Prime Minister Narendra Modi’s decision to denotify the 500 and1000 Rupee notes and his subsequent plea, asking the people of India to bear with the inconvenience for the next 50 days for a greater cause have not resonated with vast swathes of the populace. His decision to withdraw all Rs 500 and Rs 1000 notes from the system (86 percent value of money in circulation) and replace them with new currency was meant to attack black money and fake notes. But as these editorials have argued in the past few days, the big fish have all swum away, and those who have been disproportionately affected are the ones in the low- and middle-income brackets.
In financial terms, the decision has also placed an immense burden on the banking system and virtually squeezed liquidity out of the economy. Reports indicate that the agrarian economy has been hit rather hard, as the decision to withdraw all Rs 500 and Rs 1000 notes have coincided with the crucial harvest time. “The small farmer first harvests and then gets the field ready for the next sowing cycle,” according to a report in the Economic Times. “He then sells his crop and from that money he buys seeds, fertilisers and pesticides to start sowing. The government’s demonetisation has caught the farmer at different stages of this cycle. On top of this is the decline in cash inflow.” In other words, the month of November is a very busy and crucial month for farmers. Instead of being at work, many are standing in line serpentine queues waiting to exchange their hard-earned cash.
In the coming weeks, Rs 16 lakh crore has to be infused into the economy even though maximum ATM vending machines are not compatible with the size of the new Rs 2000 currency notes. The government’s decision to call an emergency meet on Saturday with the country’s top bankers three days after the Prime Minister’s announcement reeked of poor and insensitive enforcement. Till the ATMs are recalibrated to dispense new notes, people will have to wait for several hours to withdraw their money from different branches of banks and post offices across the country.
Manufacturing new currency holder trays and recalibrating the 2 lakh ATMs all over the country may take at least a few weeks. “Considering the fact that the informal sector in India accounts for about 45 percent of gross domestic product (GDP) and nearly 80 percent of employment, disruption of this liquidity can be very costly indeed, both in terms of growth and equity,” says Pronab Sen, country director of the India Central Programme, International Growth Centre. “To make matters worse, some of this cash is held by hundreds of millions of the poor as savings and for meeting contingencies, and they have little else to fall back upon.”
In India, bank account penetration increased from 35 percent to 53 percent, according to a recent World Bank study. But 43 percent of these bank accounts are dormant, while 300 million people lack the requisite identification papers. Supporters of this decision argue that those holding unaccounted wealth in cash have been affected. But according to recent data based on tax raids from 2012-13 onwards, only six percent of the undisclosed income seized from tax evaders have been recovered in cash. This move would do little to unearth black money hoarded by the rich who park their cash in different asset classes. Finance Minister Arun Jaitley urged people not to flock the banks to exchange the now-defunct banknotes, asking them to stagger it over the 50-day window provided by the government for the purpose. The Finance Minister seems to have forgotten that fifty days is a very long time when the vast bulk of the economy stands totally disrupted.
The potential backlash against the Centre’s decision will be addressed in the upcoming Winter Session of Parliament. Reports indicate that West Bengal Chief Minister Mamata Banerjee has spoken to leaders from various opposition parties, including CPM, and presented the idea of a united struggle against the Centre’s decision to withdraw all Rs 500 and Rs 1000 notes from the system and replace them with fresh currency. From the very moment Prime Minister Modi announced his decision, the Trinamool Congress leader has remained steadfast in her opposition to the decision. There were those who initially dismissed Banerjee’s pleas. But they can’t discount her views anymore. Many economists, who are not beholden to the ruling dispensation, have pointed out that the move will disproportionately affect the underclass. As per recent reports, several notices have been given for the matter to be discussed in Parliament.
Of course, it's hard to predict how the upcoming Winter Session will pan out. It is apparent that the opposition will seek to channel the overwhelming public anger against the government’s decision. However, one does hope that this anger does not merely result in shouting matches and walkouts. It would be a real shame and a failure on the part of the opposition. There is little that anyone can do to rollback the process of demonetisation. What the opposition must do is to pose some pointed questions at the government. Based on what tangible evidence did the government seek to pursue such a measure? What did the government hope to achieve? What are the costs incurred? What steps will the government take to ensure that stable monetary conditions are restored with the shortest possible delay? Have the real hoarders of black money been affected by this decision? Why does the implementation process reek of insensitivity to the plight of the common man? Evidently, the process has been haphazard.
Based on the idea of cooperative federalism, opposition Parliamentarians from various states must ask whether a decision of such magnitude can be taken without consulting the states. The ruling Bharatiya Janata Party cannot hide behind the veil of saying that anyone criticising the move “stands with black marketers and drug traders”. It must answer the above questions without hiding behind lame excuses. The opposition and the Centre can ill-afford to waste this session.