Home » Politics » A Botched Experiment

A Botched Experiment

By
Font size: Decrease font Enlarge font

The long term impact and political winners and losers of Prime Minister Narendra Modi’s extraordinary decision announced on Nov. 8 to withdraw Rs 500 and Rs 1000 banknotes overnight will not be known for some time. But there is little doubt that the demonetization drive has been executed extraordinarily ineptly and needlessly disrupted the lives of countless millions all over the country, in addition to delivering a short term body blow to the economy.

The stated objectives of the extraordinary step are laudable — flush out black money, counter counterfeit currency, and shift India to a cashless, digital economy.

But, as the popular saying goes, the road to hell is often paved with good intentions.

Economists question whether demonetization is the most effective vehicle to go after India’s black economy since less than 6 percent of the unaccounted money is in the form of cash. The vast majority is squirreled away in real estate, bullion, jewelry, foreign deposits, benami transactions, and the like.

Regardless, the incompetence with which the government has handled perhaps one of the greatest economic experiments in modern India is nothing short of mind boggling. Cash accounts for 98 percent of all consumer transactions in the country and nearly four in five Indians work in the informal sector, which pays cash wages. The vast majority of the 641,000 villages in India are only spottily connected to ATMs and banks.

The decision, therefore, to remove 86 percent of all legal bills in circulation overnight without a well-crafted plan for replacing the currency was bound to create massive dislocations and suffering, and not just for those it ostensibly targeted.

The government neither printed nor stocked the replacement currency with banks in advance. The printing capacity of the country’s mints is reportedly 3 billion notes a month, which means that it will take several months to replace the 22 billion affected notes in circulation.

The government has defended this monumental failure by arguing that the exercise required secrecy and advance printing of the notes would have tipped off cash hoarders. But that does not explain why it did not anticipate the need to manually reconfigure the cash drawers of the 200,000 ATMs to accommodate the new notes, which are smaller than the replaced currency. The Wall Street Journal reported that the Reserve Bank was only alerted to the problem by NCR, a Duluth, Georgia, based manufacturer of half the country’s ATMs, after it received the new notes, three days after Modi’s address. Reconfiguring the ATMs alone required over a month to complete, making vast numbers of the machines non or only partial functional.

Nor does it explain why the government and the Reserve Bank have been issuing a blizzard of new and contradictory regulations on a weekly, sometimes even daily basis. Cash withdrawals were restricted first to Rs 20,000 weekly, before being increased to Rs 24,000 a week later. Likewise, the exchange allowance for old bank notes was modified from the Rs 4,000 announced on Nov 8 to Rs 4,500 on Nov 14, before being slashed to Rs 2,000 on Nov 18. On Dec 19, the Reserve Bank announced that deposits greater than Rs 5,000 in the old notes would be permitted only once until Dec 30 and would require a “satisfactory explanation” to bank officials why the money had not been deposited earlier. Really? You see that line outside your window?

The government also lurched from one move to the next on accepting old banknotes for the purchase of gas, hospitals and railway and airline bookings, announcing first that the notes would be accepted until Nov 11, before extending the deadline to Nov 14 and finally Nov 24. At different stages, exceptions were created for wedding expenses, farmers, etc.

Clearly the government had neither planned nor thought through the full implications and impact of this massive economic experiment. For all practical purposes, the Finance Ministry and the Reserve Bank were being run on the fly and operating by the seat of Modi’s pants.

The ineptness and callousness of the exercise has needlessly disrupted the lives of millions of Indians, even more so in the hinterland. Tens of millions que up for days on end outside ATM machines and bank branches to replace their old bills or to access their deposits, often to discover the limited money has run out. The cash squeeze has disrupted food supply chains as farm staples rot, because wholesalers are unable to pay farmers for their crop. Real estate projects and small industries, fueled by daily cash labor, have ground to a halt. Tourists have been stranded mid-stream from a shortage of currency. Consumer spending has fallen by 20 to 30 percent and even higher in cash driven retail stores.

Prime Minister Modi denounced critics as profiteers and pleaded with Indians to endure the pain for 50 days for the longer and greater good. That time runs out Dec 30 and it is likely that the country will be forgiving should demonetization prove successful.

But the early signs are not encouraging.

The government considerably overestimated the 20 percent dividend it had hoped to extract from the black money that it assumed would not be deposited. Given the pace of deposits of old notes, however, the proportion will likely be in the single digits. This may explain why the government continuously tightened controls, but that hurts the innocent far more than the crooked. The seizure of large volumes of new and old notes all over the country is evidence that far from snapping up black money, the demonetization exercise may have unwittingly spawned a new money laundering industry, whose scale and tentacles are yet unknown.

Analysts are also predicting that the GDP will take a 2 to 3 percent hit in the last two quarters of the year. The government may end up further spooking the economy as it undertakes rigorous income tax examinations, which it pledges to do, of questionable deposits in individual accounts.

The next few weeks and months will clarify whether the demonetization experiment has succeeded or boomeranged. The fate of the Modi government may well rest on the verdict.

Subscribe to comments feed Comments (0 posted)

total: | displaying:

Post your comment

  • Bold
  • Italic
  • Underline
  • Quote

Please enter the code you see in the image:

Captcha
  • Email Email
  • Print Print

Tagged as:

Politics | January 2017 | Business

Rate this article

5.00
Submit Link

We are looking for the best Indian stories on the web. If you see something interesting, send us a link to the story.