Indian Prime Minister Narendra Modi announced the surprise demonetisation of the Rs500 and Rs1000 bank notes On November 8. Less than two weeks since the de-recognition of these notes as legal tender, the country is in an uproar.
While this is not the first time that India has attempted to demonetise in a professed bid to tackle the issue of black money in the country, unlike the last time under Moraji Desai in 1978, this time the Reserve Bank of India’s Governor Urjit Patel is in full support of the decision and has called it a bold move that “addresses the growing menace of fake Indian currency notes.”
Former Indian Prime Minister Manmohan Singh on Thursday tore into his successor Narendra Modi’s clampdown on the cash economy, calling it an “organised loot and legalised plunder” of the country, during his speech at the upper chamber of the Indian Parliament.
Singh - the architect of economic reforms that led to years of rapid growth - dubbed Modi’s shock move to scrap Rs500 and Rs1,000 rupee banknotes a “monumental mismanagement” that could shave at least 2-percentage points off economic growth.
The so-called demonetisation drive is part of a crackdown on corruption, tax evasion and militant financing, but the decision to suck out 86% of cash in circulation threatens to push Asia’s third-largest economy into a liquidity crisis.
Opposition parties led by Congress have stalled parliament, demanding a reply from Modi and compensation for the families of dozens of people reported to have died while queuing at banks to swap old money for new.
Modi, citing a survey he launched via a smartphone app, says that 90% of people expressed their support for the ban on old banknotes. The survey was not representative but drew half a million responses.
Biggest chunk of black money untouched?
Former RBI governor Raghuram Rajan has not made an official statement regarding this move, he has expressed reservations in the past about the effectiveness of demonetisation as a means of tackling money laundering, possibly indicating that he too might be in this camp of sceptics. The IMF has made a statement supporting Modi’s efforts, but has also very clearly indicated the need for prudence in managing the transition to new notes, given the pervasiveness and importance of cash to the economy.
The chief ministers of the states of Bihar, Andhra Pradesh, Odisha, and Telengana have openly expressed both support and appreciation for this move in the long run, while the chief ministers of Uttar Pradesh, Karnataka, Maharashtra, and West Bengal have expressed varying degrees of criticism and worry at the potentially very harmful short term impacts. Members of the Congress and the Samajwadi Party have violently opposed this move as well.
New Delhi’s Chief Minister Arvind Kejriwal has been vocally critical of the demonetisation, stating that the experts he has consulted have not indicated much confidence in this move as a means of getting rid of black money. Drawing upon his own election promises to weed out corruption, he has in fact accused the government of having strategically informed its friends and allies (who might have hoarded black money) in advance – thus effectively only complicating the life of the common man with this move. BJP President Amit Shah has retorted, asking for sceptics to provide concrete reasons for their opposition, and implied that only anti-social elements have a cause for worry as a result of this move.
Whether banking system prepared for it
The next question that may be raised is the preparedness of the government and the banks regarding implementation of a move of this scale. The argument provided for why this move was announced and administered overnight is that it denies hoarders of black money the chance to dispose of it. While that may appear to be sound logic, it has also apparently impacted the banking system’s ability to ensure a smooth transition. Several ATMs across the nation continue to be useless by virtue of not having enough fresh notes, while the ones that are refilled are attacked by painfully long lines and eventually emptied at once.
Some leading Bank Unions have criticised the move as having been improperly planned – resulting in a severe shortage of Rs100 notes that in turn ensures that the large tender of the new Rs2000 notes is rendered useless for routine everyday transactions.
On November 15, the Supreme Court sat down to hear multiple petitions and four Public Interest Litigations regarding this move – some of which requested a complete rollback of this policy due to its severe impact on everyday citizens. The court decided not to stay the decision right then and instead will examine its legal validity before making a decision. After asking the government to file an affidavit justifying its notification, the court adjourned the hearing to November 25.
Who is affected the most?
This in turn is the third major question raised against this policy – who is affected the most? The removal of large sums of legal tender unquestionably affects all individuals who need to engage in cash transactions in some form. Those with access to plastic money are less directly impacted even in the short term, but in both the long and short term, specific sections have been disproportionately hit.
The rural poor who lack the infrastructure to set up deposit accounts and who currently hold all their money in cash form have been directly hit. Even those who do have access to accounts among them struggle with ill prepared banks and post offices, small and dispersed in number, and the need to take off several crucial hours from work – sometimes in vain. It is also difficult to estimate the numbers of women across the board who will be potentially irrecoverably impacted by this policy – women who do not inform their families of hidden stashes of cash, who are otherwise fully dependent on male members of the family and who stand to lose years of savings because they cannot confess to their presence.
Refugees who lack the requisite documents to create accounts are also now seeing months of savings potentially vanish. Socially ostracised communities who are again disproportionately cut off from the banking systems – like trans-gender communities and sex workers – are other immediate victims. This is in addition to the fact that reports indicate that the government may have over-estimated the existing levels of connectivity to banking.
Modi, in a rousing rhetorically rich speech, requested the nation for 50 days to launch this self-labelled war on black money. He asked the people to make short-term sacrifices in the interest of long-term gains by virtue of all the money that will be seized from hoarders. Both the activist and the non-activist sections of social media have equally raved about or ripped apart this rhetoric. While it is too soon to declare whether the long-term gains are indeed forthcoming, the “short term” sacrifices have been more than just significant.