Demonetization has been defined as the act of stripping an old currency unit of its value as legal tender, in order to introduce new units in to the financial system. The Indian government has recently taken the gigantic step of demonitizing its 500 and 1000 rupee notes, a move which has been hogging the limelight since then. The government claims it is a move to stem the tide of black money or an underground and parallel system which has been sapping the growth of economy, along with some other associated benefits in the short and long term.
It is being debated with equal fervor by the opposition parties who seem to have arrived at common ground and hope to make it suitably uncomfortable for the government in order to have an upper hand on other issues.
The said currency notes totaled a whopping 86% of extant currency in India, and the move to demonitize these have made an immense impact on a cash driven economy like India. Most transactions in India are dependent on cash; these include small transactions such as grocery and daily needs shopping, transport, medicare, payment of utility bills such as electricity, gas and water, and larger transactions such as bullion trading, stock market trading, real estate and property. Reasons for the continuation of cash based transactions is the poor penetration of banking services in the hinterland, and urban centers using cash to escape lawful taxation on money heavy activities. Willy-nilly there are enough loopholes perpetrated by the financial system that are sought to be exploited by using underhand methods such as these.
The present government under Prime Minister Modi campaigned on a plank of stringent anti-corruption measures and a promise to unearth the black economy which it alleged was a direct result of illegalities that the earlier dispensations allowed to burgeon during their watch.
In the present move the government ostensibly is living up to these campaign promises. On the face of it, the move to demonitize currency in such a drastic manner seems to do precisely that; force people sitting on large piles of currency to move it in to the banking system or allow it to perish, create conditions to jump start at least the basis of a cashless economy, and initiate measures to use a sledgehammer on illegal transactions. The government promises that it would also ease out inflation in the short term by sucking out the liquidity in the financial system.
However, and with ample reason, the opposition parties seek to corner the government by portraying the move as anti- people, and the fact that such a momentous decision was taken without taking all parties on board and without adequate preparatory steps. It would also reduce the economic growth of the country simply because of the dwindling investment confidence in the financial markets. Couple this with the outflows from emerging markets such as India in the hope of a spike in the US Fed rates, and the opposition has a watertight and sealed debate!
Both sides of the argument seem to hold water, but only in isolation.
While the government took this step seemingly solely on the basis of its commitment to eradicate a flourishing parallel economy, it has been timed to coincide with important forthcoming elections in state legislatures. In addition there are massive allegations that its own minions were aware of this step and managed to convert their piles of currency before the order came in to effect.
Further that the important mega business houses which support the ruling party were warned off in advance thereby allowing them to take corrective measures. Also most of the really colossal sums of black money exist in other forms such as investments in tax havens abroad or bullion or real estate and these are not remotely affected by a domestic move of this nature. And most importantly, that in taking a politically timed step such as this, the government completely overlooked the misery it would cause the common man.
Similarly, the opposition parties are known to be sitting atop massive piles of currency which are used to affect outcomes during elections, these are normally collected against promises to be kept post elections. Naturally a sudden move which chops them at the base would engender protest. Moreover the coalition which was ruling earlier had ample time and opportunity to adopt stringent measures but they failed to do so.
Naturally in the cacophony of political voices the common man is left to fend for himself. In the past two weeks or so, the country has seen a number of deaths which emanate from a person’s inability to get adequate cash for daily life. Similarly other facets of life in India have ground to a halt, but these seem to have no articulation in the public debate. Tourists for example have been left high and dry. Military personnel serving in difficult terrain with virtually no access to banking facilities are finding it extremely hard to maintain their families back home. People in Nepal, a neighbor state that had agreed to honor the Indian currency suddenly find themselves up a gum tree. Nepalese citizens especially the Gurkhas who serve in the Indian Army and are largely dependent on their salary to meet their needs back home are completely asunder as to how to fulfill their commitments back home.
Notwithstanding the ‘fors‘ and ‘againsts‘, the motion that we hear on the media generated hyperbole, what remains clear is that the government has initiated a move without adequate preparation; possibly such a stringent move could have been more carefully balanced out to ensure minimal effect on the economy and the people. The coming months are likely to witness more turmoil. Whether the ruling party garners enough wins in the state legislatures is yet to be seen. Yes, given the enormous Indian penchant for improvisation, needless to say the black economy would find new ways to perpetuate itself.