Demonetisation: How Modi government lost the plot
by Punarvasu Parekh on 23 Dec 2016 16 Comments
The Modi government has lost the plot on demonetization. The ‘surgical strike’ on corruption, terror funding and fake bills has turned into promotion of cashless transactions, cheered by powerful commercial interests. Issuers of credit cards and debit cards are smiling from ear to ear. Promoters of payment companies and money changers are literally salivating at the tremendous business opportunities suddenly opened up for them. One of them spilled the beans in a feat of ecstasy, declaring that no amount of marketing can do what demonetization has done for them.


Meanwhile, initial enthusiasm having faded, the fatigue of being cashless is telling upon peoples’ patience. Trade and businesses, small and big, have been hit hard. Industry is limping. Despite a bountiful crop, farmers are in tears as there are no buyers for their produce, their meagre savings have become invalid; they have no money to buy inputs for sowing summer crops.


Bank employees, suddenly charged with carrying out the gargantuan task of physically replacing billions of currency notes in a short while, are having harrowing times facing people’s ire, paucity of cash, frequent changes in rules, RBI prodding and raids by investigative agencies.


Many games will be played in the few days that remain before the deadline, but the dismal picture is unlikely to change materially. Modi government underestimated the reach and the resourcefulness of the crooked, and overestimated the integrity and capabilities of the banking system. Modi himself and BJP will pay a heavy price for this double error.


In a supreme but cruel irony, a measure that was supposed to empower ordinary citizenry and punish the wrongdoers has ended up giving extra powers to income tax officers and police -- two of the most corrupt, venal and cussed arms of the Indian state.                 


Two developments have sapped people’s enthusiasm. The groups that were targeted (or were thought to have been targeted) have managed to escape almost unscathed, even as those who did no wrong are made to bear the full brunt of the exercise. Secondly, the hope that the situation will return to normal in a few weeks has proved illusory.  


All outlets are being plugged for the ordinary people (witness the latest flip flop on deposits exceeding Rs. 5000) even as floodgates have been opened for the kings of the crooks -- political leaders. The revenue secretary has “clarified” that political parties can deposit any amount, no questions asked, and no tax to be paid. Since most political parties are family businesses, political leaders will not only regularize their ill-gotten wealth as party funds, but also extend the same favour to others; for a fee, of course.


It is true that political parties have always been exempt from income tax. What is galling is that instead of devising ways to block their path to the banks, the government is helpfully drawing their attention: don’t worry, there is a way out for you. Ironically, every clarification issued by official spokesmen has only served to strengthen this assurance. Whatever the official justification or pleading, the fact is that unless political parties are divested of their illicit cash hoardings, all the hardships suffered by the people and all the damage sustained by the economy are in vain.            


Success of demonetization has three criteria. One, currency notes representing unaccounted wealth would not return to the banks and get demonetized automatically. Corrupt politicians, industrialists, businessmen as also terror funding networks would suffer heavy losses but could not complain. Secondly, the demonetized bills would soon be replaced with new legitimate ones so that it is business as usual before long. Finally, steps are taken to compensate those who have suffered losses for no fault of theirs.           


The reports till date indicate that none of these criteria is likely to be met. The volume of demonetized notes returning to the banks has exceeded all expectations. The crooks have tried every trick in the book to legitimise dud notes - Jan Dhan accounts, benami accounts, staffers’ and relatives’ accounts and advance payment of wages, besides purchasing gold, dollar and land. Plus, the last days may see a heavy rush for deposits.


Initially, there was a hope that about a fifth the demonetized notes (approximately worth Rs. 3 lakh crore) would not return to the banks and, with some help from RBI, the money could be used by the government for the benefit of the people and the economy. That hope is shriveling with each passing day. Indeed, now there is a real possibility that more notes may return to the banks than were originally issued by the RBI! It will be scandalous if they do.    


Secondly, just half the notes deposited in the banks have been replaced with new ones. Distribution of new notes is as scandalous as depositing the old ones. Ordinary citizens spend hours in serpentine queues for a couple of bills, sometimes collapsing and dying, whereas the crooked manage to get crores upon crores of rupees in new notes sitting pretty at home.


Private sector banks have shown that given an opportunity they can surpass the much maligned public sector banks in corruption and malfeasance. Even RBI staffers have been nabbed for foul play. There is a direct link between the back market in new notes and the people dying in queues before banks and ATMs. As regards the decision to print the Rs. 2000 note and change the sizes of the bills, it is hard to say whether it was a blunder or sabotage.


On the other hand, half the cash that kept the wheels of agriculture, trade, industry and businesses moving has been drained out of the system. The economy is gasping like a man with half the blood drawn out. Shops have no customers, factories have no money to pay wages or buy materials, small traders and service providers find their businesses flattened. The finance minister has added salt to the wound by declaring that not all the demonetized notes will be reprinted.     


Farmers are probably the worst hit. Bountiful harvest after two successive draughts had aroused hopes of some respite, if not good times. These hopes have been shattered. Prices have hit rock bottom at a time when kharif crop as well as fruits and vegetables are arriving in the market. There have been heart-rending reports of farmers having to destroy their own crop of vegetables to clear the ground for rabi sowing, since market prices would not cover even the cost of harvesting the crop and carrying it to the market.      


The consequences of the harm inflicted on economic activity are just beginning to unfold. The coming months would be worse. Don’t be surprised if the GDP growth slumps below 7 per cent in the December and March quarters. 


Instead of devising ways to minimize the losses suffered by the citizenry, the bigwigs of the ruling party are busy promoting cashless transactions. All cash is not black money, all black money is not in cash. Yet the use of cash is being portrayed as something outdated and undesirable, if not immoral. The fact that services of credit cards, debit cards and payment companies come at a price, are hazardous and complicated for ordinary Indians, is cleverly downplayed.    


Ordinary citizens who cheerfully put up with all the hardships and sportingly suffered losses are threatened with notice, scrutiny and punishments, even as those sitting on mountains of black money are rewarded with one more amnesty scheme: pay 50 per cent tax, keep another 25 per cent in a bank interest free for four years, and spend the rest.   


Whatever may be said by Modi’s supporters, the common man today feels cheated and betrayed. Those who did nothing wrong are facing all sorts of troubles, and the wrongdoers have escaped with a few scratches, if that. Poor planning, shoddy implementation and a rotten banking system have converted a bold and well-meaning measure into a self-goal.

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