As the nation comes to grip with the fact that their money has overnight become virtually worthless, one can’t help but wonder about the origins and consequences of such a move. By effectively wiping out 86% of the cash in circulation, the Narendra Modi government has created a cash crunch so terrible that it may take months for growth to bounce back. This is where the media opinion has acted as the executioner by looking at the problem from a short term and naïve perspective, not realizing the wide ranging ramifications it can have.
First of all let’s understand the basic reason for this move. As touted by the Modi government, this move is a fight against black money and fake currency induced terrorism. Note how the Kashmir unrest that was at its peak died down instantly with no purported truce between parties concerned. This is the greatest achievement of this move and some might feel everything after this will go downhill. Now the fight against black money is a lot more complex than any of us can imagine.
It’s been said that the money is not a stock but a flow and this is not an effective way to target black money. However, one must realize the amount of political capital that Narendra Modi has at stake due to this move. This move hits hard at the middleclass traders whose businesses are essentially undergoing a recession as people begin to postpone conspicuous consumption. This is the principal vote bank of Narendra Modi and this move has the ramifications to upset this class and turn them against this government.
If Narendra Modi has effectively gambled on his chances of getting elected again, one must realize the amount of planning and thought that could have gone into the action. The government is not stupid. It has the vast experience and knowledge of the tax authorities and the Reserve Bank at its disposal. It would be childish to assume that the government has no idea about the loopholes in this action. As I hear from the community around me, people with reach have effectively managed to convert this money into gold, real estate etc. Others have found ways through commission agents to convert their old notes into new notes by paying the same amount as they would have if they had honestly paid their taxes before. Therefore, even though they get to keep their money, it is still unaccounted and they have ended up losing as much as they would have if they had been honest about it. Also it can come back to nip them in the bud.
Chances are we shall soon see action against other means of stashing this illicit wealth. If that does not happen, this move could be considered a mediocre success as far as curbing black money is concerned. Then again, politics is a game of optics and illusion whereby Modi is showing that he has the balls to take action against black money whether that happens or not is a completely different issue. This sole display of a 56 inch chest can garner him several followers.
Let us now move ahead to the way this move has been received by the country at large. Several media reports talk of the situation as an economic emergency. Almost all sources of media have decided that this move is anti-people and anti-poor. What they fail to grasp is that while they try to win this battle, the government has already run away with the war. No matter how many interviews, testimonials and alleged deaths are shown, the fact remains that the populace has at large taken this as a sacrifice for the greater good and a large majority has supported this move wholeheartedly in spite of the hardships faced. A major reason for the poor people supporting this move is the feeling of schadenfreude that they get as they for the first time see the rich industrialists running around to save their money.
This brings us to another problem in the Indian economy. The fact that a poor person can experience joy due to the suffering of the rich in spite of the fact that he himself must bear the pain for no fault of his speaks volume about the hatred and dislike of money. If India wants to project itself as a vibrant and open place of business, it must take note of the socialist behaviors of its masses. If the rural poor abhor their richer counterparts so much, one wonders whether we can really industrialize ourselves. What this schadenfreude shows us is that the rural and poor India despises the ugliness of a richer lifestyle and this has proven to be the primary impediment to our growth in recent times. We must shed this leftist idealism and root out populism if we are to realize the dreams of the aspirational India.
Several people have blamed the government for ineffective planning and faulty execution. For this move to have any significant impact, the element of surprise was of foremost importance. If anyone got wind of such a move, it would crash before taking off. Not to mention the government would be unable to postpone it as the common man would have already got an advance warning. By recalibrating ATMs in advance or by bringing about a sudden spurt in printing of new notes, the government would have risked rumors breaking out.
Another criticism is that by bringing in the Rs. 2000 note before the Rs. 500 note, the government made a massive error since no change could be found for the higher denomination note. Yet if you think about it, by printing in advance a radically different 500 rupee note when another note of the same denomination was in circulation, the government would risk rumor mongering. The same cannot happen with a brand new 2000 rupee note. Also, it takes the same time and effort to print a single note, whatever denomination it may be. By introducing a note of higher denomination first, the government can bring liquidity in the market faster as it can print 4 times the value in the same amount of time by printing a 2000 rupee note. So instead of having no money due to ATMs running dry people face only a little hardship because they cannot find change. At least they have valid and legal tender money. As far as the move to introduce a new 2000 rupee note is concerned, even I have my reservations. Although economically it makes sense as the cost of the note will be several times lower than its face value.
Finally to round it out with the medium and long term benefits. Real estate prices are sure to see a drop due to reduced liquidity leading to preference for banking transactions. The economy will definitely see a drop in inflation as people run out of hard cash to make purchases. It promotes and inculcates a habit of engaging in digital transactions for as many people as possible. It also ends up as a valid successor to the Jan Dhan Yojana so if you did not open a bank account voluntarily, the government is forcing you to open one now. Also the money that doesn’t come back to the banking channel effectively reduces the liability of RBI, although I shall not go into the technicalities of it as it is still vague as to whether this can be transferred as dividend to the government or not. Terror funding has definitely taken a hit and the menace of fake currency has been halted.
In hindsight, one must say that this move must have been planned long back. The government started with promoting bank accounts for all, Aadhar cards for all and mobile transactions. The JAM trinity was a precursor to this move and one cannot ignore, that if you had been a part of this, you would not have suffered right now.