On November 8, Indian Prime Minister Narendra Modi pulled off a major coup against black money by demonetizing old Rs 500 and Rs 1000 banknotes. The holders of these denominations were provided with a 50-days window to deposit these notes.
The announcement which caught everyone including his close party colleagues off the guard has shaken off nearly every segment of Indian economy and society. Given more than 90 percent of all transactions are made in cash, there is a mad scramble for smaller denominations. The country is in the throes of unprecedented liquidity crisis. This is because disbursing smaller denominations and new notes of higher values to the scale of 15 trillion rupees has turned out to be a logistical nightmare for the banks. Given the entire process was kept a top secret, banks and related agencies got no time to prepare for the challenges of monstrous proportion.
This is very much evident from the chaotic scenes and never-ending serpentine queues outside banks and ATMs. Rich, poor and everyone is lined up from the wee hours to surrender high value notes and collect lower denominations for managing their daily needs. While the policy is intended to hit the hoarders of black money, mafia and terrorist organizations, the real worse hit seems to be the poorest and unbanked sections. India still has roughly 45 percent people with no formal banking access in any manner. These are mostly the rural population; mainly the farmers, daily wage laborers and people belonging to marginalized sections.
Yet, the sudden decision has hit the millions of small traders, street vendors, and petty businesses as low currency circulation has forced consumers to postpone their daily purchases. Notably, country’s healthcare, education and other essential services are badly affected by sudden disruption in cash flow. Even after nine days of the announcement, more than half of the ATMs are still without cash thereby adding to public anger and resentment.
How big is India’s black money?
For a long time, black money or unaccounted money often sourced from corruption and illicit deals has dominated India’s public sphere. There has not been an election where black money was not a major election issue. The size of black money in India is estimated anywhere between 23-26 percent of the country’s GDP. India’s current GDP is $2.3 trillion in nominal term.
From government’s own estimate, a vast portion of this black money is in high value currency. Considering its deep connection with economy and society, black money was a major poll plank for most political parties in 2014 General Elections in India.
As a prime ministerial candidate in 2014 elections, Narendra Modi had put considerable political capital on the issue of black money. During the course of his election campaign, Modi had repeatedly claimed that if he won the poll, his government would bring back the black money from abroad and then distribute a sum of Rs 150,000 to each and every poor family. After his party won a landslide in 2014, he took a number of measures to regulate the flow of black money. Apart from setting up a Special Investigation Team headed by a retired Supreme Court Justice, he brought forth a series of legislations, notably the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, to attack the entrenched edifice of black money.
These laws provided numerous amnesty schemes for black money hoarders to convert their money into legal currency after paying the stipulated penalty. Yet, the responses to these schemes have not been very encouraging and the Modi government and its strategy to bring back black money had become a subject of public debate in the recent times. Thus, the scrapping of high value currency was a sort of emergency measure to deny the large hoarders a chance to convert their illegal cash. This is also intended to push India into a cashless economy and bolter government’s revenue base.
While the large majority of populations are still backing the government’s gamble notwithstanding daily hardships, the Modi government’s most ambitious reform agenda has lost much of its shine because of weak implementation, particularly banking system’s lack of readiness to respond to the crisis of this magnitude.
Next few weeks will reveal how the scheme would play out. Much rests on government’s ability to bring the damage into control by easing the money flow and reducing the daily miseries of citizens. Else the political masterstroke would turn into massive electoral liability.
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