The images that we see here in the United States about India’s demonetisation — the euphemism employed for pulling out from circulation the old Rs500 and Rs1000 notes as legal tender — shocked Indians and non-Indians alike.
With anger, pain and frustration written large on their faces, Indians have been lining up, since the demonetisation process was announced on November 8, before banks, gasoline stations, hospitals and practically every other establishment to exchange their old notes for new ones before the December 30 deadline set by Prime Minister Narendra Modi’s government.
However, the implementation of the policy, as The Times of India put it, turned out to be a “logistical nightmare” with some political opponents predicting — and hoping — that demonetisation could become Modi’s Achilles heel.
But let’s keep politics aside and take a non-emotional approach to the demonetisation issue.
The government has said that small sums of the now invalid currency could be exchanged until the end of the year. The obsolete banknotes can be deposited directly into bank accounts, exchanged at the Reserve Bank of India or used for paying back taxes or other services from state-run entities.
The suddenness of the announcement which took by complete surprise the poor whose basic existence depends on cash transactions, coupled with the short supply of new notes, has generated a huge backlash against Modi’s government. With the benefit of hindsight, one may say that Prime Minister Modi should have first ensured that adequate supply of the new notes was available before he launched his “surgical strikes” — a term much in vogue these days — on the old notes. Indeed, many of India’s top bankers and institutions were caught red faced as they did not know how to react in the midst of the ensuing confusion.
Demonetisation makes some 86 per cent of India’s cash supply null and void with the single stroke of a pen, bringing life to a screeching halt in a country where 96 per cent of transactions — estimated $370 billion (Dh1.34 trillion) — are customarily done in cash.
Demonetisation has been a “monumental mismanagement”, according to former Prime Minister Manmohan Singh, better known for his brilliance as the architect of India’s 1991 economic reforms during his earlier avatar as Finance Minister than for his weak leadership as Prime Minister.
The liquidity crunch, Singh maintained, will cut India’s GDP growth by as much as 2 per cent, affecting cash-dependent sectors such as agriculture, the small industries and the “informal sector” which, although outside the tax radar, does contribute to India’s economy. Job losses, particularly in labour-intensive industries, could follow.
Mocking the Modi government in parliament for portraying demonetisation as good for India in the long run, Singh quoted John Keynes’ famous lines: “In the long run, we are all dead!”
But short-term benefits, usually, have a brief life. One needs a long-term vision to steer the state ship. India needs bold leadership; past leaders merely kept sweeping the trash under the rug which looked like a huge mound by the time leadership changed at the centre. The broom is now being used to sweep away the trash.
On the other hand, the suffering of millions of common Indians cannot be just dismissed as collateral damage because protecting the common man’s interest is what leaders should first strive for.
Moody’s and Fitch, the rating agencies, contend that demonetisation may have some adverse effect on India’s economy for some months, with the extent and length of the economic slowdown depending on the duration of the cash crunch. But Fitch also said that demonetisation could bring long-term benefits to India, increase bank deposits and attract greater business activities into the formal mainstream economy and into the tax net.
Modi has been criticised for his “zigzag” course on demonetisation, having frequently changed regulations on the big denomination notes, as his government tried to close loopholes used for tax evasion and money laundering, while trying to respond to the legitimate needs of the law-abiding people. It is a tough call but the government is confident about the end results.
But Modi needs to urgently organise adequate supply of the new notes because India’s poor badly need cash to manage their daily existence. While the few opinion polls published indicate that a vast majority of Indians is willing to accept the inconveniences for battling the black economy, this willingness to cooperate can easily vanish if Modi does not take immediate action to meet the common man’s basic needs.
But one also needs to understand the objective behind demonetisation which was not only an attack on the unaccounted and untaxed wealth, but was also designed to tackle rampant corruption, counterfeit currency and terrorism.
Even his fiercest opponent will acknowledge that Modi has made some smart moves on the economic front: he has lowered restrictions on foreign investments, pushed for deregulation and established a national goods and services tax replacing the bewildering state sales taxes.
Corruption and tax evasion are chronic yet intrinsic elements of the real Indian economy. It is estimated the state loses more than $300 billion in tax revenue. It’s an arduous daily battle against corruption for the average Indian: just getting a driver’s licence or registering a property is generally not possible without paying a bribe.
Modi’s monetary initiative may be causing fears and hardships, but it can also lead to long-term gain. Give Modi a chance!
Manik Mehta is a commentator on Asian affairs.
