It's nearly two months since India embarked on a dramatic move of invalidating currency notes of 500- and 1,000-rupee denominations, which accounted for over 85 percent of those in circulation, to purge its economy of the vices of cash hoarding and fake money that the government claimed were widely used to fund illegal and terrorist activities.
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The surprise announcement was made late on November 8, leaving little time for many Indians to convert their soon-to-be invalid currency notes into valid ones or digital balances. The shock move was necessary to prevent cash hoarders and those with possession of fake money from converting their money into legitimate cash, the government said. A new 2,000-rupee note was also introduced, the first time this denomination was launched.
A 50-day transition period, set to end on December 30, was announced for exchanging the invalid notes.
The ruling National Democratic Alliance claimed that demonetization was a bold move and a tightly kept secret before announcement. The government, led by Prime Minister Narendra Modi, urged Indians to put up with the inconvenience for the greater benefit of the nation. The administration also launched a strong push for a cashless society by promoting digital transactions .
As things unfolded, however, it became clear that both the Modi
administration and the Reserve Bank of India were ill prepared to handle a transition of this scale. The economy was hit with a severe cash shortage as there was no adequate supply of the new currency notes. For several days, banks across the country struggled to disperse long queues of customers waiting to exchange invalid notes or to withdraw limited cash. Banking woes continue to this day, albeit less severe.
In a country of over a billion people, where basic banking services are yet to reach many, it is the poor, the unorganized manual laborers, and pensioners who are largely in trouble due to demonetization. Farmers and those in rural areas were also hit as the currency crunch came during a crucial sowing season.
Though several Indians are quickly adopting digital or electronic payment methods, the country's currency woes still continue, and economists suggest the 50-day transition period could be extended. According to them, it would take at least 6-8 months to a year to replace the amount of currency withdrawn from circulation with new notes. The new 500-rupee note is in short supply, while many people are finding the 2,000-rupee note illiquid.
While bankers and the business community welcomed the move, economists are keeping their fingers crossed. Many are unsure whether the benefits of demonetization on such a scale would exceed the cost of implementation.
For some, cancellation of the legal tender status for the 1,000-rupee note would have been sufficient, while some question the motive behind the introduction of the 2,000-rupee bill. Some doubt if the well-intended measure was ill-timed, when the economy was going strong and hailed "a bright spot" in an otherwise dull global economy.
An oft-reported quote in Indian media since demonetization suggest that even former RBI Governor and rock-star economist Raghuram Rajan did not favor the measure.
In a speech made in 2014, Rajan said, "Unfortunately, my sense is the clever find ways around it. They find ways to divide up their hoard into many smaller pieces."
Apparently due to differences with the government, Rajan, a former IMF chief economist, decided not to seek an extension at the helm of the central bank and stepped down at the end of his term in September.
The Opposition, led by the Congress Party, was quick to seize the opportunity to unleash scathing criticism against the ruling government.
Tarnishing people's savings in high denomination currency notes as illegal money was a "mammoth tragedy" and demonetization was a "travesty" of the government's fundamental duty to protect citizens' rights and livelihood, former Prime Minister Manmohan Singh wrote in an opinion piece in The Hindu newspaper in December.
The Modi government also came under fire over reports that the "highly secretive" decision was leaked to favorites ahead of November 8. The country also witnessed public strikes against demonetization, which were effective largely in the Communist strongholds.
Political observers also point out that the ruling right-wing Bharatiya Janata Party strategically timed the demonetization effort just months ahead of elections in crucial states such as Uttar Pradesh, the most populous in the nation, and Punjab. In India, election season is big for huge flow of cash and the demonetization would have hurt the fund mobilization efforts of opponents.
Demonetization is nothing new for India, but the severe impact on people's life is a first for the country. The government had undertaken such exercises in 1946 and 1978. But the notes demonetized then were those of denominations above 1,000 rupees and hence, did not have much impact on the economy.
The really sad outcome of the latest move is the loss of lives of some people, mainly the elderly, who were in the queues in front of banks or ATMs, and some suicides, mostly among rural farmers.
That said, demonetization is not without gains. The government has been successful in seizing unaccounted cash in some instances, while some people have willingly declared their illegitimate money over fear of inviting severe penalties when caught.
Slower activity has been witnessed in the real estate and gold market, which were largely driven by the black-money. The government also hopes to bring more transactions into the tax net, mainly those in jewelries where it is common to make a purchase without an invoice to avoid paying tax.
Further, there could be an increase among those without bank accounts to take one as more and more payments would be channeled via banks and electronic payment methods such as e-wallets. And banks are hopeful of being flooded with money in the coming months.
Everything said, only time and hard data will tell if India's demonetization was a masterstroke or a monumental mess-up.
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by RTT Staff Writer
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