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Demonetization – In Modi We Trust?

On the 8th of November, at 8:15 pm, the Government decided to inform the people of India that from the stroke of midnight, their 500 and 1000 rupee notes would no longer be valid; i.e. they’d be demonetized. Similar to the surgical strike conducted by the Indian army recently, this policy was an example of the non-transparent policy environment the Modi government is trying to establish.

With its central aim being the eradication of black money, the demonetization policy took the entire country by shock. The abruptness of the announcement was intentional and necessary. If the black market heavyweights were to catch wind of this policy, they would have certainly managed to offload their illegal black money, rendering the policy moot. While not an ignoble aim, the implementation of the scheme by the government has failed to meet the sheer population and demands of this nation.

Demonetization, essentially, is the act of rendering certain existing high denomination currency invalid, and occasionally replacing it with currencies of higher or lower denomination. It is a form of shock therapy; liquidity shock, as it were, an abrupt end to the sheer availability of currency. Being Modi’s biggest policy diktat to date, the implementation of this policy needed flawless execution for it to achieve its aims. In reality, the execution of the same has been bungled by the government, with multiple failures on various administrative levels. Initially, a withdrawal limit of Rs. 4000 per day had been imposed, which was later reduced to Rs. 2000 a day. Despite the withdrawal limits, neither the ATMs nor the banks have sufficient money, which questions the government’s preparedness. The queues outside banks and ATMs have become easy fodder for jokes on social media. Modi keeps asking the population of India for more time, asking them to wait so that its beneficial effects become more apparent. The people are making do as of now, convinced by the powerful lure of Modi’s speeches, but gradually, the dissent is beginning to grow.

The move has not had the effect the government had intended it to have. Those who held large quantities of illegal money seem to have found ingenious ways to legitimize it, rather than destroying it or attracting the taxman’s attention. The government had expected otherwise, as can be seen from the large amounts of cash seized recently. As a result, a large part of the black money believed to have been in circulation has now flooded into banks, depriving the government of its expected dividend. Also, the government’s plan does nothing to tackle black money at the source. It will not be long before old habits – under-invoicing, fake purchase orders and bills, reporting of non-existent transactions, and straightforward bribery – generate new stores of the same.


Such a major shake-up of the Indian economy, the 7th largest in the world (in terms of GDP,) has affected a major part of the population. In one stroke, almost 86% of the cash, in value, in the economy, about 14 trillion rupees, has been made void. India’s economy, previously experiencing a major boom, has now slowed down tremendously, with stock markets falling sharply in the days after the announcement. Former Prime Minister Manmohan Singh estimates that India’s GDP will shrink by 1-2% in the current financial year.

As is so often the case, the impact is not being felt equally by all. India’s wealthy, who rely less on liquid money and more on online transactions, are managing to make do. The poor and the lower middle classes, who rely on cash for their daily activities, are the main victims of this supposedly “pro-poor” policy. Hospitals are turning away patients who have old notes, families are unable to buy food, and middle-class workers are unable to buy needed medicine. Despite this, the average Indian has reacted with stoic acceptance, willing to heed to Modi’s exhortations and be patient until Modi’s stipulated time runs out. The sacrifice extends far beyond mere lines; as many as 82 people have reportedly died in cash queues or related events. An astonishing 40 people died in the week demonetization took effect.

In Manipal, the effect of demonetization has been a sight to behold. As university students, the maximum amount of money spent by most people at once here is usually not more than a few hundred rupees. Initially, ATM queues were so long that it was difficult to believe, with people having to wait for hours to withdraw cash. Now, ATMs either are completely out of cash or are stocked with only 2000 rupee notes. This has resulted in an inability to spend cash as few, if any, shopkeepers have enough 100 rupee notes to give in exchange for a 2000 rupee note. The obvious solution to this is to use debit cards, but that is easier said than done in Manipal, as not all shops and restaurants accept cards, making life difficult for the students.

Kenneth Rogoff is a distinguished professor of economics at Harvard. In his book, The Curse of Cash, he provides hard evidence that the best way to slow down illegal monetary transactions is to take strict action against hoarding of cash. While tax evaders store their wealth in non-monetary forms, such as land, art, and jewellery as well, cash remains in the forefront, as it is the liquid form of wealth. In this sense, at the very least, questions posed by Modi’s critics about the role of demonetization in destroying stockpiles of black money are misplaced and demonetisation, if properly implemented, could purge out a vast amount of the black money. However, Rogoff proposes a different strategy to combat black money effectively. This strategy would depart from Modi’s in two fundamental ways. First, it would be a gradual process, implemented over several years. As a result, the negative effects of demonetization would not be as accentuated as they are now. Second, Rogoff would permanently eliminate high-denomination notes, not replace them, as with the 500 and 2000 rupee notes. This strategy is more likely to improve tax compliance and reduce corruption over time. The current policy of replacing 1,000-rupee notes with 2,000-rupee notes makes the entire rigmarole of demonetization somewhat ineffective, a toothless tiger in the fight against illegally gained money.

While demonetisation does have several benefits, the form in which it has been carried out has caused these benefits to get buried under a veritable avalanche of overwhelmingly negative consequences, be it the queues, the deleterious impact on the economy, or even the sheer difficulty posed to people wanting to spend their money. In the immediate sense,  Modi’s biggest policy instrument to date has been a disappointment. Whether the desire for long term gains is worth the short term pain remains to be seen. As is the situation right now, Modi’s move appears to be a major misstep, and it threatens to undermine the goodwill he had generated among the people of India.

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