As the country struggles to exchange Rs 500 and Rs 1,000 banknotes after Prime Minister Modi’s 8 November announcement of demonetisation, many are wondering why the section of the population not targeted by the policy is the most affected by it.
People, mainly from the lower economic classes, are lining up outside banks to withdraw money for spending, exchange old notes or deposit cash savings. Stories of daily wage labourers not getting paid and poor families going without food for lack of usable banknotes abound.
Instead of leaving 86% of the country’s currency unusable with one fell swoop, should the Modi government have put in place a spending limit for the old banknotes till the end of the year?
Fears of ‘Illegality’
Kirana stores across the country, due to their close relationships with the neighbourhoods where they’re based, are still accepting the old notes out of courtesy for long-time customers. But now, this transaction has been painted by the brush of illegality. At the same time, there won’t be policing of such activity either. So, what is the purpose of having created this fear in the nation?
“While there are people worrying about converting their black money, the common person is afraid that their currency has turned into worthless paper,” says Abhishek Jhajharia, a Delhi-based Chartered Accountant.
Dr Jayati Ghosh, Professor of Economics at the Centre for Economic Studies and Planning at Jawaharlal Nehru University says:
The most obvious thing would have been to set a date like other countries have done. Set a reasonable date so people have time. That way you’re not disrupting transactions and affecting the entire rural economy. And once they know that the banknotes will stop being legal tender, the market will drive them out anyway. Once you announce that, you start monitoring suspicious transactions. In this way, 90% of the people don’t get affected.
Would a Spending Limit Have Helped?
However, a spending limit would certainly have made the lives of the common non-black money hoarding population far easier. Jhajharia says spending limits could have been applied only to niche markets like groceries to ease transactions for the common person.
Dr Ila Patnaik, one of the country’s leading economists and former Principal Economic Advisor to the Government of India, says she doesn’t believe that demonetisation is a good policy move at all but when pushed, admits perhaps a spending limit would have eased the pressure.
They should have given people time. My problem is you’re trying to find solutions assuming that what was done was right. I don’t agree with the policy itself. So yeah, you can propose this and it’s a good idea once you agree that the policy was a good one.
But a spending limit would have been unenforceable. As Dr Ghosh points out, “Half of our economy is informal, so who can track those transactions? Imposing a spending limit would make no sense.”
Karan Gupta, a businessman and postgraduate in economics based in Delhi, asks:
How would you ensure that a person spends only up to the limit a day? So much of the economy is unregulated, how do you track spending then?
He also points out, “The government demonetised because of counterfeiting, as well as to wipe out black money. Counterfeit notes could still have been used in transactions if a spending limit was applied, but in banks one cannot deposit those banknotes.”
Unenforceable but Worth It?
But despite this seeming consensus on a lack of ability to enforce such a measure, the added convenience in the transition seems to win out over the addition of a possible loophole for black money.
As Dr Patnaik points out, “There are already enough loopholes so I don’t think it would have made more. It would have reduced the inconvenience to people.”
After all, demonetisation was not a decision to target the common person so why should they be affected the most adversely? A person struggling to save black money will continue to do so regardless of a spending limit. As far as the issue of enforcement of such a limit goes, Raghav Bahl, Editor-in-Chief of Quintillion Media says:
You’ve got to trust people. The general person will think the government is doing something good for me, so I should stay within the spending limit set by them.
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