Modi’s big gamble backfires on India
About 10 months ago, one of Asia’s largest economies, India, undertook a move that sent shock waves all across the country’s one billion plus people and the world. On the night of Nov 9, the incumbent Narendra Modi government announced that within hours 86% of the country’s money in circulation would become worthless. The move was “demonetisation”. It sent shock waves from the business community to the farmers who were barely making a living. The decision by Mr Modi prompted a total disruption of the way Indians lived their lives. November, which is the wedding season in the mostly Hindu country, saw weddings being cancelled, not to mention deaths of patients who could not afford medication as their old notes were not honoured. People queued up for hours if not days to exchange old 500-rupee and 1,000-rupee banknotes for new ones.
All this was done with a single aim of wiping out “black money” and the financing of terrorism.
On Wednesday, the Reserve Bank of India came out with its data for the quarter ending June this year — and the data speaks volumes.
The data shows that 99% or about 15.44 trillion rupees (US$242 billion) of invalidated currency had been deposited in the banking system of India. This is a far cry from the claims of Mr Modi’s government that as much as 5 trillion rupees would not be deposited as these funds were stashed away illegally to avoid paying taxes.
Mr Modi’s policy to ensure that the tax base would widen from the move has failed to materialise. Although the tax base has widened over the past few months, the widening is in fact the result of India’s implementation of goods and services taxes earlier this year.
To make matters worse, the latest data for Indian economic growth for the second quarter of this year showed that the economy has slowed, with gross domestic product (GDP) growing by only 5.7% compared with 7.9% seen during the same period the previous year.
This was the worst economic data in the past 13 quarters, and there is no doubt that the bad performance could be directly attributed to the demonetisation. The GDP data shows that the sectors that performed badly were the likes of manufacturing, which grew by 1.2% against 10.7% in the same period last year, construction and mining — all of which were cash-intensive sectors that were impacted from the cash squeeze caused by the demonetisation. This is not to mention the fact that the property sector has still yet to recover from the impact of demonetisation.
The decision that shocked the economy and the entire country was made without much thinking and input from more than a handful of people, all because it was a very sensitive issue and could have created a problem had the information been leaked.
The drawback of the demonetisation policy was the fact that most people in India managed to find what they call “jugaad” or an intelligent way to get the work done. The jugaad worked very well for most of the rich and tax-avoiding people to the extent that their funds are nearly 100% intact and some may even have benefited from the policy.
The demonetisation undertaken in haste had the severest impact on the poor and small and medium-sized enterprises.
Some reports suggest that the disruption from demonetisation cost the country as many as five million job losses, with hundreds of thousands of small businesses going belly up as they were unable to find capital to keep their operations running at the peak of the demonetisation crunch from December last year to March this year.
The cost to the economy was one thing. The cash crunch was another and the ordeal of the people was of a scale not seen in decades in India. The outcome was nothing different from the situation where the country started.
This is not to mention the fact that the Reserve Bank of India spent nearly 80 billion rupees during the 12 months from June 2016 to June 2017 to print new notes against 34.21 billion and 37.6 billion rupees it spent in the two previous years to print notes.
The positive outcome of all this has been the increase in the use of electronic payments in the country. But the fact remains that what was done by Mr Modi has been nothing but an utter failure and a lesson for other leaders in the world on the need to heed more than just their inner circle of advisers when making any major decision that could impact the country.
An advisory body that has only “yes men” who are there to please the master if and when advice is sought can only yield nothing more than a disastrous decision such as the move to undertake demonetisation by Mr Modi and his trusted advisers.
But the fact remains that what was done by Mr Modi has been nothing but an utter failure and a lesson for other leaders in the world