Across India, citizens are lining up before banks and waiting to get their hands on the new Rs 2,000 and Rs 500 notes. The salaried middle class, the daily wage earners, the poor housemaids and laborers are without cash, without work. Poor people without bank accounts or credit cards, and small businesses without card-reading machines are the most hit.
Many cannot buy food; many who saved up their earnings have been cheated with exchange schemes run by unscrupulous elements. Many are at a loss as to how to get the new notes – their life savings is now useless paper.
Four days after prime minister Narendra Modi outlined his scheme to replace all existing Rs 1,000 and Rs 500 notes with new currency bills, things are far from normal.
There is hardly enough liquidity around. There are long lines at the banks. Many office workers with no time to spend in lines before banks have to borrow cash. People who have not used credit cards and debit cards in their life are being forced to go hungry.
There is a lot of anger on social media, and most of it is directed against the prime minister himself. It’s already looking like a train wreck out there. Here is trying to make sense of this complex issue:
Is the policy bad/wrong?
Almost no one is saying the crackdown on black money is wrong. Honest people are tired of the rising prices, the dark economy, the corruption that is eroding away their buying power. And many people are more than willing to go through some temporary hardship for that.
That there are reports of burning of notes from across the country, of underselling of old notes, plenty of anecdotal evidence of panic and people trying to convert black to white through various means, show that at least there is some kind of headline effect.
At the very least, it has brought this problem eating into the vitals of our economy into the living rooms of the common man, and probably the current suffering will help increase pressure to crack down on black money. Hopefully.
Will this help contain black money?
There are no easy or immediate answers here. We will have to give it probably time till March-end when the RBI can square up its accounts to know if this has really worked as intended.
Since it is well known that Pakistan is minting the counterfeit notes, a large part of the success of this program depends on whether or not Pakistan can copy these new security features. It is doubtful that Pakistan cannot do it.
The big fish have their black money invested in gold and real estate. So they are not going to be hit by this step, unless the government can follow through with better tax policing and bring the real estate sector under stricter scrutiny. If the history of independent India is any indication, it’s hoping for too much.
Will the current liquidity crunch go away soon?
Probably not. Because evidence from across the country shows a weak banking system trying to cope with this emergency and failing, despite the best efforts of the lower-rung staff. ATMs have run out of cash by early Friday morning; many were still to be loaded – even in the financial capital Mumbai.
The limits on deposits and exchanges are ridiculous. Unless those are lifted massively, this liquidity crunch is going to drag down the economy.
Could the government have done it better?
Yes and no. A step like this would have led to some pain – that was inevitable. Because the implementation had to be quick to achieve at least some effect. But a lot of the current pain could have been avoided if more thought was given to the execution part.
The weak points in the cash distribution system should have been identified and plans tailored accordingly. The government could have waited to build up enough stores of the new notes across distribution hubs in the country before announcing the plan. The secrecy element could have been maintained to a large extent till that had been achieved, and then the plan could have been announced.
So who is to blame?
The political leadership, the finance ministry and the banking system.
The bank chiefs and the RBI top deck failed to stand up to the political masters and put their foot down. They failed to tell the government about the systemic weaknesses and logistical issues. They failed to stand up and do what they are paid to do. They behaved like Hitler’s generals. And the people are paying for it. The bank babus will continue to get their pay – in full – for not doing their work.
The bureaucrats in the finance ministry are equally culpable for the above reasons.
Prime minister Narendra Modi and finance minister Arun Jaitley are responsible too. Not for implementing this scheme as their political opponents now want the people to believe. But for not appointing honest, brave officers in key posts. They appointed doormats; people who wanted positions and power but could not do their jobs. These people are good enough to run a system that runs well, or one that nobody cares whether it functions or not; but not to run a system that needs to rise up to the challenges that crop up when tough decisions have to be implemented.
Modi and Jaitley have the wrong people at the top. That is their failure. Unless it emerges that all these worthies tried to dissuade the political leadership but were steamrolled. In that case, they should have resigned en masse.
So did Modi fail India? A lot of criticism that is being directed against him is from political opponents who have been waiting to shoot from the hip at anything that looks like the prime minister has screwed up.
The fact is Modi had no choice but to do this. It is good he bit the bullet. But he failed in having good hands to implement it.
There are some specious arguments being floated to discredit the prime minister:
» The Congress did not do it because it would hit the common man. Wrong. The Congress did not want to act against the corrupt. That is why they lost power.
» That the bank honchos were not given freedom to take those calls; that Raghuram Rajan would have not allowed this mess. Wrong again. The bank honchos never asked for freedom; they were happy to acquiesce. And Raghuram Rajan was not the man with the silver bullet to all of India’s problem as some commentators try to argue. He was good, but no one has the answer to all of India’s problems.
Monetary policy tweaks alone won’t fix the damage to the common man’s wallet from the black economy. That is pure politics disguised as economic wisdom from those who are still smarting from loss of power in 2014.
» That the common man is the only one hit and there could be riots in the country. Most such alarmist views again emanate from the aforementioned commentators. Some corrupt are hit as the reports of abandoned and burnt notes show.
Anecdotal evidence shows that the common man is irritated but a large majority is still willing to go through some pain if this step can cure the black money disease.
Well, that is probably the key point here.
While demonetization can extinguish some black money, it is not a magic cure. The government has to do much more to attack this problem, jail the corrupt and show that it means business. Whatever has been done till now, despite the pain to the common man, is still largely cosmetic. The big fish need to be caught – actively chased, ferreted out and jailed, made an example of. They should feel the pain that the common citizens are feeling now. Modi has to show that the big black sharks can be caught, and make them undergo pain. Real pain.
If that does not happen, the same people who are patiently waiting in line in front of banks will turn against this government. This is a monster that has been let loose, and if the Modi government doesn’t allow this monster to complete its job, it will eat the government itself.
And that would be just desserts.
So before we brand demonetization as a success or failure, let’s give it more time, and see how the government plans to complete the job it has started.