Narendra Modi's Bet: Demonetize India
On November 8, 2016, the Prime Minister of India, Narendra Modi, made a very unexpected and impactful announcement: there would be a demonetization of Rs. 500 and Rs. 1000 notes that was effective immediately. Indian citizens had until December 31 of that year to exchange their old notes for new ones. This decision came as the result of a collaboration between the Reserve Bank Of India (RBI) and the Indian government, but there were whispers that the demonetization occurred without the approval of the RBI. The immediate aftermath was disastrous in many ways, with very long queues forming at local banks as people desperately tried to exchange their money so that life could return to some semblance of order and calm.
There are many who are convinced that the demonetization was an orchestrated move to win political popularity for the current incumbent, as it was announced just months before the state elections in Uttar Pradesh. If the move was in fact politically motivated, it was a success. The Bharatiya Janata Party (BJP), one of India’s two major central political parties and the one to which the current prime minister belongs, achieved a sweeping victory in the state elections. This was a significant win not just in terms of the numbers, but in its long term implications—the BJP has not been in power in Uttar Pradesh, the most populated state in India, for many years.
India is a country that has seen more than its fair share of corruption. The previous political party in power finished its reign embroiled in multiple, well-documented scams: inferior construction and objectionable arrangements during the 2010 Commonwealth Games, siphoning of government funds on various occasions, and misallocation of mining and telecom spectrum rights are just a few of their most-publicized misdeeds. In fact, most bureaucratic processes were expedited by bribes to lazy officials. The current prime minister, Narendra Modi, rode to power on a strong anti-corruption campaign, promising a clean and efficient government. In the three years that have passed since his powerful victory, the Indian public has been hoping for a validation of the campaign’s message of anti-corruption.
In the light of the anti-corruption messages that the Modi government regularly puts forward, the most profound effect of the demonetization has perhaps been the way in which it has won the support the common man, referred to as the aam aadmi in Hindi. The notion has arisen among the public that there is finally someone powerful on their side, taking definitive action by waging war against corruption. In several random interviews conducted with people from lower socio-economic backgrounds in Northern India, a recurring theme has emerged: the burgeoning hope that a significant reduction in corruption will occur in the near future. For the first time in the 70 years since India’s independence, we have seen a large-scale, profoundly impactful political decision undertaken with the aim of fighting corruption.
While public opinion towards the move to eradicate corruption is generally favorable, many experts and officials feel otherwise, and their viewpoint is warranted. Official reports say that only 10 percent of Indian black money is stored in the form of cash—most is in the form of land or gold or stashed in bank accounts on foreign shores. Though about 85 percent of the old notes in circulation have been r e c o v ered, the i m p a c t that cash recovery has had on corruption is yet to be seen. There are some who say t h a t , while the recovery of actual black money may have been low, demonetization has brought many structural changes that promise to cut down on corruption significantly. All of the individuals who came to banks hoping to convert large amounts of notes have landed under the scrutiny of the Income Tax Department. Due to the introduction of new notes, all large cash transactions in the future will have to either be cut down or simply not undertaken.
The biggest complaint critics of demonetization have brought forward is the severe inconvenience born by the common man, an inconvenience exacerbated by the fact that India is a country that operates largely on cash; approximately 90 percent of the Indian economy is cash relia n t and all small businesses operate on cash. India, in fact, has the highest levels of cash circulation in the world—12 percent of its GDP works on cash. Around 80 percent of the labor force operates in the informal sector of the economy, which comprises 40 percent of the GDP. Such employees are all paid in c a s h — c a s h that has now become void. Servants working in households, laborers of all sorts in cities, smaller towns, and villages, farmhands—they all faced severe disruptions when they suddenly stopped receiving salaries, compensated with empty promises of money that was sure to come soon. The demonetization announcement brought the economy to a grinding halt. Everyday transactions were significantly reduced, as people panicked and rushed to their nearest bank to collect the new notes in the sanctioned amounts. And there were queues. There can be no denying the hours and hours for which people were forced to wait under the burning sun. Richer people managed to secure short-cuts, in the form of paying others, who desperately needed the money themselves, a minuscule amount of new cash in order to stand in the line and collect their money.
The short-term economic repercussions of the move have been resoundingly negative. Demonetization took a heavy toll on the stock markets, and there was a large dip in the occurrences of the economy. Fast moving consumer good (FMCG) companies like Unilever, which hold a very sizable market share in most household products, reported their biggest losses in decades in the quarter following demonetization. Films flopped at the box office, and, for once, it was not terrible filmmaking that caused such losses. But Christine Lagarde, the chief of the International Monetary Fund (IMF), has recently stated that the economy’s performance in the months following November 8, 2016, can be traced in the shape of a V on a graph—there has been a steady rise after the dreadful fall. The chairman of the State Bank of India, Arundhati Bhattacharya, has confirmed that this rise aligns with the workings of her bank, today the largest bank in India.
However, there are many long-term benefits that have come from this shocking situation. Since the announcement, there has been a rise in electronic payments and debit card usage and an obvious decline in the dependence on cash. Lower-income households have opened bank accounts for themselves in order to store their money. The government has implemented various schemes to ensure this smooth transition. A key component to all of these schemes is the Aadhaar card, an identification pin in the form of a 12-digit long, unique number, assigned on the basis of biometric data and demographic information. While the figures vary, news report claim that at least 90 percent of Indians now have Aadhaar cards. By way of these cards, the government has set up various new programs such as the Aadhaar Payment app, which allows people to pay one another using simply the payer and payee’s Aadhaar numbers. The government does not charge a transaction fee; the app offers a very simple and functional new way for transactions to take place. The setup of bank accounts under the prominent government, and their linkage to the Aadhaar card, allows the government to make direct transfers into people’s bank accounts and eliminates many costly middlemen. In short, demonetization has been a good way to help a cash-dependent society become more digitized.
The cost of cash is extremely high for Indians, even when compared to lesser developed countries like Kenya and Nigeria. ATM access in India is very limited, as most villages do not have ATMs. This drastic change, therefore, has forced people out of their comfort zones and, in the long run, will be advantageous in several ways. On the other hand, however, this very high cost of cash means that we cannot understate the severity of the trouble people must have had getting their hands on new money.
We will only begin to understand the true repercussions of this move in the decades to come. Several different kinds of economic analyses of demonetization have been put forward, some positive, some negative. Many are convinced that the move will ultimately be beneficial because it will prevent further black market transactions and pathways. There is also no way to understand the cause for the demonetization—it could have been a popularity play or a decision driven by the genuine desire to eradicate corruption. There are also many looming questions about the implementation of demonetization. There is no denying, however, that the move was a very powerful political statement. This is Narendra Modi’s way of telling Indians, and the world, that change is coming, and it is coming fast. The only question to answer now is whether India will be able to pay the price of such haste.