e_Paper (25 November 2016)

10
FRIDAY, NOVEMBER 25, 2016
DT
World
The gamble with India’s demonetisation
• Tribune International Desk
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
CRACKDOWN ON INDIA’S ‘BLACK MONEY’
Indians have returned $80bn worth of high-value currency notes –
500 rupees and 1,000 rupees – since Prime Minister Narendra Modi
banned their use as part of a crackdown on corruption and tax evasion
Nov 8: Prime
Minister Modi
announces Rs500 and
Rs1,000 notes to be
demonetised
Dec 30: Deadline for
exchange of old notes at
banks or post offices
2015-16: 31.8 million Indians –
just 2.6% of population – file income
tax returns, generating $43.1bn
(Rs286,801 crore) in revenue*
Tax revenue (as percentage of
gross domestic product, 2015-16)
$68.3bn
Corporate
tax, 3.3%
of India’s
GDP
$2,100bn
GDP
*provisional Income Tax Department figures. Crore denotes ten million in Indian numbering system
Sources: PTI, Statistical Commission, New World Wealth Pictures: Getty Images © GRAPHIC NEWS
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
$43.1bn
Personal
income tax,
2.1% of
GDP
$241bn
Value of bank notes
in circulation in India
$207bn
Value of Rs500 and
Rs1,000 notes
now banned
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
40%
India’s
wealth
stashed as black cash
33%
About a third
of business in
India is done with black money
$252bn
Cash and carry transactions
make up 12% of India’s
$2.1tn GDP
$10bn
Black money
declared since
Finance Minister
Arun Jaitley
announced
tax amnesty in
March. Amnesty
has raised $4.5bn in tax
236,000
Number of Indians with assets of
over $1m at end of 2015
$4 per day
Average daily income in India
stands at around 272 rupees,
according to Labour Bureau
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. •
Sources: THE DIPLOMAT, REUTERS