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The Botched Affair of India's Demonetization Drive Against Black Money

Image from Flickr by SS & SS. From public domain.

Image from Flickr by SS & SS. From public domain.

India's Prime Minister Narendra Modi, who rose to power in 2014 with a promise he would ‘battle against black money’, has made good of his word — or so it seemed on the surface. On November 8, India withdrew 500 (US $7.50) and 1,000 (US $15.00) Indian rupee banknotes from circulation to stop the flow of black money and wipe out counterfeit currency from the system.

When we dig deeper into the consequences of this move, however, we find upsetting stories. People have been forced to stand in huge serpentine queues outside banks in India's metropolitan areas and villages in a bid to exchange their money, and numerous people have supposedly died while waiting in line or when health services refused to accept the old notes.

The lack of systematic implementation has created a wider network of chaos, especially in a country that is extremely cash reliant.

Modi's strategy is a part of various other steps he's undertaken to curb the black money menace in India, including the impending Goods and Services (GST) tax roll-out next year and a tax window and new amnesty schemes for tax evaders.

Let's try to dissect the politics and problems and understand the positives and negatives of the black money issue and India's demonetization drive that has left many poor Indians in a lurch with no access to medicines and daily essentials.

Demonetization: Good intentions, faulty implementation

Nearly 86 percent of India's cash reserve was in the form of recently banned denominations — Rs 500 ($7.5) and Rs 1000 ($15) notes. This left the Indian economy hurting for cash as traders, workers, and lower strata of society heavily relies on cash transactions. The number of unbanked in India is at a staggering 233 million (around 20% of the population), according to a 2015 PeW research report. So, even if India's right-wing government wanted to clear the system of black money and get India to go cashless, analysts claim there was lack of pre-planning that created problems for citizens.

For example, Indians stood in huge queues to withdraw their money, but the Automated Teller Machines (ATM) lacked calibration in the early days of demonetization to dispense the latest currency notes because of differences in the dimensions of old and new currencies.

Targeting counterfeit money, terrorism and corruption, but ordinary Indians suffer

According to reports, more than 33 Indians have died either standing in long queues, facing shock or because of a lack of cash for emergency purposes including hospitalization and transport.

One heartbreaking example is that of a sick newborn who was refused treatment in India's financial capital, Mumbai, after parents couldn't provide money in new currency bills. The infant later died.

Meanwhile, Modi had said concessions would be allowed for use of the notes in government-run and private hospitals, chemists and petrol pumps until 11 November. This was then extended to 24 November, but numerous deaths were reported in the same period as people thronged to banks, post offices and ATM's to withdraw cash in long queues.

Prime minister targets his own ministers 

Prime Minister Modi, in a bid to come clean on various allegations that his party members were tipped off about the currency ban, asked top ministers from his right-wing Bharatiya Janata Party (BJP) to submit details of bank account transactions between November to December 2016 by January 1, 2017.

Why was it done?

Modi has made promises about bringing back black money stashed by corrupt Indians in Swiss banks. While this has not materialized, a slew of measures undertaken by the government has tried unearthing the menace of black money that plagues India's highly complex economy. The government hopes to crack down on illicit funds earned from corruption or tax evasion in the form of cash and also to tackle fake currency.

Meanwhile, only 2 to 3 percent of Indians actually pay taxes and India loses hundreds of billions of dollars in unpaid taxes every year, and nearly 90 percent of transactions in India are conducted in cash.

Some supportive, many others not so

Many Indians on social media and economists too are critical of demonetization, claiming it could block India's fast-rising gross domestic product (GDP) figures and slow down manufacturing in Asia's second-largest economy.

Meanwhile, a 19-year-old student and a self-claimed Right to Information Act activist named Abhishek Mishra was arrested by the Madhya Pradesh police for his social media posts, which attacked Modi and other politicians on the subject of demonetization.

India's former Prime Minister Manmohan Singh last week called demonetization a monumental mismanagement that might dent India's GDP by 2 percent. He said the deaths of people and distress among the poor, farmers and small traders had convinced him that demonetization had led to organised loot and legalized plunder by the government.

Indian civil rights activist and journalist Teesta Setalvad wrote on alternet.org:

Demand and supply is the basics of any system, legal or illegal, and unless the government seriously tackles the supply side of black money corruption, the unofficial economy will continue to flourish. This corruption can only double with the newly introduced Rs 2,000 crore notes.

India's former Reserve Bank governor Raghuram Rajan commented on Huffington Post India that focusing on widening the tax regime is the way to go:

There is no reason why everybody who should pay taxes is not paying taxes. I would focus more on tracking data and better tax administration to get at where money is not being declared. I think it is very hard in this modern economy to hide your money that easily.

Demonetization has also opened up debates about nationalism in India with critics being panned as anti-nationals. A senior army officer was criticized for his Facebook post condemning the currency ban while awaiting his turn in an ATM line.

The actual verdict on the demonetisation will be out only after December ends as aptly put forth by political analyst Devdan Chaudhuri:

The fall-out of the policy is unfolding now. So the next month will be critical to determine what people finally think of this move.

  • The Avenger

    When you base your reason on the back of the ‘great’ Congress ex-PM Manmohan Singh – whose own administration is the main reason for billions of dollars of black money currently in the system and who thought that the scams running from A to Z was the perfect form of excellent governance – you lose your moral high grounds on all counts. This drive is a good thing in the years to come though short term pangs will be there. The number of people who lose their life due to corrupt people runs in the hundreds everyday anyway.

    Also, not ‘some’ supported Mr. Modi; the support was truly overwhelming. An united India standing against the corrupt. The opposition called for Bharath Bandh/Aakrosha divasa (shutdown of India against demonetization) and were slapped on their faces by the citizens when everyone went around praising Mr. Modi and doing their jobs and the only ones who joined the protest rallies were those that the opposition themselves paid with black money and were stupid enough to get caught in many places on camera.

  • Pingback: The Botched Affair of India’s Demonetization Drive Against Black Money · Global Voices @soynadieorg | Soynadie Photo Press()

  • Seema Sapra

    Why Narendra Modi’s Demonetization measure violates the RBI Act and creates financial anarchy http://seemasapra.blogspot.in/2016/11/why-narendra-modis-demonetization-law.html

  • Marathon-Youth

    India’s so called “black economy’ and its so called “regular economy” are so entwined that hitting one hurts the other.
    Removing the 500 and 1000 rupee notes without notification affected over 85% of the economy.
    It was done during the marriage season which caused gold prices to plummet
    600 million Indians are part of the agricultural system that relies on an “informal” lending and borrowing. this gutted the agricultural system
    It will take up to 6 months for India’s printing presses to replace the old with the new. In the meantime billions upon billions are lost.

  • Implementation is not proper. People should not die standing in queues. That’s very bad. I suppose this is the first black spot on the face of this government – people died – people died because implementation is faulty. The government did not do homework.
    Fake notes of Rs. 2000 denomination are also being discovered or unearthed already. Perhaps this is a sign (as someone said) that ‘along with’ demonetisation the checks and balances will ensure that fakes are not circulated for long. So that is a positive sign? I mean the fakes got caught so soon is a sign of proper checks and balances and vigilance? Or is that a sign that this too shall fail?, and fail more miserably?, and thereby create lotsa chaos? I don’t know how it has to be interpreted. Of course one should be optimistic. Fingers crossed.
    I don’t care about GDP nonsense. I care about the day to day life and the ease of living. The logic, the sensibility is what is important. I don’t care about growth. That’s pure bull shit. Yeeaahh, that’s a lotsa crap.
    You see the real reason could be that the elections are around in states and BJP wants to make sure that the rogue elements in opposition parties in the various states across the country should not be able to ‘buy votes’. That, I think, could be the actual reason for this move – the timing of it. :-) I for one can give the benefit of doubt, then, to this government. Yes, votes should not be bought and elections should be fair.
    It will take some time for the fallout to reveal itself, and then some more time for the complete fallout.

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