2016 – the Modi Government in third year – is ending in a state of near-paralysis of India’s financial system with its total failure to discharge mandatory payment obligations for tens of millions of customers, even six weeks after Prime Minister Narendra Modi’s demonetisation of Rs.1000 and Rs.500 notes. Bulk of what became “worthless paper” overnight the way he put it, had been deposited well before the December-end deadline.
Never before since Independence had our financial system been brought down to this pass, nor cash crunch on such a gigantic scale witnessed, leading to acute distress for the poor, daily wage-earners, small traders, and businesses in India’s highly cash-dependent economy. The trust of the people in the state-owned banking system has been shaken and gone with it the credibility of RBI, which so far had global prestige for maintaining financial stability.
Holding it up as an act of “courage” and a “surgical strike” against black money, the Modi Government Ministers have totally ignored the sufferings of the people at large and the livelihood threats for poorer millions. They underplayed the gravity of the situation by talking of “short-term pain and long-term gain”. What is this long-term gain that is waiting in store for them? And do they have a full measure of the so-called “short-term” pain. How long is “short-term”?
In the era of “maximum governance” reduced to majoritarian authoritarianism, we still need to know how and why demonetisation have been so ill-planned to turn it calamitous for the nation? The “courage” claimed for the decision had not extended itself to own up plain failure, a “massive mismanagement” with all-round negative consequences, when 86 per cent of money in circulation had been withdrawn overnight.
Much of a systemic failure and the immense social distress and economic disruption therefrom must be laid at the door of Government’s policy planners and executors. In this case, the decision was that of Prime Minister Narendra Modi, who may be proud about declaring war against black money operators, but the head of an elected Government did not feel duty-bound to tell Parliament the rationale of such a momentous step that may have been taken in all good faith.
Instead, Modi has been using the political platform to counter-attack critics of the way demonetisation is impacting on the lives of the people. Finance Minister Arun Jaitley has sounded more escapist, shifting his ground from time to time. He spoke first of “short-time pain for long-term gain”, then a cash crunch “hurting but severity over-stated”, an easing situation and queues shortening. He later talked of a switch to enforce digital modes of payments. A less- cash economy seems to be the idea. It has been reinforced with an ordinance for certain payments including wages. Of great concern is Jaitley’s statement that remonetisation would not be equivalent to entire invalid notes returned.
Government’s contention that RBI had adequate currency stocks to meet the customer needs for a month also was fallacious. If so, the banks did not have them, the way they send back customers with fewer chips. (Jaitley himself said once it could be six months for normalcy to return).
While RBI keeps issuing series of notifications on limits for cash withdrawals or restricting access in some cases, bank branches continue to report shortage of currency to be able to meet customer needs even within specified limits. In the ongoing game plan, both remonetisation and printing of new Rs. 500 notes are being scaled down perhaps to force people for a quicker jump to Jatiley’s cash-less society.
An over-riding concern remains about the safety of people’s money in the banking system, in a diametrically changed situation. The people of India need to be reassured that the government stands by the implicit sovereign guarantee of its banks delivering cash deposited by customers in full.
These amounts ought not to be subjected to any kind of diversionary ploys to delay repayments nor subjected to a levy for withdrawals as the Chairperson of the State Bank of India obligingly proposed. There is no doubt the government is trying to make a virtue of its ill-fated exercise as one facilitating a transition to a digital economy but it failed the primary objective of getting hold of entire hoards of hidden black money.
Whichever way the Prime Minister interprets the 2014 mandate, with the ruling party’s just 31 per cent of votes polled, the havoc caused has overshadowed whatever other positive initiatives he had launched over the last two and a half years. There is nothing to suggest that the Modi Government would not have further recourse to abrupt measures in its zeal to “transform” the country in various directions.
Prospects in the New Year thus are for greater uncertainty at home and even graver developments and risks abroad. There are fears around the world about reckless policies that could emanate from the new President Donald Trump, who assumes office on January 20, on the basis of his track record of wild utterances on domestic and foreign policies.
Meanwhile, with all determination to win over UP in the early 2017 elections, the Modi Government is now focussing on the Budget for 2017-18 to make it as people-friendly as possible, giving it a distinct pro-poor image. With additional resources garnered from the deposit buildup of RBI, the Finance Minister indicated he would provide for tax reforms with lower rates as well as other incentives to coax investments by corporates, domestic and foreign.
With continued adherence to deficit reduction targets, he hopes to enlarge social development outlays. One would hope, imbibing the lesson from the immediate past, the fiscal exercise would help to heal wounds and ensure greater priority for the amelioration of ills that had thwarted India’s social development.
The economy has taken a severe beating from demonetisation. RBI had lowered growth in the current year to 7.1 per cent but foreign securities firms put it around 6 per cent. With oil prices falling, Fed rate hikes, capital outflows, and some lowering in the level of reserves, India has to tread cautiously in 2017-18 for stabilising growth.
(Views are personal.)