An Economic Catastrophe

By Nachiket Deuskar

On the evening of November 08, 2016, Indian Prime Minister Narendra Modi in an unprecedented step announced that Rs. 500 and Rs. 1,000 currency notes would cease to be legal tender post midnight. The objective of this move was to fight corruption, flush out counterfeit notes and make it difficult for terrorists. The two denominations accounted for a total of 86% of the country’s cash in circulation. The government calculated that tons of black money would either be destroyed or would be deposited in the banks by the time this exercise would complete.

That didn’t happen.

Most experts believe that the amount of counterfeit currency notes of those two denominations were between Rs. 400 to 500 crore. Scrapping Rs. 14 lakh crore for that is like burning down the house just because you wanted to kill a rat.

How did the government assume that people had stacked black money in their houses? Were they screening a Pablo Escobar documentary at 7 Race Course Road? It is well known to everyone that a very large majority of black money in this country is invested in gold, bullion, jewellery, real estate and other investments. People simply don’t hoard money in cash.

Another understanding is that cutting down higher denomination currency notes helps in fighting corruption, or rather prevents corruption. Various academics have agreed to that. So, why did they reintroduce the Rs. 500 note and why have a higher denomination of Rs. 2,000?

Also, the Rs. 500 note was not a very large denomination anymore. It was widely used. One could use it to eat at a restaurant and also to buy vegetables. It was central to many businesses. The Rs. 500 note was what the Rs. 100 note was in 1990.

The government, before announcing demonetization had asked banks to ensure the ATMs had enough Rs. 100 currency notes for a few days. Why wasn’t this followed. Why didn’t the Reserve bank of India ensure that this happened? Everyone knew government’s plan to introduce Rs. 2,000 notes. There was nothing “strategic” about it. So, why weren’t the ATMs recalibrated in advance?

Why was there a delay in printing the new Rs. 2,000 and Rs. 500 notes? Why wasn’t a decent percentage of notes printed much in advance?

The Indian National Congress claims that the rules were changed 135 times between November 08 and December 29.

An ordinance passed by the government two days ago makes it illegal for anyone to have more than ten demonetized currency notes post March 31, 2017. The person could be jailed for four years in that case. What if the person has valid reason to have that cash and can account for it?

The government had earlier said that the notes could be exchanged from banks up to December 30, 2016. So why was this stopped suddenly? Is it because the banks had no money and the new currency wasn’t available?

The government has provided incentives for people doing cashless transactions. They want to make India a cashless economy. In a country of 1.35 billion people, where 22% of the population is below the grossly low poverty line, going cashless is not wise. A salon owner in Chennai I spoke to, said that his business had fallen flat since demonetization. Another vegetable vendor said that they work on daily wages. They buy food with the money they earn in the day, and so they cannot run to the bank every evening to withdraw money that consumers have paid them through PayTM and other mobile wallets.

I don’t oppose the idea of going cashless, but we need to ensure that proper security is in place and the system is accessible for everyone, which isn’t the case right now. India is not ready for a cashless economy and you can’t have it overnight. An economist on a primetime television debate pointed out that smart phones are now common but no one had banned land lines. Such change happen slowly.

Prime Minister Modi had asked for 50 day to set things right. So, here we are. Things are far from normal. Until the time people are able to withdraw and do normal banking transactions without any cap, the situation cannot be considered normal.

There’s no liquidity in the market of the world’s fastest growing major economy. The industrial output for the month of November fell sharply and the numbers for the month of December (which are yet to come out) may not look good either.

Thousands of people have lost jobs. There’s reverse migration happening right now, putting pressure on the already strained rural economy. Small and medium scale businesses have taken a huge hit. This is hurting the economy.

Monetary policy is the prerogative of the Reserve Bank of India (RBI) . So, why did the government call the shots on this?

Who is responsible for this mess- RBI, the government or the Prime Minister’s Office?

I refuse to accept that it was just a case of mismanagement and bad implementation. The government was unable to assess the Indian reality. It was unable to assess how people withdraw cash, spend it, and understand consumer behaviour. Decisions that affect the last person in the country cannot be dictated from a cosy office in New Delhi’s North Block or the RBI headquarters in South Mumbai.

The Reserve Bank of India’s image has been dented because of these misadventures of few people. Steve Forbes called this “immoral”. The government has failed the people of this country. What hurts more is the level of sycophancy that surrounds us today. Some  people have stooped to a new low, justifying, arguing how demonetisation will do good in the “long run” whilst dozens of our fellow countrymen died. What is ‘long run’? John Maynard Keynes, a famous economist had once said (and former PM Manmohan Singh quoted him), “In the long run, we are all dead.”

There is no problem with people having a contrasting view on any issue. But, closing your eyes to the ground reality and assuming everything is fine, does not help. Some people have shown blind trust on an establishment with history of being dictatorial. Also, several supporters of the ‘note ban’ do not feel an iota of shame while accusing critics of being anti-national. You cannot call someone anti-national just because their views are different. And by the way, the top most executive office in the country has also indulged in such hate-mongering.

The Bharatiya Janata Party (BJP) has already started talking about how “successful” the ‘note ban’ exercise has been. They will continue to project it as a victory. However, it is important for the people to question them on this.

This is not “demonetization”, this is not “note ban”, this is an economic catastrophe and a financial emergency imposed by the misadventures of a few people. These people must own up to this blunder. Heads must roll.

 

Views expressed in this blog post are personal. The featured image  was clicked by me, anyone can reproduced the image only for educational purpose with credits. Please let me know if it is being reproduced for any other purpose.

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