Demonetisation: Burning the House down to get ‘Rid of the Rats’
Experts say that the attempt to demonetise is eyewash which has done little to combat the flow of black money but could instead stoke a recession
Many of the naïve souls standing in long snaking queues in front of ATM machines and banks draw solace from the government’s promise that the ‘inconvenience’ that they are enduring is the necessary cost that they must bear to help end the scourge of black money in the country. So, they soldier on, hoping that when their ‘short-term’ misery ends the monetary system in the country would be a paragon of transparency and cleanliness, devoid of the shadowy rivers of black money. Both these assumptions: that standing in the queue is a temporary inconvenience and secondly, that cooperation from the public would help combat the menace of black money- are way off the mark.
When Prime Minister Narendra Modi announced on November 8 that 500 and 1000 rupee denominations would cease to be legal tender, the government officials had created an impression that more money would be available to people after November 24. The unsaid truth is that banks are running out of cash, reportedly due to shortage of currency paper as well as security ink. This is a scandal. The reason for this currency shortfall is perhaps an outcome of the obstinacy of the government to print the notes at home to give meaning to the “Make in India” programme. Last year the PM had said that any new currency would be printed here on Indian paper with locally-produced ink. The million-dollar question that must be asked is- did we have the necessary supplies of ink and paper to print currency notes in such large numbers? The fact that those in the know who were behind this operation could not anticipate the insatiable demand for new currency notes just goes to show their profound lack of foresight. If one goes through the November 8, 2016 gazette notification by the government of India claiming that demonetisation was recommended by the RBI board, it is apparent that neither the government nor the RBI, expected the currency to run out from ATMs. In fact, they were visibly working towards a seamless gradation to improve the flow of currency. If one visits the government notification issued on November 8, the timetable suggests some homework. However, as soon as reality met these ATM machines, there was chaos. What is visible in cities like Delhi is bad, but the scenario in smaller town and villages is both grim and claustrophobic. Government sources on condition of anonymity, suggest that there are barely 20 percent ATM machines that are currently functional in rural areas in north India. As the banking infrastructure in neighbouring towns is starved off cash as well, they are rushing to Delhi ATMs.
Although the PM’s app claims that there is colossal support for demonetisation, the pain is more visible now than ever before. Most workers who were in the informal sector on cash salaries are being laid off. The construction sector that used to run on illicit money lies devastated. Many companies are sending their permanent workers back to their villages and telling them that they will be called once cash flow increases. The blue-chip construction company, Larsen Toubro laid off 14,000 workers in one swift stroke, but managed the media so well that it did not get any flak. Surely, there will be copycat retrenchment across the economy. The Centre for Monitoring of Indian Economy (CMIE) says that 4,00,000 people may get laid off and suggests a loss of Rs 1.4 trillion due to this botched move. Due to some inexplicable reason, it also states that there is great optimism in the economy. Former Prime Minister Manmohan Singh thinks that this move could be catastrophic. He asserted that the GDP growth could slip by 2 percent. All those who are optimistic of a turnaround do not understand the implications of such a fall in the growth rate. If the growth rate is strangulated as projected by Manmohan Singh, the harm it would cause to the society cannot be imagined. What will hurt more this time, in comparison to the 2008 global slowdown is that people would not have unaccounted money to fall back upon. This indeed would be an economy where those who are not digitised would be at the mercy of god. To reiterate, the informal economy where more than 80 percent of India is employed could be served a death sentence. It seems like a doomsday scenario, but this is how it is playing out.
What about corruption and black money? There is no real guarantee that much will change. Only 3 percent of unaccounted money is kept in cash. A major percentage of black money is held in instruments such as foreign bank accounts, gold and benami property. Destruction of cash-based economy will cause some hiccups, but those who have spread their riches abroad and elsewhere would not really be impacted. They will wait it out. Many of them, in the last couple of years have left India and taken up residencies in Dubai and elsewhere. More will follow suit. The people who will be left behind would be those who desperately need cash to make ends meet.