Bou­quets and Brick­bats

Southasia - - CONTENTS - By S.G. Ji­la­nee

The par­tial de­mon­e­ti­za­tion move in In­dia has its pros and cons.

De­mon­e­ti­za­tion of ₹ 500 and ₹ 1,000 ban­knotes was a pol­icy en­acted by the In­dian gov­ern­ment on Novem­ber 8, 2016, ceas­ing the us­age of all 500 and 1,000 ru­pee notes in the cur­rent se­ries as le­gal ten­der af­ter Novem­ber 9, 2016. The an­nounce­ment was made by Prime Min­is­ter Naren­dra Modi in a live tele­vi­sion ad­dress.

In mak­ing the an­nounce­ment, Modi made good his stated cam­paign pledge of fight­ing “black money” the il­licit pro­ceeds – of­ten held in cash – of tax eva­sion, crime and cor­rup­tion. He stated that some 14 tril­lion ru­pees worth of 500 and 1,000-ru­pee notes of the Ma­hatma Gandhi se­ries (equal to 86% of all the cur­rency in cir­cu­la­tion) had ceased to be le­gal ten­der. By do­ing this, he hoped to ren­der worth­less the coun­ter­feit notes re­port­edly printed by Pak­istan to fuel ter­ror­ism in In­dia.

But the move sent shock waves through­out the coun­try and the short­term im­pact was dis­as­trous as In­dia’s econ­omy went into a tail spin. All in­di­ca­tors – sales, traders’ in­comes, pro­duc­tion and em­ploy­ment - took a plunge. It ap­peared the de­mon­e­ti­za­tion drive had re­sulted in se­vere eco­nomic dis­rup­tion. Small pro­duc­ers, lack­ing cap­i­tal to stay afloat, just shut down. In­dia’s huge num­ber of daily wage work­ers couldn’t find em­ploy­ers with the cash to pay them. Lo­cal in­dus­tries sus­pended work for lack of money. Ac­cord­ing to one re­port, 10,000 con­struc­tion work­ers left Gur­gaon

due to the cash crunch. The in­for­mal fi­nan­cial sec­tor – which con­ducts 40% of In­dia’s to­tal lend­ing, largely in ru­ral ar­eas – all but col­lapsed.

Hos­pi­tals were turn­ing away pa­tients who had only old ban­knotes; fam­i­lies could not buy food; and mid­dle-class work­ers were un­able to buy needed medicine. Peo­ple even died in cash queues and re­lated events.

In one in­ci­dent, a 42-year-old man was re­ported to have com­mit­ted sui­cide af­ter fail­ing to with­draw

₹ 20,000 in cash to pay to his cousin over a land dis­pute and es­cape so­cial boy­cott by a khap pan­chayat in east­ern Ra­jasthan’s Ka­rauli district.

In­evitably, low-in­come and ru­ral house­holds were hit hard­est by the cur­rency re­form. Barter economies re­port­edly sprung up in many towns and vil­lages. Banks lim­ited the amount that could be with­drawn. Scores of wed­dings were called off. In the im­me­di­ate af­ter­math of the de­mon­e­ti­za­tion, In­dian stocks plunged be­low their 200-day mov­ing av­er­age.

Be­cause In­dia’s econ­omy re­lies pre­dom­i­nantly on cash, the mea­sure af­fected a vast ma­jor­ity, par­tic­u­larly those who have the least fi­nan­cial re­sources. ATMs are scarce in In­dia and few ru­ral In­di­ans have a credit or debit card. An es­ti­mated 600 mil­lion In­di­ans — nearly half the coun­try’s pop­u­la­tion — are with­out a bank ac­count. Three hun­dred mil­lion have no gov­ern­ment iden­ti­fi­ca­tion, nec­es­sary to open an ac­count. It would take an eter­nity till the en­tire pop­u­la­tion has a bank ac­count. And the re­form could not wait that long.

The de­ci­sion is likely to cut some amount of GDP growth - “be­tween a quar­ter and three quar­ters” - be­cause of the eco­nomic dis­rup­tion it has caused in dif­fer­ent sec­tors of the econ­omy. Ac­cord­ing to some eco­nomic an­a­lysts, in­clud­ing for­mer Prime Min­is­ter Dr. Man­mo­han Singh, this alone is enough to damn de­mon­eti­sa­tion.

De­mon­e­ti­za­tion has re­ceived flak from other sources as well, such as the AAP chief Arvind Ke­jri­wal calling it “a scam worth Rs 8 lakh crore.” For­eign mis­sions say the cash curbs breach the Vienna Con­ven­tion and have warned of ac­tion.

Frank Hans Dan­nen­berg Castel­lanos, Dean of the Diplo­matic Corps com­pris­ing 157 for­eign mis­sions in New Delhi, said: “The buck stops at PM Naren­dra Modi’s door and he should in­ter­vene to re­solve the is­sue soon.” Roiled by re­stric­tions on with­drawals by their em­bassies, many for­eign gov­ern­ments are re­ported to be con­tem­plat­ing re­cip­ro­cal mea­sures against In­dian mis­sions abroad.

But along with brick­bats there also have been bou­quets for Modi. BJP pres­i­dent Amit Shah ap­pre­ci­ated the de­mon­e­ti­za­tion move be­cause it would deal a hard blow to “black money” which is used in the elec­tions.

Ex­plain­ing the prime min­is­ter’s ac­tion at a press con­fer­ence, the Gover­nor of the Re­serve Bank of In­dia, Ur­jit Pa­tel and Eco­nomic Af­fairs sec­re­tary, Shak­tikanta Das stated that the de­ci­sion to elim­i­nate the notes had been taken be­cause, “whereas the sup­ply of notes of all de­nom­i­na­tions had in­creased by 40% be­tween 2011 and 2016, the ₹ 500 and ₹ 1,000 ban­knotes in­creased by 76% and 109%, re­spec­tively, in this pe­riod ow­ing to forgery. The forged cash was then used to fund ter­ror­ist ac­tiv­i­ties against In­dia.”

Ac­cord­ing to Fi­nance Min­is­ter Arun Jait­ley “de­mon­eti­sa­tion would clean the en­tire eco­nomic sys­tem, in­crease the size of econ­omy and rev­enue base.” The move has re­ceived the sup­port of In­dian Na­tional Congress spokesman Ran­deep Sur­je­w­ala, Bi­har Chief Min­is­ter, Ni­tish Ku­mar, Andhra Pradesh Chief Min­is­ter Chan­drababu Naidu and for­mer Chief Elec­tion Com­mis­sioner of In­dia, S.Y. Qu­raishi. So­cial ac­tivist Anna Hazare wel­comed de­mon­eti­sa­tion “as a revo­lu­tion­ary step” and Pres­i­dent Pranab Mukher­jee hailed it as “a bold step.“

In­ter­na­tional re­sponse has also been pos­i­tive. IMF is­sued a state­ment sup­port­ing Modi's ef­forts to fight cor­rup­tion by the de­mon­eti­sa­tion pol­icy. Sin­ga­pore-based news­pa­per The In­de­pen­dent pub­lished a lauda­tory ar­ti­cle on the move ti­tled "Modi does a Lee Kuan Yew." From mak­ing up his mind to rolling it out, a new Lee Kuan Yew is born in In­dia. It will be re­flected in the legacy of this Prime Min­is­ter," the ar­ti­cle said.

Oth­ers who show­ered en­co­mia in­cluded Chi­nese state me­dia Global Times which called it a "fierce fight against black money and cor­rup­tion." For­mer Prime Min­is­ter of Fin­land and Vice Pres­i­dent of the Euro­pean Com­mis­sion Jyrki Katainen, BBC’s South Asia Cor­re­spon­dent Justin Rowlatt and Swedish Min­is­ter of En­ter­prise Mikael Dam­berg, think this was a bold de­ci­sion on part of Modi.

The con­fu­sion and in­con­ve­nience were largely due to the fact that the size of the de­mand for new notes was not cor­rectly fore­seen and new cur­rency notes had not been printed in ad­e­quate num­bers.

Some have called Modi’s de­ci­sion a mis­cal­cu­la­tion of epic pro­por­tions. But this is an un­char­i­ta­ble judg­ment. The prob­lem needed surgery which could not be de­ferred. A lit­tle tem­po­rary dis­lo­ca­tion in the sta­tus quo was in­evitable. Modi’s ar­gu­ment is short term pain for long term gain. And, on the whole, the mass re­ac­tion is pos­i­tive, due to the hope that it will rid so­ci­ety of cor­rup­tion.

In­dia has set the course, which Pak­istan, with its 5,000-ru­pee note and bur­geon­ing cor­rup­tion might find use­ful to fol­low.

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