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15 November, 2016

Disastrous currency switch

BRP Bhaskar
Gulf Today

A week after the government abruptly invalidated the two highest-denomination currency notes, vast sections of the people of India are in a state of virtual penury, several sectors of the economy are paralysed and retail trade is disrupted.

Prime Minister Narendra Modi announced the immediate withdrawal of currency notes of Rs1,000 and Rs500 in an unscheduled telecast last Tuesday. He also outlined the procedure laid down for surrender of the invalidated notes and collection of new notes of Rs2,000 and Rs500 by the year end.

Within days it became evident that the switch had been made without giving adequate thought to the logistical aspects and making sufficient preparations to effect the change smoothly. Critics are already dubbing the demonetisation a Tughlaqian reform --- an allusion to the failed attempt by a 14th-century Sultan, Muhammad Bin Tughlaq, to shift the capital from Delhi to Daulatabad in the middle of the subcontinent.

The demonetisation came soon after the closure of a scheme for voluntary disclosure of concealed incomes. Tax evaders disclosed a total income of Rs652 billion.

Initially, the demonetisation decision was welcomed enthusiastically by not only Modi’s loyalists, who reflexively cheer every act of his as something only he can do, but also by many others who viewed it as a step to eliminate black money, which was one of the promises that had helped the Bharatiya Janata Party to win the 2014 elections. 

There were two demonetisations before this — one by Nehru’s government in 1948 and the other by the post-Emergency Janata government in 1978. Curbing black money was the motive on both occasions. On the second occasion, notes of Rs5,000 and Rs10,000 were withdrawn. After that there was no currency note of a denomination higher than Rs1,000.

Modi had met the three Service chiefs and the National Security Adviser before announcing demonetisation. This suggested that the move was also aimed at denying funds to domestic as well as Pakistan-based extremist groups who have been using fake Indian notes. 

The experience of 1948 and 1978 showed that demonetisation has only limited value as a step against the black money menace. A good part of the money hoarded by Indians is held abroad. Official studies have indicated that only about six per cent of the black money within the country is in cash. The rest is invested in various assets, including gold and real estate.

Demonetisation turned currency notes worth Rs14,000 billion into scraps of paper. As much as 86 per cent of all money in circulation ceased to be legal tender. From the next morning people started crowding at banks and post offices to surrender the old notes and collect new ones.

The only new notes that were immediately available were of the denomination of Rs2,000. The authorities placed restrictions on the value of currency that can be exchanged and set ceilings on amount that can be withdrawn from banks and ATMs. All this resulted in an abominable situation: millions of people were still stuck with old notes and millions of others possessed notes of Rs2,000 which they could not use for small purchases as shopkeepers did not have change to give.

Many of the country’s 200,000-odd ATMs were empty. When the machines were loaded, waiting customers emptied them quickly. At present the ATMs are able to dispense only small denomination notes. Finance Minister Arun Jaitley said it would take about three weeks to recalibrate them to be able to handle new notes of Rs2,000 and Rs500 which differ in size and weight from the demonetised ones.

What was supposed to be a surgical strike on fake money hurt honest citizens as well. The worst hit were families with planned weddings or surgeries.

Life was smooth for those who are into net and mobile banking, but then their number is small. A recent official study found that while there are about 450 million mobile connections in rural India, mobile banking attempts (the figure includes failed transactions) in a month numbered only 3.7 million. It identified high costs and complexity of operations as the reasons for the low reach of mobile banking.

At least three persons collapsed and died during the week while waiting in queues to exchange notes. A sick child died as a private hospital refused treatment since the family had only old notes. In many places drivers did not take out trucks as there was no money to meet expenses on the road. The traders’ association in Kerala has called an indefinite strike from today (Tuesday).

The authorities clearly had failed to understand the magnitude of the problem and make arrangements for painless transition.

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