Ben­e­fits of cash over­haul elu­sive as dead­line passes


Kuwait Times - - FRONT PAGE -

Fifty days ago, In­dia yanked most of its cur­rency from cir­cu­la­tion with­out warn­ing, jolt­ing the econ­omy and leav­ing most cit­i­zens scram­bling for cash. As the dead­line for ex­chang­ing the de­val­ued 500- and 1,000ru­pee notes for new ones hit on Fri­day, many In­di­ans were still stuck wait­ing in long bank lines. Empty ATMs and ever-chang­ing rules pre­vented peo­ple from with­draw­ing money, and many small, cash-re­liant busi­nesses from cin­e­mas to neigh­bor­hood gro­cery stores suf­fered huge losses or went un­der.

De­spite those prob­lems, Prime Min­is­ter Naren­dra Modi said his Nov. 8 de­mon­e­ti­za­tion de­cree suc­ceeded in un­cov­er­ing tax eva­sion and crack­ing down on graft. The In­dian gov­ern­ment is urg­ing pa­tience, in­sist­ing it’s play­ing a long game that will even­tu­ally mod­ern­ize In­dian so­ci­ety and ben­e­fit the poor. So far, de­spite the wide­spread in­con­ve­nience and costs, most of the coun­try’s 1.25 bil­lion cit­i­zens ap­pear to be tak­ing Modi’s word for it. Here are a few things to know about In­dia’s mas­sive cash over­haul:

Hard­ship for the poor

Modi’s an­nounce­ment that 500 and 1,000 ru­pee bills - mak­ing up 86 per­cent of In­dia’s cur­rency - were no longer le­gal ten­der has posed an enor­mous hard­ship for mil­lions of peo­ple who use cash for every­thing from salaries to cell­phone charges.

Almost im­me­di­ately, ser­pen­tine lines ap­peared at banks and ATMs as peo­ple waited hours to de­posit or ex­change old cur­rency notes for new bills. Since au­thor­i­ties only be­gan print­ing the new bills af­ter the pol­icy was an­nounced, de­mand vastly ex­ceeds sup­ply and cash ma­chines of­ten run dry. Daily com­merce in essen­tials in­clud­ing food, medicine and trans­porta­tion screeched almost to a halt. Worst af­fected were the coun­try’s hun­dreds of mil­lions of farm­ers, pro­duce ven­dors, small shop own­ers and daily-wage la­bor­ers who usu­ally are paid in cash at the end of a day’s work. Many lost their jobs as small busi­nesses shut down, com­pound­ing their poverty. Pankaj Ag­gar­wal, owner of a cloth­ing shop in the Old Delhi neigh­bor­hood of Chandni Chowk, says his sales crashed by 70 per­cent.

“You can imag­ine what our busi­ness is like now. It will be some time be­fore our sales nor­mal­ize,” he said. Modi ap­pears to have suc­ceeded in pro­mot­ing the cash over­haul as a “pro-poor” pol­icy, tap­ping into deep anger among the have-nots to­ward wealthy elites. “The first two months have been so bad for us, we don’t even have enough money to buy food,” said daily wage la­borer Neeraj Mishra, 35. “Over­all, I think Modi has done some good. Peo­ple with a lot of money are the ones who have been trou­bled. I don’t have enough cash for it to bother me much.”

Po­lit­i­cal sci­en­tist Sreeram Chau­lia, dean of the Jin­dal School of In­ter­na­tional Af­fairs in New Delhi, de­scribes the strat­egy as “clas­sic pop­ulism.” “Some peo­ple are out­raged, but are hes­i­tant to come out and say it be­cause they don’t want to be branded as anti-na­tional or self-cen­tered,” he said.

A bruised econ­omy

The wide im­pact of the de­mon­e­ti­za­tion won’t be known un­til the gov­ern­ment is­sues its next quar­terly GDP fig­ures in Fe­bru­ary, but the Reserve Bank of In­dia al­ready has shaved half a per­cent from this year’s GDP growth fore­cast, to 7.1 per­cent. Since do­mes­tic com­merce drives most eco­nomic ac­tiv­ity, an­a­lysts have ex­pressed alarm over the scale of eco­nomic and so­cial dis­rup­tion and are warn­ing a con­trac­tion is likely in com­ing quar­ters. “The count­less un­pre­dictable con­se­quences that will con­tinue to show in the com­ing weeks and months mean that it is, in ef­fect, a huge gam­ble,” said Jan Zalewski, an Asia ex­pert with the Bri­tain-based risk as­sess­ment firm Verisk Maple­croft. “In­flict­ing such huge costs for what is an un­cer­tain out­come is prob­lem­atic.”

Real es­tate, tourism, trans­porta­tion and gold and gems have been hit the hard­est, along with in­for­mal sec­tors that rely mostly on cash. Prices are fore­cast to rise since the cash crunch is pinch­ing sup­plies of all sorts of goods. The coun­try’s banks, how­ever, are see­ing ban­ner busi­ness. The cen­tral bank said old notes worth 13 tril­lion ru­pees ($191 bil­lion) had been de­posited as of Dec. 10, with many more ex­pected by Fri­day’s dead­line. That should im­prove bank liq­uid­ity and in turn en­cour­age more lend­ing to boost eco­nomic growth.

Mixed mes­sages, chaotic rules

The Fi­nance Min­istry and cen­tral bank have is­sued at least 60 dif­fer­ent di­rec­tives, some of them con­tra­dic­tory, about such is­sues as how much money can be with­drawn from bank ac­counts and which doc­u­ments are needed for de­posit­ing old cash. The mixed mes­sages have com­pounded the over­all chaos and shaken in­vestors’ con­fi­dence.

“There ap­pears to be less trust in many in­sti­tu­tions, in­clud­ing the Reserve Bank and other banks. That is one im­por­tant be­hav­ioral change that has been ush­ered in,” said Mi­hir Sharma, se­nior fel­low at the Ob­server Re­search Foun­da­tion, a New Delhi-based think tank. Fi­nan­cial ex­perts are baf­fled about how to eval­u­ate the move. “One of the ma­jor prob­lems with the de­mon­e­ti­za­tion move is that suc­cess is so dif­fi­cult to mea­sure,” Zalewski said. “In and of it­self, it can’t end black money, stop ter­ror­ism fund­ing and the coun­ter­feit­ing of notes.”

New bills, old habits

The idea that swap­ping old cur­rency notes for new ones would wipe out tax eva­sion has al­ready been proven naive. Over the last seven weeks, In­dian in­come tax au­thor­i­ties un­cov­ered more than 32 bil­lion ru­pees ($477 mil­lion) in un­de­clared wealth held in new notes, for­eign cur­rency, gold and other com­modi­ties. The Fi­nance Min­istry found enor­mous stashes of new cur­rency bills se­creted away by cor­rupt bank man­agers. Axis Bank’s CEO Shikha Sharma said she was “em­bar­rassed and upset” af­ter it was found man­agers at the bank had used the stolen funds to fake ac­counts and laun­der cus­tomers’ un­taxed sav­ings for a pre­mium.

A global trend?

A month af­ter Modi scrapped the high­de­nom­i­na­tion notes, Venezuela’s pres­i­dent an­nounced that the 100-bo­li­var notes that ac­count for more than three-quar­ters of the coun­try’s cash would be taken out of cir­cu­la­tion. Sky­rock­et­ing in­fla­tion had taken the value of the Venezue­lan notes to 2 US cents from 10 cents in the past year.

But while In­dia’s cash over­haul has been rel­a­tively peace­ful, Venezuela’s was not. When no new bo­li­var notes ap­peared to re­place the old ones, ri­ots and loot­ing erupted in towns across Venezuela, whose econ­omy was al­ready in sham­bles. Hun­dreds of gro­cery stores were dam­aged or de­stroyed. Ul­ti­mately, the gov­ern­ment ex­tended use of the old 100-bo­li­var notes un­til Jan 2.

Venezue­lan Pres­i­dent Ni­co­las Maduro de­clared the abrupt cash over­haul an eco­nomic tri­umph, claim­ing peo­ple were rac­ing to de­posit the old notes into banks. He did not say how much was de­posited. In Pak­istan, op­po­si­tion law­mak­ers passed a res­o­lu­tion last week call­ing for the with­drawal of the coun­try’s high­est-de­nom­i­na­tion note from cir­cu­la­tion. The gov­ern­ment re­jected that move, say­ing there was no need to dis­con­tinue the coun­try’s 5,000-ru­pee note, worth about $48. “The very no­tion of can­cel­la­tion of such con­ve­nience in trans­ac­tions is pre­pos­ter­ous and un­equiv­o­cally de­nied,” the Fi­nance Min­istry said in a state­ment.

KASH­MIR: In­di­ans stand in a queue to de­posit dis­con­tin­ued notes in a bank in Samba dis- trict of Jammu and Kash­mir.

— AP pho­tos

NEW DELHI: In­di­ans stand in a queue out­side a bank.

GAUHATI: An In­dian bank of­fi­cial counts dis­con­tin­ued five hun­dred ru­pees notes.

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