Narendra Modi’s penchant for high drama has not only taken India by surprise but unleashed a reign of chaos on unsuspecting citizens. At stroke of midnight on November 8-9, 2016, 86 per cent of Indian currency in circulation got invalidated.
The stringent limits on cash withdrawals, long queues outside banks and non-functioning ATMs indicate not only the government’s unpreparedness to handle the situation, but perhaps thoughtlessness as to the short- and long-term consequences of the act. Moreover, some hidden motives behind the drastic action cannot be ruled out. The stated objectives for demonetisation have been to flush out black money, to remove counterfeit currency and to stop terror funding.
The stand of the Government of India on terror has always been that the major problem is not homegrown terrorism but cross-border terrorism. Cross-border terrorism is sponsored by international funding, its source is outside India and the currency is not Indian rupees but other international currencies. Demonetisation can’t really tackle the problem. Similarly, the problem of counterfeit notes was not such a big one as to necessitate such a drastic action. According to a study done by Indian Statistical Institute in 2015, at any given point of time, counterfeit notes of an approximately. value of Rs 400 crores were in circulation, which is a mere 0.025 per cent of total budget outlay of Rs 19.78 lakh crores. Just the printing cost of the withdrawn notes is approximately Rs 12,000 crores. What sense does it make to waste Rs 12,000 crore “investment” in printing the notes just to put out of circulation counterfeit notes worth Rs 400 crores? Not to mention the additional cost of printing new ones!
The most-hyped argument being given by the government and the Prime Minister is that demonetisation is all about flushing out black money. Cash money consists of a miniscule percentage of the total black economy. Unlike what was shown in Hindi films of 1970s and 1980s, unaccounted money is not stacked inside mattresses, rather turned into other forms of unaccounted wealth by investment into real estate, bullion, foreign currencies, hundis, foreign accounts etc. Even by conservative estimates, the black wealth is around 20 per cent of GDP. This means the annual generation of black wealth is around Rs 30 lakh crores. The value of the withdrawn currency is approximately Rs 14 lakh crores. Not all of the withdrawn currency is black. Even if half of it is unaccounted money, still the figure is really less compared to the total amount of black wealth generated annually. Much of this unaccounted money will get back into the parallel economy eventually through money-laundering. There are rackets buying old notes at a discount, selling gold and foreign currency illegally. With this sudden act, the government has effectively incentivised unproductive consumption. By withdrawing higher denomination currency is not going to make any major impact on the black economy as it doesn’t address the genesis of the problem of generation of black money. Without structural changes, institutional and tax policy reforms, it’s not possible to hit out at the root causes that generates black wealth and operates as a parallel economy.
In this “crusade” against black money, an act like demonetisation that has impacted 1.25 billion people, including the poorest, was thrust upon the people with just a notice of four hours, ostensibly to catch the hoarders of unaccounted currency unawares, and not to give them any time to manage the situation. Going by this logic, it’s extremely surprising that the Prime Minister, in his speech in Goa, announced that next in line are the benami property owners who would be targeted post-December, thus giving enough notice and time to benami property owners to take necessary measures to safeguard their unaccounted wealth that would be exceeding far more in value that the unaccounted cash. It seems that after failing to recover black money from foreign accounts and delivering Rs 15 lakhs to every bank account holder in India, the burden of unveiling black money has fallen on the shoulders of ordinary citizens standing in long queues outside the bank.
The suffering of people standing in queues for hours to get their own money is just the tip of the iceberg. Demonetisation is going to hit the informal sector that accounts for nearly 40 per cent of India’s GDP, but provide almost 80 per cent of employment. The informal sector functions primarily on cash transactions. The rural areas are hit the most. Without adequate banking facilities and banking experience, people in villages are wiped out of their meagre savings and are potential victims of exploitation by petty officials and local influences like moneylenders. They could easily be subjected to deliberate misinformation, rumours and fall prey to attempts by unscrupulous rogues to wipe out their life’s savings. It is also going to hit the employment prospects of rural-urban migrants, most of who get absorbed in the informal sector.
Agriculture is another sector that is hit badly. The timing of demonetisation coincided with the sowing of rabi crops. This is time to buy seeds, fertilisers and other necessary inputs for the next cycle of crops. To deprive small farmers of cash at this time is suicidal. It’s going to have a negative impact on produce and will add on further to the spiralling food inflation, causing more misery to the people.
In the absence of a widespread banking network and banking literacy, the sudden demonetisation is creating utter confusion, chaos and misery for the majority of Indians. Despite the much-flaunted Jan Dhan Yojana, the number of bank account holders remains around 400 million, with a high dormancy rate of 43 per cent. It implies that more than half of the Indian population do not access banking facilities and rely on cash transactions. In his zeal to usher in a cashless economy, Mr Modi might tweak around a famous statement purportedly made by Marie Antoinette and say “If they don’t have cash, let them use credit cards”.
