India | India's demonetization policy fails to address real problems

India’s demonetization policy fails to address real problems

Kadayam Subramanian November 24, 2016 11:57 AM (UTC+8)
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The government of India’s decision to demonetize nearly 86% of the circulating currency in the name of fighting corruption and black money has had a huge adverse impact causing chaos and unrest in rural and urban India.

On November 22, the members of the Aam Aadmi (‘common man’) Party (AAP) led by Arvind Kejriwal, chief minister of Delhi ‘gheraoed’ (‘encircled’) India’s Parliament and demanded an immediate scrapping of demonetization. Kejriwal accused the Prime Minister of having centralized all power in his hands without adequate consultation with stakeholders with no preparation for proper implementation of the policy.

The Trinamool Congress (TMC) party, led by Mamata Banerji, chief minister of West Bengal was expected to follow up.

The demonetization move of the central government came as a surprise and shock to the people of India. It appeared to be a decision taken by the Prime Minister alone without adequate planning and preparation. Even the Governor of the Reserve Bank of India, whose role is crucial for the successful implementation of the government policy in this regard, seemed to have been kept out of the consultation process.

The suffering of a vast number of people standing patiently in serpentine queues in front of banks and Automatic Teller Machines (ATMs) for withdrawing their own money despite the cash crunch, was captured on TV screens and in newspaper reports. However, the emerging unrest over the issue has not yet fully manifested itself except for instances of violence.

This undemocratic and non-transparent approach has harmed the process and was a major setback for the Narendra Modi government in New Delhi, potentially capable of destabilizing it.

Parties other than the AAP and the TMC are also deeply concerned about demonetization but are working towards serious plans to deal with the problem within and outside Parliament.

On November 17, AAP leader Arvind Kejriwal and TMC leader Mamata Banerji along with their supporters, held a massive rally for traders, farmers and laborers at the Azadpur ‘mandi’ (‘market’), reportedly the biggest such market in Asia and addressed their concerns. They have also met the President of India and articulated the serious concerns of the affected public especially peasants, workers, traders and others in the country.

The Prime Minister made his dramatic announcement to demonetize high value currency in a TV address to the nation on November 8.

The result has been that millions have lost precious work hours to queue up at banks to exchange their old notes; workers have been plunged into distress with wage payments delayed; states are getting ready for a drop in food production; farmers are unable to access crop loans and commodity supplies in rural markets has declined.

Opposition parties in Parliament have opposed the unplanned government approach on demonetization. Serious questions are raised about lack of preparation to tackle the aftermath of demonetizing 86% of all currency in circulation. Adequate numbers of new currency notes to replace the old ones had not been printed before the policy was announced. Automatic Teller Machines had not been re-calibrated to dispense the new notes.

Urjit Patel, Governor of the Reserve bank of India since August 2016, is responsible for the implementation of the demonetization policy but he has remained completely silent since November 9. He has not found it necessary to make a single statement about the chaos that this process of demonetization has unleashed in the country. Shaktikanta Das, Secretary of the Department of Economic Affairs has been left to do the firefighting in front of the cameras.

From the raging debate over demonetization in the media, we may select a useful presentation. Welfare economist Jean Dreze has noted (Economic Times, November 22) that ‘demonetization in a booming economy, is like ‘shooting at the tires of a racing car’.

The sudden move to demonetize high-value currency notes has created a scary situation for people living on the margin of subsistence. Perhaps the opposition parties are the real targets of the present scale of demonetization and the resulting consequences.

Tall claims about the ability of demonetization to ‘flush out black money’ ‘crush the shadow economy,’ or achieve ‘an all-out assault on the parallel economy’ are based on the wrong theory of the ‘hoarding’ of black money which holds that black money is a gigantic hoard of illegal income that keeps growing in the economy and needs to be flushed out.

However, crooks know better than to keep their illegal income in suitcases of cash. Instead, they spend, invest, launder or convert it in one way or another. They use it to buy property, fund lavish weddings, shop in Dubai or oblige politicians. Of course, at any point of time some black money is likely to be lying in jars or pillow-cases. But going after that residual liquidity is like ‘mopping the floor under the shower.’

Thinking of demonetization as a decisive strike on the black economy is a severe delusion. This point has already been made by many eminent economists, but the government seems to prefer its own echo chamber.

It is to be noted that the main cash hoarders are likely to be political parties. For them, it makes sense to accumulate cash over time, in anticipation of election campaigns. Being in power, the ruling party is less vulnerable in this regard.

Looking at rural India, people waste a lot of time standing in long and serpentine queues in front of banks and ATMs. The liquidity crisis in the informal economy leads to worker layoffs, and many tragic deaths. Wider economic costs are likely to be felt soon.

Reports suggest that economic activity in rural markets has slowed down. When farmers are short of cash, agricultural laborers and local artisans are bound to suffer too. National Rural Employment Guarantee workers are also likely to be badly hit. As it is, they are affected by chronic delays in wage payments. With bank staff out of action for weeks, it is bound to become even harder for them to collect their meager wages. The same applies to social security pensions, a lifeline for millions of poor widows and elderly persons.

For people who live on the margin of subsistence, this is a scary situation.

Real financial inclusion means providing effective banking services to everyone. Today, many people have bank accounts but they are still deprived of banking services because the banks are distant, understaffed, overcrowded and often unfriendly towards poor people.

One reason why demonetization is causing so much havoc is that banks are out of their depths in the first place, especially in rural areas. For instance, they are finding it difficult to keep up with wage payments, pensions and scholarships.

Now, bank staffs are diverted full-time for weeks to renew bank notes. This will cause chaos beyond the demonetization deadline.

Simple measures such as extra bank counters, functional ATMs and better queuing systems could go a long way in improving banking services in rural areas. This is not rocket science.

Further, black money in the sense of illegal income may or may not be earned in cash, and even if it is earned in cash, it can easily be converted into other stores of value.

Demonetization on this scale is thus a huge gamble with the economy. The full consequences are difficult to predict. The best-case scenario is that the economy will stay the course, after the initial disruption, and that significant sums of black money will be neutralized.

The worst-case scenario is a prolonged economic slowdown, with very little result in terms of preventing illegal activity. The initial economic shock, already visible, can easily have ripple effects over the next few months. Delayed sowing of ‘rabi’ crops could affect the harvest months from now.

With employers short of cash, laborers are likely to lose jobs. Macroeconomic trends depend a lot on expectations. If the initial shock creates adverse expectations, the economy’s growth trajectory could be derailed.

The demonetization decision struck the country as lightening and left people cashless.

On November 15, Chief Minister Arvind Kejriwal made a stirring speech on demonetization at the specially convened session of the state assembly before the winter session of Parliament.

He accused Prime Minister Modi of having accepted huge bribes from the two major industrial groups of Aditya Birla and Sahara when he was chief minister of Gujarat in 2012-13. He displayed income tax departmental documents to prove his case. The case is now with the Supreme Court of India.

He said the Prime Minister was cherry-picking black money hoarders while other notoriously corrupt businessmen who had been awarded loans to the tune of millions of dollars were allowed to leave the country with no possibility of recovery of the money.

Modi, he said, was running a government of the rich and attacking the millions of poor in the name of curbing black money and tackling terrorism.

Impressively, the video containing Kejriwal’s November 15 speech in the state assembly containing serious charges against the ruling BJP and the Prime Minister received about 5 million views in just a week after the speech.

The AAP’s social media team said The AAP Facebook Page saw an organic growth of about 640 percent in the week after demonetization. The video has also garnered 172,128 shares on the party’s Facebook page making it the most popular post on the timeline of the party.

The Modi announcement on November 8 on demonetization amounted to USD 211 billion, made illegal tender with the stroke of a pen. Only one per cent of the Indian population pays income tax. The black economy makes up as much as 20 per cent of India’s total GDP, that is, USD 1.74 trillion in PPP terms.

Prime Minister Morarji Desai’s demonetization in 1978 made up just 0.6 percent of India’s then circulating currency though the demonetization effected by Narendra Modi has made illegal 86 per cent of India’s circulating currency. Modi says this is his war on corruption. Kejriwal described it is a war on the poor people of India!

Modi did not realise the implications of his demonetization decision: the impossibly long queues; the futile vigils; the empty ATMs; the exhausted bank employees; the abject misery of millions who live on less than a dollar a day and having to make a choice on whether to stand in line for currency from banks and ATMs or to devote the valuable time to earning money instead.

Modi was unhinged and he cried: ‘My life is in danger. They will kill me.’

The November 8, 2016 demonetization has been viewed as the single biggest disruptive move made by any Indian Prime minister after Independence. Its implementation was pathetic.What should have been charted out on Day One with military precision, emerges piecemeal bits every other day: indelible ink to be used; withdrawals to be increased; banks to remain open on Sundays; senior citizens to stand in a separate line; photocopies of ID cards not required and so on.

Half of Modi’s term as Prime Minister of India has ended. It is not clear what new rabbit the ‘event manager’ PM will pull out of his cap during the remaining term.

The Modi government has so far been working mainly for the welfare of the business community in India: in running hotels, airlines, insurance companies, coal fields, drug companies, power plants, steel smelters, banks and so on.

Every day these businesses make losses, and every day Modi throws more money at them. It would be funny if it were not so cruel. But no one appears to do or say anything; nor take Modi to task for failing to deliver on his promises to the people.

Kadayam Subramanian
Kadayam Subramanian is former Director, Research and Policy Division, Union Home Ministry, Government of India, and former Director General of Police in Northeast India. He is the author, among others, of Political Violence and the Police in India, Sage, 2007, and State, Policy and Conflicts in Northeast India, Routledge, 2016
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