As everybody knows, any criticism of demonetisation is both unpatriotic and anti-national.
Suresh Menon in The Hindu
As everybody knows, any criticism of demonetisation is both unpatriotic and anti-national. In any case, it has been a success — if you read the right newspaper editorial, watch the right television channel or listen to the bright folk from the country the U.K. magazine Private Eye calls Aslikhan. There is a good reason economics isn’t an exact science. It tells us demonetisation is both an unmitigated disaster as well as a resounding success.
The demonetisers think it was the latter while it was the former for the demonetisees. The de-mon is in the details.
To fully understand the whole thing, here’s an analogy. Imagine India preparing to put a man on Mars. He-who-has-your-best-interests-at-heart then goes on national television to announce the three reasons for doing so: to prove that Mars is inhabited by Indians, to bring back all the gold stashed away there by people not sympathetic to his philosophy, and finally, to arrest all the fake Martians and throw them into jail on Jupiter.
Weeks later the objectives change. Now we are told that the mission is to bring back Matt Damon who has been left behind there by Hollywood.
“But that was a movie, all fiction,” cry the critics only to be told to shut up because, as everybody knows, critics are the ones who have stashed away the gold. To err is human, but to criticise is (see above) …
A few more weeks go by, and it is discovered there are no jails on Jupiter. With the flexibility that allows him to hide unseen behind a spiral staircase, the spokesman now tells us that the mission is a success, that we have achieved everything we set out to do and anybody who doesn’t believe that can go to Jupiter, our neighbouring planet.
A confused population (was it Mars or Matt? Is there gold on Jupiter? Can we tell a real Martian from a fake one?) continues to look for answers. Finally these arrive. In summary, we shouldn’t have gone to Mars, the objectives made no sense. We told you so.
“April Fool,” says the spokesman, “we were misquoted on live television. The following are the real reasons for going to Mars: to help India win the cricket series in Sri Lanka, to give the television channels something to fight about, and to give us a reason to return to earth. You can’t come back home without going away first. We have achieved all these targets. We are the greatest.”
One point two billion people suddenly remember their Keats: Was it a vision, or a waking dream? Fled is that November speech –Do I wake or sleep?
Did someone forcibly pull out from our pockets all those ₹1,000 currency notes? Were we told in various accents across the country that everything was being done for our own good, so shut up and queue up? Was this the face that launched a thousand slips? Perhaps the Mars trip is the real story and demonetisation the fictional one, who knows?
On November 8, 2016, when Prime Minister Narendra Modi announced to the nation that ₹500 and ₹1,000 currency notes would cease to be legal tender from midnight, he was unequivocal in asserting that the measure was aimed at breaking “the grip of corruption and black money”. Explaining how the shock move would work, he said: “The... notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper.” The premise then was that a sizeable part of the ₹15.44 lakh crore of the two high-value banknotes would remain in the hands of the holders and would not be tendered back into the banking system due to fear of punitive government action. There were hints that the windfall gains made from the scrapped currency notes that couldn’t be deposited in banks, estimated at anything between ₹3 lakh crore to ₹5 lakh crore, would be deployed for larger purposes — social welfare schemes and infrastructure projects, for example. This would be effected with the Reserve Bank of India, which bears the liability to honour the value of the country’s currency, paying as dividend to the government the majority, if not all, of its extinguished liabilities. But with the RBI’s annual report, released on August 30, showing that as much as 98.96% of the demonetised currency had returned to the central bank as of June 30, the gains in the form of cancelled liability from the note ban have been piffling.
For the Finance Minister to now claim that the “confiscation of money” had not been an objective, and for his Ministry to say that the government “had expected all the SBNs [specified bank notes] to come back to the banking system to become effectively usable currency,” is disingenuous. If that were indeed the case, the rationale behind the various stop-go announcements that followed in the wake of the November 8 decision are hard to fathom. For instance, the RBI circular setting a ₹5,000 limit on deposits of withdrawn notes unless done under the government’s amnesty scheme, tendered for the first time or explained otherwise was clearly a measure intended to dissuade bank customers from returning the demonetised currency. True, demonetisation has had some beneficial spin-offs such as arguably fostering greater compliance with the tax laws and reducing the economy’s reliance on cash through increased adoption of digital payments. But such gains could have been achieved by other and less self-defeating ways. As things stand, it is unclear how many of those who have laundered their black money will be punished. Despite the large amounts that were deposited in banks post-demonetisation, it is doubtful whether the Income Tax authorities have the necessary resources to track down and penalise the corrupt. All in all, the costs of demonetisation, which has resulted in robbing the country of its economic momentum, are far greater than the benefits it has bestowed.
India lost its tag as the ‘world’s fastest-growing economy’ last month as its fourth quarter GDP growth fell to 6.1%, the slowest in two years. Very few economists expected the slowdown. In fact, most waited for the economy to rebound as it quickly healed from the impact of the demonetisation of high-value rupee notes in November. Critics of demonetisation felt vindicated, particularly after GDP figures for the third quarter suggested that the shocking, overnight move to demonetise had very little negative impact.
Yet, for all the sermon delivered by the country’s punditry, the fact remains that macroeconomic forecasting is a lousy business — regardless of who makes the predictions. For one, data cannot prove or disprove any hypothesis as they do not establish causation. The mere fact that growth slowed in the first full quarter after demonetisation does not prove decisively that the slowdown was caused by demonetisation. As some have speculated, the current slump in the growth rate may be a continuation of the trend of slowing growth witnessed even before demonetisation.
Nor does the unexpectedly strong GDP growth in the third quarter prove that demonetisation has had no negative impact on the economy.The economy is a complex organism with several variables working in tandem, which makes prediction an almost impossible task. This is in contrast to the physical sciences where controlled experiments allow scientists to tease out the influence of any variable.
Two, there are no constant relationships between variables when it comes to the economy that allow for making exact predictions. So, even if economists were to dig into historical data and find the exact impact that demonetisation has had on GDP growth, there is no guarantee that it would hold in the future. For instance, people’s expectations may change which makes them adapt to a cashless economy better, thus blunting the impact of demonetisation on GDP growth.
Three, macroeconomic forecasting is focussed to a very large extent on measuring things that are fundamentally immeasurable. When it comes to measuring GDP, for instance, the price that is assigned to a good as its value is arbitrarily decided by statisticians. This happens despite the fact that the value of any good lies in the eyes of the consumer. Finally, both innocent and political biases influence the process of official data collection to calculate GDP, a fact that raises questions about its reliability. None of this is to say that economists can make no useful predictions. But such predictions are more likely to be qualitative rather than quantitative. Any wise economist could foresee that demonetisation would have a substantial impact on the economy; simply from the premise that money greases the wheels of commerce, so outlawing it would affect demand and create chaos across production lines. But trying to quantify its impact in terms of the exact percentage points of growth that would be shaved off GDP is a futile exercise.
As chief minister of Gujarat, Narendra Modi was a highly polarising figure. Due to the 2002 anti-Muslim riots that took place on his watch, Modi was anathema to leftists, liberals and even to a section on the right. After the riots, Atal Bihari Vajpayee, the Bharatiya Janata Party prime minister at that time, himself wanted Modi sacked as chief minister.
Yet, as the general election of 2014 approached, Modi’s base expanded. As the prime ministerial candidate, Modi ran a powerful campaign that focused on economic growth, limited government and liberalisation. The communal polarisation that had kept him in power in Gujarat was rarely addressed. Coming after the moribund United Progressive Alliance-II government, Modi presented an attractive economic pitch to many right-wing liberals.
The utilitarian approach
The mood of many right-wing liberals was captured by a much-discussed Gurcharan Das piece that was published in April, 2014, a few weeks before the election results were due. In his piece, Das, former CEO of Procter & Gamble, India, and an author and columnist, juxtaposed Modi’s communalism versus his promise of reform thus:
“There is a clear risk in voting for Modi — he is polarising, sectarian and authoritarian. There is a greater risk, however, in not voting for him. It is to not create jobs for 8-10 million youth that enter the market each year…There will always be a trade-off in values at the ballot box and those who place secularism above demographic dividend are wrong and elitist.”
As a thesis, this was utilitarian in the extreme. Das was not absolving Modi of the communal stain. He was simply saying it was outweighed by the benefits Modi would bring as an economic reformer. Three years down the line, how well has this bargain worked?
One end of the bargain
Novelist and political commentator Aatish Taseer said that his initial assessment of Modi was off the mark. “In 2014, I expected a mixture of economic vitality and chauvinism with Modi, but I was wrong,” said Taseer. “What India got was only chauvinism – and now we’re in an even deeper malaise”.
Taseer’s point is backed by data. In 2014, Das was clear that job creation was a moral imperative that outweighed ideals such as secularism. However, this argument is under severe strain three years later, given that job creation has ground to a halt under the Modi administration. India’s unemployment rate has actually increased since the Bharatiya Janata Party-led government took office. The number of jobs added by the Modi government in its three years in office is just 50% of the jobs added by the previous Manmohan Singh government in its final three years.
Even as the Modi government is unable to live up to its promise on increasing employment, it has also slipped on its promise of small government. In 2014, Modi ran for prime minister with the slogan “maximum governance, minimum government” – a thrilling prospect for India’s economic liberals, given how rare the concept is in India. Yet, as right-wing commentator Rupa Subramanya pointed out in a piece last month, the Modi-led Union government is “starting to slip back into the old command and control mode and away from the promise of good governance”.
Earlier this week, clashes erupted between Dalits and Thakurs in Saharanpur, UP. (Photo credit: PTI).
Religious identity politics
Even as the vast majority of India’s population stagnates economically, religious identity has emerged as the main axis of Indian politics. For the past three years, politics around the cow has taken centre stage, with vigilante groups attacking Muslims and Dalits across the country on the suspicion of cattle smuggling and slaughter.
Political columnist Tavleen Singh supported Modi in 2014. Yet, on May 7, Singh wrote,
“It is hard to understand why a Prime Minister so passionate about making India a modern, digital, prosperous country has seemingly not noticed that hunting and killing Muslims on the pretext of cows and love jihad does not sit well with modernity.”
Speaking to Scroll.in, Singh said, “I think I misjudged him. I thought he was a liberaliser.”
In Swarajya, a magazine that describes itself as “a big tent for liberal right of centre discourse”, senior journalist Seetha argued that right-wing liberals are “disappointed at his [Modi’s] inability to get the BJP-ruled state governments to rein in the hardline/fringe elements and vigilante groups”.
Seetha specifically called out the appointment of the far right Adityanath as the chief minister of Uttar Pradesh in March to buttress her point.
Hobson’s choice
Gurcharan Das, though, is still sticking to his 2014 analysis. “Jobs are plummeting all over the world,” argued Das, defending Modi’s poor job-creation record. “This is due to automation. I am not sure what other policies could have been pursued to make it better.”
Das is also sanguine about the BJP’s record on law and order. “Yes, there have been stray events such as gau rakshak attacks,” he said. “There has been no sort of state-planned murder or anything.”
Das is disappointed with the fact that Modi has been unable to raise India’s ease of doing business ranking but said, overall, he would still support the BJP were he given a chance to turn back the clock to 2014. “There is nobody else,” explained Das.
The TINA or “there is no alternative” argument, however, is something that punctuates most critiques of Modi from his right-wing liberal supporters.
“Modi and the BJP is still the best option,” said Tavleen Singh. “Compare him with Nitish [Kumar], Lalu [Yadav] or Rahul Gandhi. That is why he wins; because the voter can see he is the best option.”
Liberal irrelevance
In the end, the fact that Modi can coolly ignore his right-wing liberal supporters and still end up being backed by them might serve to illustrate how increasingly irrelevant India’s tiny liberal elite – both right and left – are becoming to the political discourse. Maybe nothing captures this better than the Union government’s demonetisation of Rs 500 and Rs 1,000 banknotes late last year. The move went against every liberal principle of limited government and had few economic benefits. Sadanand Dhume, a Wall Street Journalcolumnist and a prominent supporter of Modi during the 2014 elections called the move a “debacle”.
Yet, Modi simply brushed aside this criticism and converted what was an economic disaster into a political windfall. Months after demonetisation was announced, the BJP won a landslide victory in India’s most populous state, Uttar Pradesh. If 2014 saw a provisional alliance between right-wing liberals and Hindutva groups, three years since, it is clear that right-wing liberals are getting increasingly marginalised. For the last two years of the Modi adminstration’s term, it seems the Hindutva right will call the shots within the BJP.
REGULATION NEEDED: “Finance capital is the storm, and our governments can and will do nothing about it."
Imagine a mythical planet not visited by the Little Prince. This is a planet divided up into a thousand and one sections with walls between them. There are doors in the walls, and windows of course. But there is no roof to the planet. Everyone on the planet is affected by storms that cross the skies, sometimes devastating this section, sometimes that. Sometimes the storms afflict all the sections, but in different ways: flood in one place and hail in another; cyclone on one, landslide in another.
A man-made storm
The denizens of this planet are peculiar: they are mostly unable to look up. As such, many of them cannot see signs of a gathering storm. The few who can are helpless. What can they do about storms? This is also true of the various presidents, prime ministers, monarchs and dictators who govern the different sections of this planet. Many of these leaders even believe that the storms are necessary: some good will trickle down. So all they can do is regulate the doors and windows of their sections, and the citizens inside them.
We are living on this planet today. With one difference: most of the storm clouds circling us are man-made.
Finance capital is the storm, and our governments can and will do nothing about it. If you are running a national government but cannot really regulate financial speculation and finance capital as the main source of power, what is it that you can do? Regulate people — as citizens and as foreigners. That is the condition, in slightly different ways, of almost every country in the world today.
When liberal capitalism died
Sometime in the 1980s, a strange thing happened to classical liberal capitalism. It was murdered. No one noticed the crime. Today, we are living with the dead body of liberal capitalism, which is why leftist critiques of it also fail. What we have today is said to be neo-liberalism, but neo-liberalism is almost as different from classical capitalism as night is from day. Actually, neo-liberalism is partly a misnomer: it has little to do with liberalism.
Liberalism insisted on the separation of the state and the market, and decried government interference in markets. Neo-liberalism believes that governments should intervene in markets — but only on the side of banks, finance capitalists and lending agencies. Every time financial speculation creates a crisis, governments are expected to tax their citizens and use that money to save banks and financial institutions. Even if one argues, as some do, that liberal capitalism was always to some extent state capitalism, this signifies a major shift.
We have known since the 19th century that money makes better sense than production or services in capitalist societies. Goods and services fluctuate in demand, but money has to be employed no matter what good or service is on offer. Hence, it makes sense, finally, to traffic only in money. Financial speculation is built into capitalism.
But when financial speculation takes over, as it started doing from the 1980s, an entirely different situation comes into being. Today, financial speculation far outstrips global trade. Finance capital tyrannises not just social capital but even industrial capital. Most of the capital used for such financial speculation does not need to be invested in production or services; it can just be moved around in, as U.S. President Donald Trump said about his taxes, ‘smart’ ways. Most of this capital is not even in the shape of cash, which is cumbersome to move. It is sheer numbers, including digital money, and many types of debt and credit.
Mr. Trump’s victory is the assault of finance capital on not just social capital (welfare, public facilities, etc.), which has long been battered, but this time also on industrial capital. Mr. Trump might actually try to ‘bring jobs home,’ but what this will lead to is greater curbs on industrial capital — not only leaving finance capital free, as his Wall Street appointments have indicated, but probably forcing more industrialists to convert industrial capital into financial speculation. Demonetisation in India might be a sincere attempt to fight corruption, but it will also reinforce the ascendency of finance capital, regardless of what the government wants.
Maurizio Lazzarato points out in Governing by Debt that all national governments are basically employed in collecting taxes from their citizens and cutting on social services, in order to keep paying national and other debts to financial organisations. National leaders have come to believe that ‘economics’ is an independent field, far from politics, when actually economics is the new politics of neo-liberalism. That is why governments are employed to tax citizens in order to repay financiers and banks, and governments are also employed to smoothen the paths of financial speculation. A necessary façade
In this context, the nationalist policing of ‘undesirable foreigners’ is a necessary façade — to obscure the lack of governance of global finance. Xenophobia is inevitable in such a situation, because national leaders cannot even talk of the real storm — invisible finance capital; they can only regulate the bodies on the ground. The general scepticism of politicians — on which Mr. Trump, Turkish President Recep Tayyip Erdogan and so many others have ridden to power — arises from the fact that politicians only govern people today. They cannot govern global finance capital. Instead, finance capital governs politicians.
Politicians have abandoned much of actual politics to the economic ideologues of neo-liberalism, and they cannot even confess it to ordinary people.
Down one of the hundreds of dusty lanes that make up Gandhi Nagar market, Delhi’s largest textile bazaar, the small factory where Neeraj Sharma produces girls’ jeans is quiet.
“Normally you couldn’t walk in here,” he says, ambling across the concrete shop floor, past dormant sowing machines and piles of unfinished denim.
Sharma estimates around 80% of his workforce have left Delhi for their villages in the past month. “It’s good that they left,” he adds. “Because of this demonetisation problem, there’s no work for us either.”
Your money's no good: rupee note cancellation plunges India into panic
It is the largest-scale financial experiment in Indian history: gutting 14 trillion rupees – 86% of the currency in circulation – from the most cash-dependent major economy in the world.
More than a month on, India’s Reserve Bank has issued around 1.7 billion new notes, with less than one-third the value of what was removed. The sixth-largest economy in the world is running on 60% less currency than before. Lines outside banks continue to stretch, and India’s small business lobby says its members are facing an “apocalypse”. But Modi insists he isn’t done.
Initially intended to flush out the “black money” said to be hoarded by elites and criminals, the government now frames demonetisation as the first step in a “cashless” revolution to shift the billions of transactions undertaken each day in India online – and onto the radar of tax authorities.
This week, labour minister Bandaru Dattatreya announced it would soon be mandatory for employers to pay their staff into bank accounts, a hugely ambitious step in a country where as many as 90% of workers are paid in cash.
Already struggling, businessmen such as Sharma are dreading the prospect of more enforced digital migration.
“How do you think I can pay the workers with a cheque if they don’t have a bank account?” he asks, in a tiny office thick with incense smoke. “And it takes three days to clear a cheque. What will they eat during those days?”
His reasons are not just altruistic. Apart from potentially raising his tax bill – in a country where just 1% pay income tax – paying salaries electronically would mean giving staff Delhi’s mandated minimum wage, currently 9,724 rupees (£114) per month for unskilled workers. “Right now no one pays the minimum wage that the government decides,” Sharma says. “It will only make things expensive: we will charge the customer.”
Outside his workers’ earshot, he adds: “If someone is doing the work of Rs.2000, why should we pay them Rs.15,000?”
But workers too are wary of the big push online. Tens of millions of Indians have been given zero-deposit bank accounts in the past two years under a government scheme to boost financial inclusion. But even after demonetisation prompted a rush of new deposits, 23% of the accounts still lie empty.
Asha Devi sits spread-legged on the Sharma factory’s floor, using fine scissors to cut loose threads from piles of jeans. A migrant labourer from Bihar state, she has a bank account, but has not been able to access her money since early November.
“I’ve been standing in [bank] queues from 7am until 5.30 in the evening,” she says. “I still cannot withdraw money, and I lose a day of work each time.”
The experience has heightened her scepticism about being paid online. “I am a daily wage worker and I’m not sure if I’ll have a job tomorrow,” she says. “If I get [the cash] in hand, I know I have the money.”
Cash has a cold, hard certainty that still matters to itinerant workers. “There are many factory owners who will make these daily wage workers into fools,” Devi adds. “They’ll tell them they have deposited the money when they haven’t.”
“In theory, it’s a great idea to actually ensure that workers actually get the wage they’ve been promised,” says Aparna, the president of the Indian Federation of Trade Unions, who like many Indians uses only one name.
“The downside is: we can’t do it. It’s a bit like say the government has announced the end to all poverty by tomorrow. It’s not taking into account any of the obvious constraints that even a child in India could see.”
Around one in three Indians still don’t have bank accounts, she says, many of them put off by the need to navigate banking bureaucracy. “For people who don’t have matching identity cards – say, if somebody made a mistake typing their name – then it’s a nightmare,” she says.
Nagendra Sarkar, another of Sharma’s employees, has been trying to open an account in Delhi, but keeps running into an obstacle: he has no fixed address. “The bank people are asking for papers to prove that it’s my account,” he says.
It is one of many points at which the digital salary plan, and the entire “cashless” vision, butt up against the stubborn reality of Indian working life.
“Take an example of rickshaw puller who transfers goods from my shop to the factories,” says Pyarlal, a lace factory owner in Gandhi Nagar.
“For one trip I pay him 100 rupees. Does the government expect me to give him a cheque? I mean, how do I pay him?”
Such a major reform, even one that might benefit workers, can’t be enforced overnight, Aparna says. “You have to do it gradually, let the system be put in place, create the infrastructure first.”
Mihir Sharma, a senior fellow at the Delhi-based Observer Research Foundation, agrees. “The law might well be passed,” he says. “But it would likely be widely ignored, which is the fare of most labour regulation in India.”
Digital payments might be novel, but the ambitious plan is “an old Indian pathology”, he says. “The belief that if you legislate something, it happens.”
On November 8, Indian Prime Minister Narendra Modi announced that, at the stroke of midnight, some 14 trillion rupees worth of 500- and 1,000-rupee notes – 86% of all the currency in circulation – would no longer be legal tender. With that, India’s economy was plunged into chaos.
Modi’s stated goal was to make good on his campaign pledge to fight “black money”: the illicit proceeds – often held as cash – of tax evasion, crime, and corruption. He also hoped to render worthless the counterfeit notes reportedly printed by Pakistan to fuel terrorism against India. Nearly a month later, however, all the demonetization drive has achieved is severe economic disruption. Far from being a masterstroke, Modi’s decision seems to have been a miscalculation of epic proportions.
The announcement immediately triggered a mad scramble to unload the expiring banknotes. Though people have until the end of the year to deposit the notes in bank accounts, doing so in large quantities could expose them to high taxes and fines. So they rushed to gas pumps, to jewelry shops, and to creditors to repay loans. Long queues snaked in, out, and around banks, foreign-exchange counters, and ATMs – anywhere where people might exchange the soon-to-be-defunct notes.
But, upon getting to the front of the line, people were often met with strict withdrawal limits, because, in a display of shocking ineptitude, not enough new currency was printed prior to the announcement. Worse, the new notes’ design prevents them from fitting into existing ATMs, and their denomination – 2,000 rupees – is too high to be useful for most people, especially given that the government’s failure to print enough smaller-denomination notes means that few can make change.
India’s previously booming economy has now ground to a halt. All indicators – sales, traders’ incomes, production, and employment – are down. Former Prime Minister Manmohan Singh estimates that India’s GDP will shrink by 1-2% in the current fiscal year.
But, as is so often the case, the impact is not being felt equally by all. India’s wealthy, who are less reliant on cash and are more likely to hold credit cards, are relatively unaffected. The poor and the lower middle classes, however, rely on cash for their daily activities, and thus are the main victims of this supposedly “pro-poor” policy.
Small producers, lacking capital to stay afloat, are already shutting down. India’s huge number of daily wage workers can’t find employers with the cash to pay them. Local industries have suspended work for lack of money. The informal financial sector – which conducts 40% of India’s total lending, largely in rural areas – has all but collapsed.
India’s fishing industry, which depends on cash sales of freshly caught fish, is wrecked. Traders are losing perishable stocks. Farmers have been unloading produce below cost, because no one has the money to purchase it, and the winter crop could not be sown in time, because no one had cash for seeds.
Despite all of this, ordinary Indians have reacted with stoicism, seemingly willing to heed Modi’s call to be patient for 50 days, even though it could be much longer – anywhere between four months and a year – before the normal money supply is restored. The government’s assiduous public relations – which portrays people’s difficulties as a small sacrifice needed for the good of the country – seems to have done its job. “If our soldiers can stand for hours every day guarding our borders,” one popular social media meme asks, “why can’t we stand for a few hours in bank queues?”
But the sacrifice extends far beyond queues. Hospitals are turning away patients who have only old banknotes; families cannot buy food; and middle-class workers are unable to buy needed medicine. As many as 82 people have reportedly died in cash queues or related events. Furthermore, it seems likely that many of the short-term effects of the demonetization could persist – and intensify – in the longer term, with closed businesses unable to reopen. It could also cause lasting damage to India’s financial institutions, especially the Reserve Bank of India, whose reputation has already suffered.
Perhaps the worst part is that these sacrifices are not likely to achieve the government’s stated goal. Not all black money is in cash, and not all cash is black money. Those who held large quantities of black money seem to have found creative ways to launder it, rather than destroying it to avoid attracting the taxman’s attention, as the government expected. As a result, most of the black money believed to have been in circulation has now flooded into banks, depriving the government of its expected dividend.
On top of all of this, the government’s plan does nothing to control the source of black money. It will not be long before old habits – under-invoicing, fake purchase orders and bills, reporting of non-existent transactions, and blatant bribery – generates a new store of black money.
Many Modi supporters claim that the demonetization policy’s problems are a result of inept implementation. But the truth is that its design was fundamentally flawed. There was no “policy skeleton,” no cost-benefit analysis, and no evidence that alternative policy options were considered. Judging by the blizzard of policy tweaks since the announcement, it seems clear that no impact study was carried out.
Yet, rather than recognize the mounting risks of the non-transparent policy environment he has created, Modi has been discussing going even further, moving India to an entirely “cashless society.” Does he not know that more than 90% of financial transactions in India are conducted in cash, or that over 90% of retail outlets lack so much as a card reader? Is he unaware that over 85% of workers are paid in cash, and that more than half of the population is unbanked?
Modi came to power in 2014 promising to boost growth, create jobs for India’s youthful population, and encourage investment. His poorly conceived demonetization has made a mockery of these objectives, while bruising his reputation as an efficient and competent manager. How long it will take for India to recover is anyone’s guess.
