The doomsayers are having a field day over the Modi Government’s move to scrap some old currency denominations and introduce other new ones. There have been problems and the public has been inconvenienced. But heavens have not fallen, nor will they fall
The Indian economy has been the world’s pride. It has been showcased as the only growing economy, a proud moment for Indians, particularly under Prime Minister Narendra Modi.
That was until a week back. International media quietly observed the scenario for eight days. On November 16, 2016, CNN, BBC and other international channels came out with long stories. The CNN headline screamed: “Indian economy is in turmoil”. The BBC and, others also echoed the same sentiment in different words. A week has changed the worldview!
The Opposition in the country is debating, demonstrating and protesting. The queues at banks and post offices are surging. But, despite all this, one surprising aspect is that those standing in the queues or suffering the sudden drying up of cash are with Modi, and even the Opposition does not doubt his intention. A week later, after many brawls at such counters, they have started blaming the officials.
Many in the crowd now say that the officials have misled the Government and had given inappropriate information of smooth transition leading to the chaos.
Even insiders do not mind admitting that the dependence on officials was “possibly a bit too much”.
There are ramifications for people living abroad and questions are being asked on how they can exchange the demonetised notes. Those in Nepal also have their concern, and Kathmandu has officially taken it up.
The Government also needs to understand that its move to channelise the trading and transactions through banks is also not appropriate. The banks have become unethical, levy undue charges and are expensive. The private banks are less dependable. Credit card transactions at two per cent cut (annualised would be over 30 per cent) are expensive for sellers. Debit cards expose the holders to risk of being swindled as their data can be compromised.
Bank transactions are slow and instruments like cheques are not trusted. India’s wholesale business works on one to 1.5 per cent cuts. It moves on trust. It is fast. The defaults are rare.
If it moves to banks, it would cost over three per cent. Outside urban India, it is largely hard cash transactions. Banks are 15 or more kilometres away from villages. It has hit the villagers hard.
This apart, 1.25 lakh bank branches and two lakh ATMs (of which only 1.25 lakh remain operational any time), are inadequate if 1.25 crore people are moved to the banking system. It is bound to collapse. No society is fully banked and possibly, it should not be so.
The move has hit the market, except a small section that accepts cards. Some traders say that the servers have become difficult to access. The saving grace is shopkeepers and traders are allowing free credit to their customers.
It has affected sowing as well, in large parts of the country. Again, the local credit system is keeping alive farm functions and supply of fertilisers and seed.
There is a cost on the economy. The old notes had cost about Rs15,000 crore in printing. The new notes also have a similar cost. There is cost for recalibrating the ATMs, which may take over three weeks to complete.
How much is the counterfeit currencyIJ According to a study done by the Indian Statistical Institute, Kolkata, in 2015, Rs400 crore worth of fake notes were in circulation in the economy. This is merely 0.025 per cent of the total Budget outlay of Rs19.7 lakh crore, as announced this fiscal.
The cash comprises only a tiny part of black assets. This is borne out by facts. Cash recovery has been only six per cent of the undisclosed income seized from income tax evaders, according to data from tax raids from 2012-13 onwards.
In April, the State Bank of India said that people were withdrawing cash in Rs100 and Rs50 denomination notes in large amounts. Newspapers in some parts of the country, had reported that demonetisation and introduction of Rs2000-notes were in the offing in April itself.
Data from different banks show that, during the last three months, most of the banks reversed the trend of declining deposits and witnessed healthy growth. The sudden rise in deposits, many of it in high-value notes, has raised some eyebrows.
While it is necessary to take people with untaxed money to task, the present move has made the detractors vocal as large section of the people are hit and unable to access their own money.
While partial demonetisation always takes place, the problem this time was the sudden withdrawal of 86 per cent or Rs16 lakh crore worth cash from the system. The 500-Euro-notes were demonetised, but, it remains a legal tender till it is in circulation. The Indian case is aimed at the supposed super rich, but it hit the marginalised, and the vocal middle class the most.
Such moves have taken place in some other countries too. In 2002, all European currencies were replaced by Euro. The transition was smooth.
But, in many other countries like the Soviet Union led by Mikhail Gorbachev in January 1991, Zaire in 1993, Myanmar in 1987, Ghana in 1982, Nigeria in 1984 and North Korea in 2010, the moves failed. Most of these led to massive protests, civil wars, ouster of Governments and economic collapse.
In the case of India, despite problems, people have shown faith in Prime Minister Modi’s move and are showing solidarity for cleansing the system. It has caused some disruption, but the trade chambers say the corporate transactions are on. The chambers complain that if the officials had briefed properly things could have moved without this massive jerk.
India needs to solve the cash problem. And the issue needs to be resolved soon. There need not be an insistence on what is now being referred to as cashless economy.
Personal income tax needs to be reformed to pep up the economy. The Government is reportedly mulling on such ideas, as a Union Minister in the Ministry of Finance said.
The economy may have taken a small hit due to a sudden demand slump, but it is not in turmoil as an envious Western media says. In the course of the next few weeks, it is expected to be back on rails.
(The writer is a senior journalist)