Saturday, November 19, 2016

Demonetisation of Indian Currency and the Islamic view point towards it


On 8th November 2016, the Indian Government announced its decision to demonetize 500 & 1000 rupees notes in the country overnight. It was conveyed that people could exchange the old currency notes at various institutions such as public & private sector banks and post offices. And, individuals could deposit up to 2,50,000 INR into their bank accounts with a promised indemnity from tax on that sum. This hasty announcement has led to a visible unrest and a palpable confusion amidst a whole lot of unanswered questions.  

To understand the issue better, some aspects of the Indian economy need to be studied.

Firstly, in the past few years, Indian public sector banks have accrued a total loss of 2.5 lakh crore INR ($ 37 Billion). This was reportedly lost in loans given out to borrowers who eventually defaulted. In the past 2 years alone, SBI (State bank of India) has incurred a loss of up to 75,000 crore INR ($ 11 Billion) due to these bad loans (which the bank has no hope of recovering). The penurious state of the public sector banks in India has forced them to stop lending money to businesses in the country. Many businesses now have to resort to approaching foreign investors and banks for loans.

Early in June this year, Moody’s Investor Services had said that the Indian government will have to infuse Rs 1.2 lakh crore into PSU (Public Sector Unit) banks by 2020 to bolster their balance sheets and make good the losses suffered by them.

This was echoed by the Indian finance minister in his budget speech this year. He declared that the government had announced a revamp plan - 'Indradhanush', to infuse Rs 70,000 crore into state-owned banks over four years, while the banks will have to raise a further Rs 1.1 lakh crore from markets to meet their capital requirements in line with global risk norms Basel-III.

Secondly, a large section of Indian economy is cash driven. According to a 2015 report from consulting firm PwC (PriceWaterHouseCoopers), 68 of the total value of (small & large) consumer transactions is conducted in cash & 98% of all large transactions happen in cash. Compared to this cash formed 55% & 48% of the consumer payments in US and UK. As a result, a large shadow economy exists (one that is neither taxed nor monitored, nor included in the GDP). According to conservative estimates by McKinsey & Company this stands at 26% of India’s GDP and 1/4th of the Indian economy. And, according to a report tabled in May 2016 by the National Institute of Public Finance and Policy (NIPFP), a public economics and policies institute under the Indian Finance ministry, the cash driven black economy is about 75% of the reported GDP of the country.

Thirdly, since the transactions of this shadow economy happen outside the purview of the banking system, the government is unable to monitor them and thereby receives no taxes on the sum involved or the profits made. Capitalist governments and authorities contend that this unwatched circulation of cash often allows an informal or shadow economy to grow or dominate.

Fourthly, India being one of the most corrupt countries globally is a huge deterrent for international businesses and investors. Although high-profile corruption and scandals have been absent from the Modi administration in the past 2 years, low-level, everyday corruption has flourished unabated, harming the country’s more vulnerable citizens. Corruption Perceptions Index (CPI), a prominent watchdog which scores and ranks nations based upon expert perceptions of public sector corruption, ranked India 38, making it the 76th most corrupt country in the world out of the 168 nations surveyed. This has minified the current government’s prospects of inviting foreign businesses to invest in India.


1.  The Modi government found that quantitative easing (printing more money) for infusing into the banks would lead to hyper-inflation in an already inflated economy. Instead, the government chose to find a mechanism that would infuse the much-needed liquidity into the banks. And the recent decision has had its desired effect. So much so that on the 12th of November, 2 days after the announcement, the Indian finance minister proudly revealed, About two lakh crore rupees deposited in banks till Saturday afternoon in public and private banks”. News reports state that SBI alone received 39,677 crore INR in deposits in just 1 day after the announcement, what it normally receives in 1 month.
2. The Modi Government in its attempt to open up the country's Agricultural & Commodity market to foreign MultiNationals like the US based WalMart has faced large opposition from Trade Unions at mandi’s and other wholesale hubs who deal mostly in cash in making purchases from the farmers and selling to the retailers and by demonetizing the currency the government has ensured that cash strapped Trade Unions now exert lesser influence and control on the agricultural & commodity market can be opened to the big Multinationals.
3. The Indian government, speciously, calls this a drive against black money. Nothing can be farther from the truth than this. The expectation that the government has is that roughly 3 lakh crore INR ($ 45 Billion USD) are not likely to be exchanged for new notes out of the 17.11 lakh crore INR in circulation (according to RBI records as on October 28, 2016).  The government intends to portray that people holding black money will not come to the banks to deposit this amount, fearing high taxes and penalties announced by the government. However, the World Bank’s data of India’s GDP in 2016 was $2073.54 billion which means that the share of shadow economy would come out to be $523 billion USD as the shadow economy in India stands at 26% of the GDP.

Now if we compare the amount of black money in cash , 3 lakh Crore INR ($45 billion USD) with the actual black money that exists in the economy ($523 billion USD) then the black money that will be retrieved through this exercise is just 8% of the total amount. This is because over the years, it has been converted into legal bank deposits, real estate investments, jewelry and a major portion sent to safe havens abroad.
So, in reality, the demonetization will barely have an impact on the income made through the shadow economy or the black economy in the past few years.
4.  It’s an open secret that all political parties maintain large troves of cash, running into hundreds of crores. Most of the campaign finances of Indian political parties are, typically driven by unofficial funds. Data over the last decade shows that about 75% of the money going to political parties in India is from undocumented sources. During the 2016 Bihar elections alone, over 80 crore INR were seized by the election officials.
Demonetization of the currency means that all unaccounted cash that political parties use to buy and cajole votes will simply become paper.

In this way Modi has strangled all major opposition parties in the states having assembly elections in the next few months. Parties and candidates who accumulated unaccounted wealth to cover their election campaigns will now have to find new ways to first dispose off the existing cash and then generate fresh funds.


1.  The Capitalist economies and their banks are driven by giving and taking interest which is the root cause behind the failure of the banks in India and has been the reason for the financial crisis that has plagued the world’s economies since 2007. Allah (swt) says:

وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا
Allah has permitted trade and forbidden (all) interest.” [TMQ Al-Baqarah: 275]

Islam abolishes all interest based contracts only to be replaced by contracts which share returns and risks. The absence of Riba (usury/interest) encourages people not to detain their money in a bank. People would be inclined to circulate it into the market and earn profits than to just regularly incur a 2.5% Zakah on unused wealth. The spending and investments will thus generate economic activity in the society and boost any economy bringing greater employment and better standards of living.

2.  Today’s currency is fiat (paper) currency which has no inherent value nor is backed by real assets, yet it rides on a (false) confidence instilled by the capitalists. This is the primary reason for the ever-increasing inflation the world over. Islam resolves this by making Gold and Silver the basis of the currency in Islam. The Islamic rules have been set in the Quran and Sunnah in terms of Gold and Silver such as the Nisab of Zakah.

The Prophet (saw) established the tangible things as basis for the Islamic currency - the Dirham and the Dinar thereby, defining a currency that has real, inherent value and also retains its value. A currency that is not only backed by its basis but also interchangeable with it. So, in the Khilafah one can go to the Bayt al-Mal and exchange the paper notes for gold or silver. Therefore, inflation is eliminated as the value of gold and silver are stable.

3.  Islam discourages hoarding of wealth and emphasizes that the wealth should not circulate among a few, He (swt) says referring to wealth:

كَيْ لَا يَكُونَ دُولَةً بَيْنَ الْأَغْنِيَاءِ مِنْكُمْ
That it does not become a commodity between the rich among you.” [TMQ Al-Hashr: 7]

Islam has made the circulation of wealth among all citizens an obligation, and it has forbidden the restriction of such circulation to a certain group of people to the exclusion of others.

Hoarding/monopolizing goods is forbidden. Islam treats market hegemony as oppressive and iniquitous. Hoarders aren’t allowed a free run nor monopoly permitted lest the price be dictated by a select few. This is based on the hadith: 

لا يحتكر إلا خاطئ
“Whoever monopolized is a wrongdoer.” [Muslim]

4.  Despite the false assurances by the government that the demonetization is going to help the common man by creating a transparent economy, the only beneficiaries of this economic adventure are the ailing banks of the country and the Government’s reputation and its future political success.

The nature of the Capitalist Economic system is that it works only for the benefit of the capitalists and those who are close to the ruling class and this has led to fasaad all over the world. The crisis in India is not the first. In fact, there have been hundreds of crises that have taken place in India and elsewhere before this. The reality of the Western Secular Capitalist system is like that of the house of the spider which even though complex is so weak, Allah (swt) says:

مَثَلُ الَّذِينَ اتَّخَذُوا مِنْ دُونِ اللَّهِ أَوْلِيَاءَ كَمَثَلِ الْعَنْكَبُوتِ اتَّخَذَتْ بَيْتًا وَإِنَّ أَوْهَنَ الْبُيُوتِ لَبَيْتُ الْعَنْكَبُوتِ لَوْ كَانُوا يَعْلَمُونَ
“The parable of those who take protectors other than Allah is that of the Spider who builds (to itself) a house; but truly the flimsiest of houses is the Spider's house if they but knew.”   [TMQ 29. Ankaboot: 41]

The only solution to this demonetization crisis and all other crises that are created by the Capitalist Economic system in India and globally is through the implementation of Islam which has a detailed and comprehensive Economic system that will solve the problems that have been created by the Western Capitalist system and will establish a just, stable and a prosperous economy.

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