Recognizing this, it has been felt that introduction of RBP may be taken up to make ground for considering raising the insurance cover from the present ceiling of Rs 0.1 million."

Let the Government walk the talk on Demonetization's benefits for the poor by providing for 100% deposit insurance cover.

NDA also needs to separately explain why it has reduced the serious challenge of tackling black money to a cat-and-mouse game. It has to realize that it is doing the same mistake that Vajpayee Government did by amending High Denomination Bank Notes (Demonetisation) Act, 1978 to reintroduce Rs 1000 notes.

The Act says: "Whereas the availability of high denomination bank notes facilitates the illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes and it is therefore necessary in the public interest to demonetise high denomination bank notes."

(The Act in its ordinance form had demonetized Rs 1000, 5000 and 10,000 notes).

In 1998, several MPs had cautioned the Government to not to re-introduce Rs 1000 notes as Rs 500 notes were already been counterfeited in Pakistan and elsewhere and flooded into Indian economy.

As put by P.C. Chacko in Lok Sabha during December 1998, "What is the security of our monetary system? Now fake notes are being printed outside and then smuggled into India….The Government does not have any account. The Government does not have any control. The Heavens are not going to fall if Rs. 1,000 notes are not printed (read re-introduced) tomorrow…; and no common man will die of starvation."

Modi Government has now introduced Rs 2000 note, which would benefit more the corrupt and tax evaders in India and printers of fake notes than Aam Aadmi.

Good governance and common sense requires the authorities to first explain to the public all dimensions of hydra-headed black economy and corruption. The Government should have listed all options required to attack the twin malaise that have not been eradicated so far in any country.

The Government should tone down its political rhetoric on dubious benefits of demonetization. It ought to set up an independent commission to compute the net benefit/loss of demonetization-cum-CDS-cum-public expenditure control to common man and economy.

Simultaneously, it should make public UPA-commissioned three studies on black money and complete five reports of Justice Shah panel on black money. The Government should complement these efforts by issuing an action not taken report on recommendations of various committees on black money and corruption.