Bouquets and Brickbats
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 Banks limited the amount that could be withdrawn.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.