The disruption of normal life caused by the abrupt cancellation of 86 per cent of the money in circulation, announced by Prime Minister Narendra Modi five weeks ago, continues to wreak havoc. What was presented as a cure for endemic corruption is proving to be worse than the disease.
Ground realities are compelling the government’s stoutest supporters to moderate their enthusiasm. Deepak Parekh, Chairman of HDFC, the country’s third largest bank, who had hailed demonetisation earlier as the biggest of all big-bang reforms, said last week it had derailed the economy in the short run.
Initially, there was wide support for the decision to withdraw high-denomination currency notes as people believed the government’s claim that it was directed against corrupt elements. Now, there is growing realisation that it acted without due diligence and that its actions are hurting honest citizens, particularly the poor, more than the corrupt.
Modi and a small team are said to have charted the demonetisation plan in utter secrecy. A sudden jump in term deposits in banks and large-scale acquisition of property by the ruling Bharatiya Janata Party in some states just before demonetisation suggest that some had prior knowledge of the decision.
Black money holders quickly found ways to beat the government plan. In the three and a half hours between the telecast in which Modi announced the decision to invalidate currency notes of Rs 1,000 and Rs 500 and the time set for its implementation, jewellers in several cities did roaring business. A temple in Kerala reported record sale of gold lockets.
Religious institutions were allowed to accept donations in old notes. This concession enabled unscrupulous priests to help their rich patrons to launder black money.
The bank accounts the poor had opened under a scheme lunched by Modi in his first year as Prime Minister suddenly started swelling. Evidently the rich were taking the help of the poor to turn black into white.
The government found it necessary to issue new regulations almost daily to plug the loopholes ingenious black money holders were using to legitimise their hoard. But the crooks managed to remain one step ahead of the government at all times.
Following complaints that the limit on withdrawals from bank accounts affected planned weddings, the government directed that one member of a family may be allowed to withdraw up to Rs 250,000 to meet marriage expenses. Soon there were massive withdrawals on the strength of fake wedding invitations.
Amid the cash crunch, Modi’s Cabinet colleague Nitish Gadkari, mining king and former Karnataka minister G Janardhan Reddy and Kerala liquor baron Biju Ramesh reportedly spent tens of millions on daughters’ weddings.
Banks and ATMs often lacked enough cash to pay out even the small sums which account holders were entitled to draw. Yet many people were able to change their stock of old notes into new ones. Cash seized in stray raids in nine states during the past month included at least Rs 2.4 billion in newly introduced notes of Rs 2,000.
Fraudulent transactions of such high order would not have been possible without the cooperation of bank officials. Two managers of a leading private bank in Delhi were arrested on charges of helping crooks to open fake accounts using forged documents and launder about up to Rs 4.5 billion. Some public sector bank employees too are facing action.
Sensing that things were getting out of hand, Modi kept changing the narrative. A commentator, who analysed eight speeches he made between November 8 and November 27, said that during the period the objective of the demonetisation exercise shifted from elimination of black money to promotion of cashless economy.
According to the Reserve Bank of India, as much as Rs 11,500 billion out of Rs 14,500 billion which were in the hands of the people when demonetisation was announced have already reached the banks though the deadline for depositing old notes does not expire until December 30. The exercise is, therefore, unlikely to result in the extinction of an estimated Rs 4,000 billion of black money, as the authorities initially claimed.
Why did the government impose needless pain on the people, especially poor, in the name of eliminating black money? Ashish Nandy, well-known social theorist and political psychologist, has offered a plausible explanation. He says, “Modi has been pushed by his intense desire to do something but he does not have the imagination or wherewithal to do it.”