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While India goes cashless, economy falters and people die
by Himani Singh (himani.singh [at]
Wednesday Jun 7th, 2017 4:13 AM
Heuristic: “enabling a person to discover or learn something for themselves” - an approach sometimes valued in pedagogy but best kept out of the world of economics, where the “let's try this and then we'll see” method of improvisation can prove unwise. In an unprecedented way, India decided last November to cancel the validity of almost 90% of its currency, with barely any notice. The consequences are already ghastly, and this is just the start.
If the road to hell is paved with good intention, Indian prime minister Narendra Modi seems to be speeding down the avenue. In an attempt to better protect the people from crime and corruption, PM Modi shocked India and the world by announcing overnight (1) that Rs 500 and Rs 1000 banknotes (which make for 86% of the circulating currency) would become worthless pieces of paper in a matter of weeks. By forcing all cash to be deposited into accounts, where it becomes visible, the intent was to identify undeclared financial circuits and force everyone into the taxable arena. PM Modi said, in his televised announcement:”Corruption and black market is a big hindrance in removing poverty”, which is true. In response to this problem, he added (2) “Rs 500 and Rs 1000 notes will be invalid from November 8 midnight. The process of cash circulation is directly related to corruption in our country impacting the lower classes of our society. From Midnight Nov 8, 2016 today, Rs 500 and Rs 1000 notes are no longer legal tender. You have 50 days (From 10 Nov to 30 Dec) to deposit notes of Rs 500 and Rs 1000 in any Bank or Post office”. But the reform was so ill-prepared, brutal and blunt that instead of curbing tax evasion and revealing corruption circuits, it has wreaked havoc in the economy and the lives of ordinary citizens.

Instead of hitting criminals and corrupt officials, the reform hit the population like a ton of bricks, as ordinary transactions cannot be carried out. A construction worker interviewed by SCMP (3) in the wake of the reform testified as to the massive economic disruption brought about by the decision :“The developers have put their projects on hold. They need cash to pay wages and buy raw materials. As there’s no cash, there’s no work in Nashik now, we have all stopped going. It’s late morning in the middle of the week and the young and able have nothing to do.”

Among the reform's misconceptions is the fact that the country is not prepared for anything close to a cashless economy. Even highly developed countries in Europe have considered going cashless and then chosen otherwise. Demonetization relies on a rock-solid and widespread IT network, as well as on individual equipment for all business units, even the most humble shopkeepers, which PM Modi claimed he was seeking to protect. So, to believe that a cash-killing transition would go smoothly in a country which has always run on cash and is nowhere near the level of technological equipment to support this shift was naive, to say the least. Ajit Mozoomdar wrote (4):”The wrong-headed approach, treating cash transactions as undesirable and hence to be curtailed, sets impossible targets and will lead to wasted effort. It won’t be in the foreseeable future that wages in the informal sector, purchases and sales of handicrafts, small workshops and food stalls, bus and auto fares in urban areas, and moneylending, mandis and kirana stores in the villages do not involve cash transactions.”

As a result, people's lives in India are severely disrupted. Uncertainty on the immediate economic future has contaminated the entire country, even the government itself, which is unable to predict next year's fiscal revenue due to market instability. The times of India warned its readers (5): “While indirect tax receipts grew by an annual 14.2 percent in December, a slump in consumer spending along with a contraction in services and manufacturing suggest the outlook is anything but rosy.” The ripple-marks caused by the economic bombshell has even started building a rapidly evolving death toll. Over a hundred people have lost their lives over disruptions brought by the reform, such as lethal exhaustion after days of waiting in line at the bank to salvage their savings. Sukhendu Sekhar Roy, an Indian opposition member of parliament, said “115 persons have lost their lives in 30 days since Prime Minister Narendra Modi announced junking of old 500 and 1000 rupee notes. Their death should be mourned in the House.”. The Prime Minister has announced that he was aware of the situation but wished to continue pressing on – the tally may therefore evolve further.

Unsurprisingly, people are resisting the reform, in the hope of salvaging the economy on which they live. With some shopkeepers having lost near 90% of their business already, some come forward to the press to publicly oppose the reform (6). “Demonetization has been the biggest crisis ever for the business”, said Ashok Minawala, an 80-year old shopkeeper in Mumbai. “There were tremors of protest now over the situation arising out of demonetization, which had devastated the economy, adding that the industries, the farming sector and the small traders in Punjab had been badly hit by the cash crunch.”, said Sunil Jakhar, vice-president of Punjab congress, as tens of thousands flocked to the streets to cry out their anger and despair.

According to Ronald Reagan, the ten scariest words in the world are “Hi, I'm from the government and I'm here to help”. Narendra Modi has given a perfect example of botched reform, where the hope to tackle a long-lasting problem leads to causing far greater damage than the initial problem. In other words, making things worse through lack of preparation, incompetence and, above all, the certainty that the government may make the decisions, but the citizens will ultimately bear the consequences.