After his recent trip to India, THE MUMBAI MUMBLER is unimpressed with Modi’s demonetisation
If you are an enthusiastic Modi supporter, I suggest you skip this column. However, if you are interested in a critical, ‘non-official’ perspective, you may want to continue.
Having recently spent a week in Bombay, I have experienced the disastrous consequences of Mr Modi’s demonetisation, first hand. It is a harrowing time for most Indians. This extremely radical step with dubious reasoning has inconvenienced the ‘aam aadmi’ enormously.
And, I am not talking of Kejriwal.
In the eight days I was there, it was literally the only talking point. People had to go to extraordinary lengths to get their OWN money out of their OWN bank account. Some people were despairing, not just desperate.
The demonetisation scheme can safely be concluded as an ill-conceived and hasty – if not, a politically motivated move and there were woefully inadequate preparations made. In fact, I question the legality too: doesn’t the Reserve Bank of India guarantee to pay the bearer of the note the sum of money stated on it? Also, unlike in 1946 and 1978, (the two previous instances of demonetisation), there has been no ordinance issued to provide the legal basis. Is a mere notification legal?
The reasoning has varied, depending on the speaker, the audience and the venue:
This move was supposed to rid India of black money. If this was the primary intent, not only has it failed abjectly, but succeeded in generating even more as people with black money sought to have it white washed for a fee, which, in turn, has created new black money! So far, in the one month since demonetisation, over 85% of the Rs 500 and Rs 1000 notes have been turned in and there is still over a fortnight to go. The Revenue Secretary, Hasmukh Adhia has conceded that it is likely that virtually all of the demonetised currency will come back. This would totally negate the government’s hope to ‘cancel’ or rid a significant chunk of outstanding black money from the system and prevent it from returning.
In any case it has been repeatedly and reliably estimated that only about 5% to 7% of black money is stored in cash. The rest either goes overseas or is invested in property, or gold, or jewellery or other capital assets.
Another stated aim was to tackle the scourge of counterfeiting. Our friendly neighbour apparently was largely responsible. But, again the facts are starkly in contrast to the hype. Hardly seven in every million notes is detected as fake. The value of the detected fake notes in 2015-16 was Rs 29.64 crore, which is 0.0018 per cent of the Rs 16.41 lakh crore currency in circulation, as per the RBI. There was (merely!) around Rs 400 crore in fake notes, circulating.
The Indian Statistical Institute estimates that 250 notes in every million notes are fake, so even the detection of fake notes by the banks handling these, is negligible. Peanuts, really!
And, you can bet that the counterfeiters would be busy now, trying to forge the new notes. Though India has been talking about plastic currency notes for over a decade, they only last week decided to go ahead. Incidentally, plastic notes are not the panacea either. Just ask the RBA, which is aware of excellent but fake $50 notes “Made in Australia”
Then, there was the aim of curtailing terrorist funding as it was believed that fake notes were used by infiltrating terrorists. Well, it may have a limited, one-off impact, but you can bet that the fake notewallah printing presses will soon be humming and providing more new fodder. It is amazing that the Indian government does not demand exclusivity when buying paper, ink, machinery. The same suppliers are able to supply these with impunity to other countries or non-state actors. In the past, North Korea, Russia, Israel and Pakistan have been mentioned in despatches as having highly skilled state or non-state actors in this vocation.
Another new attribution for the demonetisation move is “digitisation”. The government wants to curtail the role of cash in the Indian economy and wants Indians to switch to electronic cash, presumably so there can be a ‘paper trail’ (pardon the irony!) of transactions. Currently, 68% of all transactions in India are cash transactions. However, cash is not a dirty word, and just because a transaction is a cash transaction it should not necessarily lend it any suspicion of being a ‘black money’ transaction.
When only 38 % of the branches of the nationalised banks are in rural areas and four out of five villages and one out of three semi-rural areas do not even have a bank, digitisation is a ridiculous expectation! There are more than 60 million adults in India who do not even have the minimal documentation to open a bank account (e.g. Aadhar card). Given the dire unreliability or lack of power and internet coverage in rural areas, what were they thinking?
None of the government’s arguments stack up or have been borne out. Nevertheless, for a measure which has seen people lose their lives and livelihoods, there has been an unprecedented amount of support, if not tolerance.
For his largely urban middle-class constituency, Modi can do no wrong, even when he does – as in this instance. The business community in India have shown themselves to be an entirely pusillanimous lot, with not just their uncritical support, but enthusiastic backing despite facts being to the contrary.
Economists in India have likened demonetisation to sucking out 85% of the blood of a healthy human and asking him to carry on living normally. Cash is the life blood of the thriving Indian economy. Already, the RBI has cut its annual growth expectations by half a percent, but this is laughable. Given the widespread dislocation caused, things have virtually come to a grinding halt in every village, town and city. Discretionary spending has abruptly dried up, circulation of income slowing down means production has had to slow as demand is affected, employment drops and investment either stops or falls. The deleterious consequences of demonetisation are not likely to remedy in days or weeks. Our GDP and growth will be wrecked.
Moreover, the public, having been jolted with the illiquidity, are hoarding cash and there will have to be a lot more note printing than the current output – which largely consists of Rs 2000 notes (ironically, a better and bigger store of black money?), exacerbating the liquidity crisis and ensuring that it persists longer than anticipated.
And, all this for what? To show that this is a dynamic government? They have failed to even understand a very basic precept: to demobilise cash does not automatically mean the black economy will collapse.
In fact, the black economy will be left largely untouched, whilst one of the world’s fastest growing economies has been seriously wounded and stalled.
The Mumbai Mumbler is actually a Sydneywallah, who was a former Mumbaiker. The Mumbler travels frequently to that megapolis and is in daily touch on account of business, social and familial relationships