Demonetisation Impact: Will PM Narendra Modi’s masterstroke turn out to be a blunder?


November 17, 2016

Prime Minister Narendra Modi has taken a bold move by demonetizing Rs 500, Rs 1000 currency notes. Citizens of the country hailed the much debated economic reform even as Opposition parties lambasted it.

November 17, 2016

Prime Minister Narendra Modi has taken a bold move by demonetizing Rs 500, Rs 1000 currency notes. Citizens of the country hailed the much debated economic reform even as Opposition parties lambasted it.

But chaotic scenes and seemingly never-ending queues can still be seen outside banks and ATMs as people hustled to get valid currency notes for meeting their daily expenses after the last week's decision.

Cash-strapped people were seen waiting in frustration as most of the cash dispensing machines ran out of cash within hours after being stocked, while thousands of ATMs are still not functional. Adding to the customer woes, there have been reports of bank servers facing technical glitches. People hailing from different strata backed PM Modi over his decision to fight black money but that overwhelming mood seems to be transforming into mixed one. Nobody except the politicos has cast aspersions over the move, but questions have been raised over the execution part!

Teary-eyed Narendra Modi made an emotional appeal to countrymen to have faith in him and give him 50 more days. Yes, it is not easy to carry out such mammoth exercise but it could have been hassle-free. Even ATMs at the Finance Ministry and Parliament House witnessed long queues with average waiting time of an hour.It may take two more weeks before ATMs start dispensing new high-value Rs 500 and Rs 2,000 notes. Currently, they are mainly dispensing Rs 100 notes.

More and more people across the country are complaining about problems with regard to their daily basic needs as local stores have stopped lending goods and other essential items on credit. Grappling with unending queues and frayed tempers in banks and to check operation of syndicates, the government yesterday decided to introduce a system of marking customers exchanging defunct currency notes with indelible ink from today onwards in major metro cities.

This, according to the government, would prevent syndicates and certain kind of people coming to a branch again and again and misusing the note-exchange facility.

Now that 86% of India's currency is no longer valid, the central bank has struggled to print replacement denominations’ and the new notes are the wrong size for existing ATMs. Modi's asked people to be patient for 50 days, but the process could take as long as four months. India's simply too big and complex for shock and awe. Large parts of the rural economy use cash for 80% of transactions and have been hard-hit. People in the hinterland have resorted to barter system. The government also has taken help of Indian Air Force to transport cash.

Among India's middle class, Modi's "surgical strike on black money" still appears to be popular. It's the old "vegan fallacy" — if something tastes terrible, it must be good for you. Enough Indians are suffering that they believe it must be in a greater cause. It's a moral project, not an economic one. Stand in line, we're told, and you honor our brave soldiers at the border. But will that support last? Economists agree it will have no effect on the generation of black money through corruption, a Bloomberg report said.

Meanwhile, estimates of the amount of black money that will eventually be recovered vary widely. The optimists (wrongly) think enough cash will be destroyed by hoarders that the central bank will be able to pay a hefty dividend to the government. Others point out that a very small fraction of black money tends to be held as cash and that there are a dozen ways still available to launder that fraction. The government has largely failed to close these loopholes. Worse, rumors of the demonetization were reportedly circulating before Modi's announcement, leading to suspicions that the well-connected may have had time to dump their cash piles.

Even in the best case scenario — that a significant proportion of the outstanding currency is destroyed — there's no reason to suppose it was all black money and not the savings of regular citizens scared of harassment by tax authorities. Modi has dropped dark hints that this is just the beginning, raising fears that business should now worry about of constant tax raids and the reopening of decades-old cases. In fact, that dark new age may already be here. Even setting aside the painful adjustment, the long-term effects of this monetary shock on India's informal economy could well be severe; a large proportion of marginal firms may not survive the loss of a fortnight of income. The informal financial sector — unregistered moneylenders who provide loans to businesses worth 40% of total bank lending — will be decimated, the report said.

The costs to the government could be equally high. Modi's administration has put political considerations over economic detail once too often — and this time, it's severely dented its image for efficiency and practicality. Even if the long queues vanish in the next few weeks, that damage to the government's reputation is permanent.

Courtesy: The Financial Express