Making a mess of 'demonetisation'

Prime Minister Narendra Modi's 'astra' (demonetisation) has misfired, his "maximum governance" failing to ensure an orderly exchange of illegalised high-value notes for the urgent cash needs of hundreds of millions of people in all walks of life.

The country, a full-blown cash economy, has been overtaken by chaos, with 86 percent of the money in circulation turned overnight into "worthless paper", without any forethought and adequate preparation for banks to provide reasonable amounts of cash for the surrendered high denomination notes.

The proverbial surgical strike is now on the people, not the hoarders and the corrupt, rendering them unable to buy food and other essential needs and paralysing small businesses and traders, in particular. About sixty percent of the economy is in the unorganised sector, and it is the small-scale sector that has been largely contributing to India's production, exports and employment.

From the look of things, the lofty aim of "cleansing" the economy would continue to do collateral damage to the economy. Nor is it likely that people's misery would end in 50 days, as the Prime Minister expected. It could be well into 2017 beyond March, as economists aver, taking into account the logistics for printing of new notes to replenish old stocks and for their transportation and being put into countrywide circulation.

That it was more a desperate political move by the Prime Minister to recapture the heights from which his government had been descending over nearly two and a half years, with the proven inability to revive economic growth out of stagnation and provide promised jobs, is now demonstrably clear. The Prime Minister must have begun to calculate his party's fortunes beyond UP and into 2019.

He cannot be grudged credit for many of his initiatives thus far, both infrastructural and welfare-oriented, which, however, need to be brought into more productive play. It must also be his desire to see that rampant corruption at the political level, mainly poll-related, is extinguished at the earliest.  Thus, he played his so-called trump card in the war against corruption, black money and terrorism.   

With such laudable object underlying demonetisation, the country and the political parties, in the main, would have had little justification to complain had the Modi Government averted a systemic crisis in the financial system.  And even now, there are hardly visible signs of an early end of the ordeal to which the people have been exposed on a gargantuan scale.

Leading analysts point out that whatever the long-term gains for the economy, the severe social consequences are inescapable. In the frenzy of never-ending queues in front of bank branches all over the country, people waited vainly to get the needed cash in exchange or for ordinary people having access to their current or savings accounts to draw some cash.

Unfortunately, in the midst of all praise for a bold move of the Prime Minister, people's misery also soared with the inability to obtain cash for purchases of essential requirements and for meeting urgent obligations for occasions like marriages, etc. 

In the melee, a string of fatal casualties was also reported during the first nine days at 47 including a case or two of children dying not getting timely feed without purchases and some elders either succumbing to heart attacks while in queues or their homes, unable to overcome the shock. 

Finance Minister Arun Jaitley claimed it was a "well-planned move" in a  tongue-in-cheek style, covering up his own Ministry's failure and responsibility for the disorderly manner of execution of that move.  That they had not foreseen the magnitude of the transactions required for currency exchange is apparent from the way in which the banking system has been unable to rise to the occasion.

Mr Jaitley contended  they could not have planned for it as it would have harmed need for extreme secrecy.The winter session of Parliament has begun with uproar in both Houses over what they regard as a total failure of Government in preparing for the fall-out of demonetisation and the inadequacies of the banking system. 

The Reserve Bank of India cannot escape its share of responsibility for the mess, not having been able to cope with demand for cash of the requisite order in the wake of effective withdrawal of as much as 86 percent of money in circulation.

At one stroke, the people's faith in the currency has been shaken, and the credibility of RBI has also suffered in the process. Lacking conviction themselves the way their Government has implemented demonetisation, BJP leaders are trying to counter the opposition charges by branding all critics as supporters of black money!

The millions outside the banking system, semi-literate rural masses, with no access to the banking system, are the worst to suffer in the absence of normal flow of cash for wages or getting paid for services rendered. The sufferings of people deprived of cash for purchases of food items including vegetables and of small traders, especially in rural areas, are acute.

Farmers have found it difficult to obtain credit or money for purchases of agricultural inputs, and their plight worsened, with the cooperative credit societies themselves caught up in the cash squeeze at a time of crucial sowing for rabi crops. Hundreds of trucks with goods were held up on highways for want of money.

The cash crunch has affected all sectors of economic activity and would have a contractionary effect on demand with fall in consumption and could impact growth in the third quarter (Oct-Dec)  of current fiscal year.  End of November would know the second quarter GDP (July-September). While inflation had significantly lowered with continuing slowdown in commodity prices, especially oil, shortages could also drive prices up in the days to come.

The Finance Minister seems unperturbed for his taxmen are hyper-active to detect evaded incomes out of the high-value notes received back from the people and boosted the revenues for him to be able to remain again fiscally prudent to adhere to the budgeted deficit at 3.5 percent of GDP. There are more warnings from the Finance Ministry of curbs on the use of cash on high-value deals. 

Even if the exchequer gains at the expense of the people, it is still doubtful whether the Government would also fulfil its commitment to making a greater public investment for growth.

The Modi Government has moved with great understanding and solicitude for the corporate sector hoping that some bank write-downs and further interest rate reductions would help the revival of private investments after a lapse of three to four years. 

Demonetisation could benefit government revenues and economy over the medium-term when taken along with the still-to-be enacted GST, but in the interim period, millions of people, especially in rural areas, will undergo unprecedented strains.