India has been plunged into chaos since the night of the 8 November, when Prime Minister Narendra Modi, in a 48-minute address, announced that some 14 trillion rupees worth of 500 and 1,000 rupee notes – amounting to 86 percent of all the currency in circulation in India – would become illegal as of midnight. People would have till the end of the year to deposit them in bank accounts (and pay whatever taxes and fines the authorities decided to impose on them) but they were no longer legal tender.
This unexpected shock-and-awe announcement, Modi said, fulfilled a declared campaign objective to fight “black money”: Cash made from tax evasion, crime, and corruption. The Prime Minister declared that his announcement would not only rid the nation of black money, it would render worthless the counterfeit notes that were reportedly printed by Pakistan to fuel terrorism against India.
- Demonetisation marked
by poor implementation cause major inconvenience to millions.
- Note ban deals a blow
to the economy with lack of cash affecting both consumption and demand.
- Those at the bottom of
the pyramid suffer due to the so-called “pro-poor” policy
- NDA’s “surgical strike”
seems to be ineffective as old habits of under-invoicing, fake purchase
order and bills will generate new black money.
- Prime Minister’s image
takes a hit and irreparable damage done to institutions like the RBI.
The initial stunned reaction was followed by a panicky scramble to unload the expiring notes: The very night of the announcement, people rushed to petrol pumps to fill up their tanks, jewellers tripled their sales, loans were hastily returned. There were unexpected consequences too: Housewives who had salted away their savings in biscuit tins for a rainy day found that their years of thrift would soon be worthless. In most cases, even the husbands had not known how much their wives had saved.
But within days, the real result of the Modi announcement became apparent – the severe disruption of normal economic activity. Inept implementation made a mockery of the initial shock-and-awe. Not nearly enough new currency had been printed before the announcement, so banks did not have even a fraction of the money needed to meet consumer demand for new notes.
Long queues snaked in, outside and around banks, foreign exchange counters (including at the international airport) and ATMs to change the old notes and withdraw new ones. But the ATM cash trays were largely empty, since the new notes have been made in a different size from the old ones and do not fit the existing ATMs. These need re-calibration, a process that it’s estimated will take 50,000 engineers several months. The government had not thought of making the new notes the same size as the old to avoid this obvious problem.
Blow to the Economy
In the meantime, thanks to the slow speed of the printing presses, cash is in short supply. Banks don’t have enough money and so have restricted withdrawals to small amounts of cash that most customers find insufficient. The initial replacement notes have come in the form of an unusually high denomination (2,000 rupees) that most people do not find useful – especially since the government’s failure to print additional quantities of smaller notes means that no one is able to make change for a 2,000 rupee note.
Since over 90 percent of all financial transactions in India are made in cash, and over 85 percent of workers are paid their incomes in cash, the everyday economy has ground to a standstill.
If this points to an appalling lack of elementary planning on the part of the government, the broader consequences are far worse. The economy has been plunged into chaos, and the decision looks more like a miscalculation than a masterstroke.
The lack of cash has reduced both consumption and demand across the board. A booming economy that boasted the highest growth rate in the world has suddenly become a cash-scarce economy. Production is down in all sectors. Small producers cannot get working capital to keep business going, and many are shutting down.
Daily-wage workers (a large majority of India’s labour force) are losing employment because firms do not have the cash to pay them. All indicators – sales, traders’ incomes, production and employment – are down; India’s GDP, former prime minister Manmohan Singh estimates, will shrink by 1 to 2 percent. Local industries – footwear in Agra, garments in Tirupur – have suspended work for lack of money. The informal financial sector – rural moneylenders who provide loans that amount to 40 percent of India’s total lending – has all but collapsed.
Inconvenience to the Aam Aadmi
Rural India is in bad shape. The fishing industry, dependent entirely on cash sales of freshly caught fish, is wrecked. Traders are losing perishable stocks; farmers have been unloading produce below cost since no one has the money to purchase their freshly harvested crops.
A study by two economists at Delhi’s Indira Gandhi Institute of Development Research found that in mid-November, deliveries of rice to rural wholesale markets were 61 percent below usual levels, soybeans were down 77 percent and maize nearly 30 percent. The winter crop could not be sown in time because no one had cash for seeds, and the resultant harvest is likely to be 25 percent lower.
All this has been hugely destabilising in the short-term.
The Prime Minister asked people to be patient for 50 days, but the process could take much longer, anywhere between four months and a year, before normal money supply is restored. As for the long term, as former Prime Minister Manmohan Singh trenchantly observed, quoting Keynes, in the long run, we are all dead.
As ordinary people clutching their savings waste hours standing patiently in queues that offer no assurance of money at the other end, fatalism battles with exasperation. Stories of individual tragedies are reported daily, of hospitals turning away patients who only have old notes, children not being fed, middle-class wage earners unable to buy medicines for the sick, and as many as 84 people reportedly dying in cash queues or related events.
Those at the bottom of the economic pyramid are the principal victims of this supposedly “pro-poor” policy. Yet they have reacted with stoicism, swayed by the government’s assiduous public-relations messaging that portrays their difficulties as a small sacrifice for the nation. “If our soldiers can stand for hours every day guarding our borders,” one popular social media meme asks, “why can’t we stand for a few hours in bank queues?”
Pain Outweighs Any Gain
Foreigners have been spared tragedy but not inconvenience: They can only cash a hundred dollars a day and often have to go from bank to bank to get the money. Tourists have returned from Agra without seeing the Taj because their notes were not accepted at the ticket window, and travel plans have been curtailed by lack of new money.
The government’s propagandists boast of a “surgical strike” on black money, but it is clear the collateral damage is so extensive that the pain it has inflicted outweighs any tangible gain, at least as of now. (Add to this the economic cost of printing and replacing notes, estimated at Rs 1.25 trillion.)
As December began, new victims surfaced, from salary earners trying to get money out of their bank accounts and pensioners unable to receive their monthly allowances, to fathers and brides unable to finance long-planned weddings at the peak of the Hindu marriage season. Indians were surviving on a little more than a quarter of the cash that had been in circulation at the beginning of November —and this in a country where cash represented 98 percent of all transactions by volume and 68 percent by value.
Unfortunately, there is no evidence that any of the declared objectives of the scheme will be attained. In a largely cash-fuelled economy, all cash is not “black money” and all black money is not cash: In fact, most of it has been invested in real estate and other property, gold and jewellery, investments in property abroad and “round-tripping” that has seen the money return to India’s stock market as “foreign investment” via countries like Mauritius. The Modi move therefore touches only a small proportion of black money assets.
Money Launderers At It Again!
Worse, the government had hoped that the sudden move would eliminate a large portion of the black money holdings altogether from the government’s liabilities, since some hoarders would destroy their money rather than attract the attention of the taxmen by declaring it. But those who held large quantities of black money seem to have been more resourceful than the government and have found creative ways to launder their money, with the result that most of the estimated black money in circulation has flooded into the banks.
Some well-placed friends of the ruling party were allegedly tipped off before Modi’s announcement, leading to suspicions that the well-connected may have had time to dump their black money stocks. Experts agree that the amount of black money that will eventually be recovered will fall significantly short of the initial estimates. Indeed, there may be no liability write-off at all.
And since corruption seems to be a way of life in India, it will not be long before the old habits of under-invoicing, fake purchase orders and bills, reporting non-existent transactions and straightforward bribery all generate new black money all over again. The government’s plan is therefore likely to be ineffective in the long term, since it does nothing to control the source of black money.
Myth of Cashless Society
Meanwhile, the goalposts keep shifting: The Reserve Bank of India has issued no fewer than 51 notifications on demonetisation, each tweaking an earlier announcement. The prime minister and finance minister are now talking about moving India to a “cashless society”. But they seem blissfully unaware that over 90 percent of retail outlets do not even have a card reader, that half of India’s population is unbanked, and that the overwhelming majority of their countrymen and women still function in a cash economy.
The digital infrastructure for “cashlessness” simply does not exist: India offers some of the slowest broadband speeds in the world, and at least a third of the population have no reliable supply of electricity. Ironically, the rich – more likely to hold credit cards and be “cashless” – are relatively unaffected; the poor and the lower middle-class, who rely on cash for their daily activities, are the main victims.
Impact of Monetary Disruption
Among the long-term effects of this monetary disruption could be unemployment and severe dislocation of India’s informal economy; the collapse of many marginal businesses unable to survive the ongoing loss of income; severe reductions in the winter crop and problems of agricultural credit; and the accelerated flight of investment out of India.
Even more worrying is the risk of lasting damage to India’s fledgling financial institutions, most notably the Reserve Bank of India, which conspicuously failed to exercise its autonomy, to anticipate the problems of Mr Modi’s scheme and to alleviate its impact. The inexplicable silence of its governor, Urjit Patel, has reduced him to a lamb.
Modi’s Image Tarnished
While many Modi fans are blaming the implementation rather than the prime minister’s intent, the fiasco was inherent in the design of the policy. It is clearly a "symbolic" policy – high ambiguity, high conflict, top-down, centralised, and authoritarian. There is no “policy skeleton”, no cost-benefit analysis, no evidence that alternative policy options were considered.
It is clear no impact study was done, judging by the blizzard of new official notifications every day, tweaking and fixing the regulations. The government has presided over a non-transparent policy environment that seems entirely non-conducive to the creation of a cashless society.
Modi came to power in 2014 promising to boost growth, create jobs for India’s youthful population and encourage investment. These objectives lie in tatters with his ill-thought-out demonetisation. His reputation for being an efficient and competent manager is irremediably stained by the implementation disaster. How long it will take for India to recover is anyone’s guess.
(Former UN under-secretary-general, Shashi Tharoor is a Congress MP and an author. He can be reached @ShashiTharoor. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)