The winter session of both the Houses of the Parliament has seen all Opposition parties expressly in favour of rooting out corruption and black money, but critical of the tone and tenor of the Modi government’s sudden decision of demonetisation without putting in place adequate mechanism to replace old currency notes with the new ones.
In a strongly worded attack on the government in the Rajya Sabha, former prime minister and senior Congress leader Dr Manmohan Singh said several deaths and distress among the poor, farmers and small traders convinced him the demonetisation plan led to “organised loot and legalised plunder…In my opinion, demonetisation will hurt agricultural growth, small industries and all those who are in the informal sectors. I urge the prime minister to find practical and pragmatic ways and means to end the distress of people. It is no good that every day, the banking system modifies rules and conditions. This reflects poorly on the office of the PM, finance ministry and the Reserve Bank of India. I am very sorry that the RBI has been exposed to this criticism.”
Lamenting that more than 65 people have already lost their lives, Dr Singh said that such a move would weaken and erode the people’s confidence in our currency and banking system. Instead of replying to Dr Singh’s arguments, ministers in the Modi cabinet are recalling scams that took place during the UPA regime.
Dr Manmohan Singh has found support from an unexpected quarter, the Shiv Sena chief Uddhav Thackeray, who dubbed the move as ‘extortion of common man’, further said: “Former prime minister Manmohan Singh is a renowned economist. Thus, his words and opinions should be taken seriously. One person cannot take a decision for 125 crore people. Before taking the decision to demonetise (the banknotes), people should have been taken into confidence.”
Opinions expressed by most of the economic experts echo Dr Singh’s opinion on demonetisation. Some experts opine that the Modi government’s move has deeply damaged India’s mostly cash economy where online transactions are uncommon and hobbled by a lack of connectivity and poor network across the vast countryside.
Former disinvestment minister in NDA-1 Arun Shourie has strongly criticised the decision, saying while the stated objective may be good, the idea was not well thought out. “Small and medium enterprises, the transport sector, the entire agricultural sector…I can’t reach six lakh villages…jumping in the well is also very radical, committing suicide is also radical…if you want to make a beginning, make a beginning on reforming the tax administration.”
The worst affected are people in rural areas where cash is king and the banking system’s penetration is poor. The decision to relax cash-holding limits for banking correspondents, the crucial link between banks and villages, and allowing them to replenish multiple times a day, should help in faster distribution. This ought to have been done much earlier. The cash crunch week after week is certain to have an adverse impact on consumption spending, especially in the rural areas, with the resultant effect on the economy in the third quarter.
There is pain and suffering all around, and the after-effects of the move threaten to cause financial havoc. Yet, those responsible for the botched operation are prescribing more nostrum (quack medicine) and promises daily. Some economic experts have argued that in view of the estimated cost of the demonetisation move topping Rs 1 lakh crore, with tens of thousands of workers in informal sectors already bearing the brunt of the cash crunch, impact on the national economy could be damaging.
Even the National Institute of Public Finance and Policy (NIPFP), a think tank affiliated with the finance ministry, has warned that the shocking move of demonetisation could lead to “a contraction of economic activity in the economy” and social unrest.
Standing in a long bank queue, this writer talked to an elderly person in his late sixties how he felt about Modi move. He bemoaned: “I find myself the mortified possessor of what in sarkari parlance is deemed ‘black money’. Overnight, I am no different from those fat cats and business tycoons and politicians we had looked down upon as ‘corrupt’ and hence reprehensible.”
There have been reports of scuffles, and some outraged customers have smashed ATM screens. The possibility of more trouble ahead cannot be ruled out if things don›t go back to normal soon. The common man is feeling intense pain because cash is used for 98 percent of consumer transactions. The country of 1.3 billion has just 2 lakh ATMs — and roughly half of those are non-functional. Under the prevailing circumstances, if 20 people withdraw money, the cash gets over.
Over 90 percent of the total population is adversely affected by this currency swap move along with huge loss of man-days, paralysis of small business and common man standing in the queue. The super-rich who are expected to hoard huge ‘black money’ have reportedly already swapped the old currency for new months back as indicated in many media reports. Only a vast majority is left to wail and groan, thanks to PM’s misreading of the situation. Nevertheless, the Prime Minister Modi sees it differently: “The poor are sleeping peacefully, while the rich are running around trying to buy sleeping pills.” What an irony!
As patience of the common man has almost run out and the Opposition attack is getting fiercer by the day, worries are creeping in the BJP over the demonetisation move and its implications over the party’s future prospects. The ‘economy-stalling, common-people harassment move’ has already created a storm in Parliament.
Undoubtedly, BJP activists bravely defend the move; nonetheless, a section of the BJP is keeping fingers crossed that the black money culling attempt does not end up as a ‘self-goal’ for the party in days to come, especially in Assembly elections in UP, Punjab and elsewhere. In any case, several BJP leaders in private agree that the decision could have been “more refined and perhaps more well-designed”.
Undoubtedly, the Prime Minister has promised further action; nevertheless, if none is seen against those holding big money or actually indulging in nefarious monetary activities, many BJP leaders apprehend that the advantage will be lost. The Opposition attack is primarily based on the premise that people in the queues do not have the black money and that ‘friends’ of the BJP had been warned about the move long before it was actually implemented on the ground.
The cascading effect of the move can outweigh the gains if not handled properly. Mere congratulations to 1.25 billion Indians and appeal to their patience will not work. Modi may have more plans up his sleeve to fight black money but at the moment, the buck stops with the prime minister.
In view of the fact that the informal sector in India accounts for about 45 percent of GDP and nearly 80 percent of employment, disruption of this liquidity can be very costly indeed, both in terms of growth and equity. 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. To be sure, eventually most of these funds will be replaced; but during the interim, the human cost will be substantial.