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Demonetization policy plunges country into chaos
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ON November 8, Indian Prime Minister Narendra Modi announced that, at the stroke of midnight, some 14 trillion rupees (US$207 billion) worth of 500- and 1,000-rupee notes — 86 percent of all the currency in circulation — would no longer be legal tender. With that, India’s economy was plunged into chaos.
Modi’s stated goal was to make good on his campaign pledge to fight “black money”: the illicit proceeds — often held as cash — of tax evasion, crime and corruption.
Nearly a month later, however, all the demonetization drive has achieved is severe economic disruption. Far from being a masterstroke, Modi’s decision seems to have been a miscalculation of epic proportions.
The announcement immediately triggered a mad scramble to unload the expiring banknotes. Though people have until the end of the year to deposit the notes in bank accounts, doing so in large quantities could expose them to high taxes and fines. So they rushed to gas pumps, to jewelry shops, and to creditors to repay loans. Long queues snaked in, out, and around banks, foreign-exchange counters, and ATMs — anywhere where people might exchange the soon-to-be-defunct notes.
But, upon getting to the front of the line, people were often met with strict withdrawal limits, because, in a display of shocking ineptitude, not enough new currency was printed prior to the announcement. Worse, the new notes’ design prevents them from fitting into existing ATMs, and their denomination — 2,000 rupees — is too high to be useful for most people, especially given that the government’s failure to print enough smaller-denomination notes means that few can make change.
But, as is so often the case, the impact is not being felt equally by all. India’s wealthy, who are less reliant on cash and are more likely to hold credit cards, are relatively unaffected. The poor and the lower middle classes, however, rely on cash for their daily activities, and thus are the main victims of this supposedly “pro-poor” policy.
Small producers, lacking capital to stay afloat, are already shutting down. India’s huge number of daily wage workers can’t find employers with the cash to pay them. Local industries have suspended work for lack of money. The informal financial sector has all but collapsed.
Black money
Perhaps the worst part is that these sacrifices are not likely to achieve the government’s stated goal. Not all black money is in cash, and not all cash is black money. Those who held large quantities of black money seem to have found creative ways to launder it, rather than destroying it to avoid attracting the taxman’s attention, as the government expected.
As a result, most of the black money believed to have been in circulation has now flooded into banks, depriving the government of its expected dividend.
On top of all of this, the government’s plan does nothing to control the source of black money. It will not be long before old habits — under-invoicing, fake purchase orders and bills, reporting of non-existent transactions, and blatant bribery — generates a new store of black money.
Many Modi supporters claim that the demonetization policy’s problems are a result of inept implementation. But the truth is that its design was fundamentally flawed. There was no “policy skeleton,” no cost-benefit analysis, and no evidence that alternative policy options were considered. Judging by the blizzard of policy tweaks since the announcement, it seems clear that no impact study was carried out.
Shashi Tharoor, a former UN under-secretary-general and former Indian Minister of State for External Affairs and Minister of State for Human Resource Development, is currently chairman of the Parliamentary Standing Committee on External Affairs and an MP for the Indian National Congress.
Copyright: Project Syndicate, 2016.
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