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The 12 Labours of Narendra Modi: India’s Demonetisation Saga

The 12 Labours of Narendra Modi: India’s Demonetisation Saga

No. 2, Nov.-Dec. 2016 » DiploMATTERS

On the 8th of November 2016, the same day in which a revolutionary election took place, empowering Donald J. Trump to become the next President of the United States of America, the Indian Prime Minister, Narendra Modi, announced a radical decision for his country.

This decision, resulting in the demonetisation of 86% (some say 90%) of the cash in circulation, inaugurated what the Indian PM described as the process of gradual evolution towards “less-cash society” and finally to a “cashless society”

In his address to the Nation, and in his endeavour to fight corruption and black money and to eradicate poverty and terrorism, Modi proclaimed that the five hundred and thousand rupee notes “will no longer be legal tender”, thus becoming “worthless pieces of paper”. People would either convert their money to lower denomination notes, exchange them for new notes or deposit their money in bank accounts until the end of the year [1]. This decision, resulting in the demonetisation of 86% (some say 90%) of the cash in circulation, inaugurated what the Indian PM described as the process of gradual evolution towards “less-cash society” and finally to a “cashless society”, as well as a call to embrace the developments of the digital world [2]. Was his vision realistic or did this policy just sow the seeds of a deep and veiled economic, political and social crisis for the country which was expected to have one of the fastest economic growth rates in 2017?

The strong do what they can, the weak suffer what they must

A series of analysts warn about crucial and devastating economic effects, that will ultimately result in an acute destabilisation of both the country and the government.

The move radically attempts to eliminate overall dependence on physical cash and, together with it, the black market and the financing of terrorism. However, the ban on high denomination notes is already showing counterproductive effects. A rapidly emerging economic havoc and chaos, accompanied by severe uncertainty, afflicts the lives of ordinary citizens and, in particular, of the desperately poor rural population. Although he claimed that his initiative is directed towards helping the poor, Modi failed to realize that the latter will eventually be the most affected – the poor people who lack the knowledge, as well as the means to deposit their savings.

In a country plagued by food insecurity, this measure also inflicts damage upon the 260 million Indian farmers in the middle of the planting season, after massive efforts to recover from two years of drought.

Also affected are the small, cash dependent businesses that have suffered significant financial damage, in addition to the burdens imposed by the notorious Indian “red tape” and harsh taxes and regulations. These businesses, which make up the backbone of the non-agricultural labour market, are collapsing, resulting in millions of people losing their jobs and losing also their yet unpaid accumulated wages, since employers have no more cash to pay their employees [3], [4]. In a country plagued by food insecurity, this measure also inflicts damage upon the 260 million Indian farmers in the middle of the planting season, who are themselves inextricably linked to the cash economy and who have no bank accounts, making them unable to buy the seeds and fertilisers required for the winter crops and thus endangering the production of key commodities, after massive efforts to recover from two years of drought[5]. The informal economy, contributing almost 40% of the GDP and consisting of assets in the form of real estate, jewellery or deposited abroad in bank accounts will also suffer since their subsequent conversion will face significant difficulties[6], such as steep discounts for laundering the money.

Creative destruction the wrong way

The policy, covertly designed by PM Narendra Modi and a small circle of his supporters, took by surprise not only the population, but also the financial institutions. Long queues have been formed in front of ATMs and banks that constantly run out of cash, notwithstanding strict restrictions upon the quantity of money to be withdrawn (around 37 dollars per day at first, impacting businesses and the better banked social classes). Arbitrary policy changes have compounded uncertainties and provoked exasperation, as the initial weekly limit of 24,000 rupees reportedly became 10,000 in certain banks by the beginning of December. Banks are incapable of meeting the demand for new banknotes to be exchanged for the banned ones, with images on the Internet depicting people dying while waiting to exchange their money, in some cases without even receiving any help from the others, who did not wish to lose their places in the lines [7]. Scenes such as these were already taking place in another beleaguered economy, that of Venezuela. After a month following the announcement of the demonetisation policy, only 35% of nationwide ATMs were operational, whereas voices even discussed about a revival of the archaic barter system [8]. Moreover, it has been noted that the release of the new banknotes has augmented, rather than solved, the counterfeiting problem, due not only to the poor quality, but also to the similarity between the new and the old bills, that already gave an incentive for the circulation of fake currency [9].

The gold market has reportedly gone underground, with more and more people purchasing gold with old banknotes and smuggling it abroad - ironically, states one article, the world’s biggest illicit importer of gold turned into its biggest exporter.

Forbes presented the dramatic situation entailed by the massive disruption in trade across nearly all sectors of the economy and the impact of millions of people standing in the queue for hours rather than working, not to mention the critical condition of the poor people, in the aftermath of what was designated as “shock doctrine economics” [10]. Goldman Sachs Global Investment Research provided relevant data that proved a sharp decline in vehicle sales, the registrations of motor vehicles, tax collections, sale of consumer durables, truck rentals, land registrations and farmers’ sales after the policy announcement [11]. Vegetable prices have faced a decline of 25% to 50%, causing hardship and further impoverishing millions of farmers [12]. As in all periods of economic uncertainty, the approach that ordinary Indian people have embarked upon, contrary to what the government has advised, relies upon the conversion of untrustworthy government tender, the rupees, into gold – whose value is expected to not only increase in the following months (note: its price has increased by 15% and even 20% within the first 10 hours of the invalidation of high-value notes), but which is also, for now, exempt from governmental control. Moreover, experts predict a substantial rise in smuggled gold, which is subject to no kind of taxation, particularly in a context marked by a decline in the rupee’s purchasing power [13]. The gold market has reportedly gone underground, with more and more people purchasing gold with old banknotes and smuggling it abroad - ironically, states one article, the world’s biggest illicit importer of gold turned into its biggest exporter [14].

A poor candidate

Any attempt to explore the logic that laid the foundations of this policy must take into account basic features of both the Indian economy and the society. First, mainstream statistic measurements are in agreement that 97% of Indian economy is cash-based [15]. What effects, other than catastrophic outcomes, could the overnight ban on cash have upon an economy which is almost entirely based upon physical notes and in which more than 90% of all transactions, both on the white and black markets, are done in cash [16]? Almost 85% of workers are paid in cash, and India is the only country in the world in which even Uber accepts payment in cash [17]. Social data is even more discouraging and serves to make matters worse. Only 25 million Indians have credit cards and there is an estimated number of 550-660 million debit cards in circulation at the national level. Half of India’s citizens do not have a bank account and around 25% do not even have an ID card that would allow them to access the banking system – the poorest, together with the old, the disabled or the sick lack from the start any means to convert their money, especially the savings under the mattress [18]. The poor and now desperate people who struggle to earn a dollar or two a day in order to survive are now expected to use electronic means for transactions and digital payments, in an economy in which electricity and Internet connections are still poor and highly unpredictable in big, urban areas, let alone in isolated, rural areas [19].

Most of the time, India is depicted as the fastest growing large economy and praised for its successful democracy and technological advancement. Returning to a fact-based reality and disregarding the aggressive marketing of the Indian transnational lobby yields a different picture. India has a population of 1.34 billion people with a GDP of $1,718 per capita. Almost 50% of India’s citizens do not have access to toilets, electricity, water or efficient sanitation – the lifestyle of 75% of the population can be compared to a feudal existence. 48% of Indian children under the age of 5 are stunted, with long-term impact on their mental and physical potential, a percentage greater than in any other major country of the world and worse than Sub-Saharan Africa, which has received significant international attention. Only one-third of Indians currently have Internet access and less than 20% possess a smartphone.

The next China? Chinese GDP per capita is more than five times higher than India’s, and growing more than four times faster – studies show that even if India would keep growing at the recent high rate of 7.5%, compared to the 6.3% recorded by China, it will still take India more than 135 years to catch up with its Asian rival.

The next Venezuela? The recent demonetisation policy has brought about a correlation between India and Venezuela – however, differences are striking, not only in terms of GDP (Venezuela’s GDP is seven times that of India), but also in popular morale and attitude (“Venezuelans fight when they go hungry. Indians are too weak to even leave their homes[20]).

Sense and prudence

The goal of the demonetisation policy is, officially, the evolution towards a modern cashless and digital society. The official party line has been repeatedly invoked by the Indian Finance Minister, Arun Jaitley, as well as by Prime Minister Narendra Modi, whose initiative has been depicted as “over-ambitious and somewhat callous” (The Indian Express) and even “insane and inhumane” (Zero Hedge), amounting to a disaster to India’s economy [21], [22]. Besides the fight against corruption and black money (allegedly used by Pakistan to finance terrorism), another key policy initiative of the Indian government under the leadership of Modi is Digital India, launched in the summer of 2015, which includes three major components – infrastructure, digital literacy and delivery of services [23]. The demonetisation policy can be therefore regarded as a major step in this framework – Bill Gates agrees with this assumption and has warmly welcomed Modi’s measure, describing it as a milestone in the evolution from a shadow economy to a transparent one, while predicting that India will become in the next years “the most digitized economy” [24].

Bill Gates agrees with this assumption and has warmly welcomed Modi’s measure, describing it as a milestone in the evolution from a shadow economy to a transparent one, while predicting that India will become in the next years “the most digitized economy”.

The oft invoked Swedish example bears no relation to Indian realities. The former is acknowledged as the best example of a cashless society, in which only 2% of transactions are cash-based. In this respect, one should not disregard some key differences between the two countries that supported an organic trend towards a cashless society – Sweden exhibits low rates of corruption in government and high social trust, not to mention state-of-the-art financial and technological infrastructure, none of which can be found in India [25]. Considering even more powerful countries, such as Germany or the United States, which undoubtedly possess the proper banking and technological infrastructure to enable the existence of a cashless society, the results are striking: in Germany, more than 80% transactions are done in cash, compared to a still significant 45% in the United States [26].

A series of articles has referred to the “demonetisation saga” and the subsequent degradation of India [27]. In a brief analysis aiming to explain why a cashless society would have disastrous consequences on Indian society, the Times of India points out to the end of privacy as one of the major negative effects, since every type of payment would be available not only to the government (which can use this kind of data arbitrarily against the citizens), but also to all kinds of hackers and thieves, particularly in the context in which India has no privacy laws and data protection has lagged significantly [28]. Another article available on The Indian Express’ platform InUth, tackles even more issues that undermine the prospect of successfully evolving towards a cashless society – network connectivity issues together with very high Internet costs and the very absence of Wi-Fi connection in public places, additional charges (2%) for online or credit-card transactions, the paucity of bank accounts, insufficient bank infrastructure, lack of computer literacy and education for the use of digital facilities [29].

Conclusion

India is far from being ready to become a cashless society, regardless of the disruption the government is willing to accept to see it happen. Wider infrastructural problems must be solved before embarking upon such an ambitious project that would, otherwise, have genuine benefits – reducing transaction costs or bypassing bureaucracy, enhancing efficiency and transparency. The most ardent critics state that India evolving towards a police state, shaped by aggressive nationalism and with no independent body free from the propaganda machine engineered by the powerful Narendra Modi [30]. Should the economic hardship and perceived unfairness flare up in the form of severe civil disturbances, the necessary measures will mean that the PM might just have propelled his country on the path towards autocracy which, given the size and complexity of the nation, would lead to chaotic disintegration. Institutions will be strained to the point of collapse and the civil society, which already had a low level of development, will increasingly be characterised by irrationality and lack of discipline [31]. Whether such negative scenarios can become reality or the overwhelmingly optimistic vision fostered by Modi will win the day, is anybody’s guess when severe uncertainties clash with unrealistic expectations. As for the dreams of a cashless society, India’s woes might become the ultimate counter-example to restrain the technocratic fervour of modernizing elites, while tarnishing Narendra Modi’s shine in the West.

NOTES

[1] pib.nic.in/newsite/erelease.aspx
[2] www.zerohedge.com/news/2016-11-27/indias-modi-admits-plan-shifting-nation-cashless-society
[3] www.washingtonpost.com/world/indias-currency-crisis-is-stalling-small-industries-and-sending-workers-home/2016/12/24/5a2d3aea-c7b2-11e6-acda-59924caa2450_story.html?utm_term=.83bde3bf3079
[4] www.zerohedge.com/news/2016-12-20/demonetization-has-achieved-nothing-indias-rapidly-plunging-toward-police-state
[5] www.dnaindia.com/india/report-demonetization-indian-farmers-fear-losing-crops-income-from-govt-move-against-black-money-2274535
[6] scroll.in/a/821113
[7] www.ndtv.com/tamil-nadu-news/70-year-old-dies-in-bank-queue-in-tamil-nadu-no-one-rushes-to-help-1633913
[8] www.zerohedge.com/news/2016-12-09/65-atms-nonoperational-goldman-warns-india-returning-barter-system
[9] www.zerohedge.com/news/2016-11-16/stunning-scenes-panic-gold-price-skyrockets-india-after-currency-ban
[10] www.forbes.com/sites/wadeshepard/2016/12/12/one-month-in-whats-the-impact-of-indias-demonetization-fiasco/2/#1862342c5d69
[11] www.zerohedge.com/news/2016-12-09/65-atms-nonoperational-goldman-warns-india-returning-barter-system
[12] www.hindustantimes.com/india-news/i-am-ruined-farmers-hit-hard-as-demonetization-brings-down-prices-of-vegetables/story-OwgxN4Qk33M6djqpoMk1oJ.html
[13] www.zerohedge.com/news/2016-11-27/indias-modi-admits-plan-shifting-nation-cashless-society
[14] www.zerohedge.com/news/2016-11-23/black-money-backlash-these-are-illegal-workarounds-indias-cashless-chaos
[15] www.zerohedge.com/news/2016-11-16/stunning-scenes-panic-gold-price-skyrockets-india-after-currency-ban
[16] scroll.in/a/821113
[17] www.forbes.com/sites/wadeshepard/2016/12/14/inside-indias-cashless-revolution/#27f8b4e918c7
[18] www.zerohedge.com/news/2016-11-16/stunning-scenes-panic-gold-price-skyrockets-india-after-currency-ban
[19] www.zerohedge.com/news/2016-12-20/demonetization-has-achieved-nothing-indias-rapidly-plunging-toward-police-state
[20] www.zerohedge.com/news/2016-12-20/india-next-venezuela
[21] indianexpress.com/article/opinion/web-edits/demonetisation-the-dream-of-a-cashless-economy-4382493/
[22] www.zerohedge.com/news/2016-12-27/indias-prime-minister-has-singlehandedly-crushed-economy-his-reckless-cash-ban
[23] www.slate.com/articles/technology/future_tense/2016/11/india_s_push_to_a_cashless_society_has_a_high_cost.html
[24] www.slate.com/articles/technology/future_tense/2016/11/india_s_push_to_a_cashless_society_has_a_high_cost.html
[25] www.wsj.com/articles/indias-bizarre-war-on-cash-1482452964
[26] timesofindia.indiatimes.com/home/sunday-times/all-that-matters/three-reasons-why-a-cashless-society-would-be-a-disaster/articleshow/56041036.cms
[27] www.zerohedge.com/news/2016-12-20/demonetization-has-achieved-nothing-indias-rapidly-plunging-toward-police-state
[28] timesofindia.indiatimes.com/home/sunday-times/all-that-matters/three-reasons-why-a-cashless-society-would-be-a-disaster/articleshow/56041036.cms
[29] www.inuth.com/india/cashless-society-narendra-modi-demonetisation/
[30] www.acting-man.com/?p=47966
[31] www.zerohedge.com/news/2016-12-20/demonetization-has-achieved-nothing-indias-rapidly-plunging-toward-police-state
 
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OEconomica No. 1, 2016