The Indian government’s so-called demonetisation drive in November of 2016 was a polarising, radical undertaking. Modi and his ministers would have people believe that it was a success. However, the sudden overnight cancellation of all 500- and 1000-rupee bank notes sewed chaos across the nation of 1.3 billion people. The damage to the Indian economy is still being counted and the stated motivations for the decision have been shifting, unconvincing, and at times, far from honourable.
The government aimed to show decisive action. Taking aim at corruption and ‘black money’ in a bid to strengthen poll numbers, the ban was more a political move than an economic stroke of genius. Immediately following implementation Narendra Modi achieved another term from the March elections. In that sense the move was a kind of political success, Modi riding on an initial wave of public goodwill. However, the rash and incompetent manner the government went about the policy caused catastrophic damage to the economy and unleashed months of social disruption.
Adding insult to injury, the primary goal of flushing out illicit funds, acquired through tax avoidance or criminal enterprise, appears to have been largely a failure. With 99.3 percent of the currency being returned, the question on everyone’s lips was soon “Where was all the ‘black money’?”
“The Indian economy lost 1.5 per cent of GDP in terms of growth,” former Finance Minister, P. Chidambaram, said in the aftermath of the event. That alone was a loss of 2.5 trillion rupees. Over 100 lives were lost as a direct result of the crushing lines and unrest associated with exchanging the of old bills for new, and for waiting at ATMs with tightly controlled daily cash withdrawal limits. Additionally, 150 million daily wage earners lost their livelihoods for several weeks. “(Thousands) of SME units were shut down… (hundreds of thousands) of jobs were destroyed,” Chidambaram said.
So incompetent was the execution of the policy that not only were the people of India not ready for the move, the Reserve Bank of India was not ready either. It became apparent that the new notes no longer fit the size specifications for national ATMs. All 100,000 machines had to be upgraded before they could supply replacement currency.
The Indian Congress demanded an apology from PM Modi. The former prime minister, Manmohan Singh, was outspoken in his condemnation. “Small and medium businesses that are the cornerstone of India’s economy are yet to recover from the demonetization shock,” he said in a statement. “This has had a direct impact on employment as the economy continues to struggle to create enough new jobs for our youth.”
Modi’s government set out with the message that the move would catch ‘black money’ criminals. When this was unsuccessful, they changed tact: now it was a push towards a more formalised, digital economy. When the numbers suggested that there had been close to no noticeable difference in spending habits a year on, and that there was about 9 percent more cash in the economy two years later, their position changed again. Modi’s final consolation has been to boast about how quickly they were able to collect the 99.3 percent of the cancelled currency. As Bloomberg’s Mihiri Sharma writes, this is “like throwing yourself off a building while praising how hard the ground is.”
Those hardest hit were, of course, the lower-bracket earners, in particular the gigantic informal economy of India. “The informal sector’s capital needs are met by moneylenders and the informal credit market,” explained Pronab Sen, former chief statistician of India. “Demonetisation seriously penalised this category which is dependent on cash transactions. So, now, the finance available for the informal economy has been hit. Part of India’s crippling rural distress is because of this,” Sen said.
Weddings were cancelled, funerals were delayed, medical expenses could not be covered, let alone food paid for – as a liquidity crisis crippled the economy. The government dripped in new currency slowly, exacerbating the suffering of their citizens. Along with an ever-changing series of regulatory policies that further complicated the lives of workers and financial institutions.
Ultimately, the drastic policy did far more harm than good. On top of that, what little gains were made could have been achieved without affecting the poorest people in the country. Incentivising of digital payments would have resulted in a better conversion of spending habits, and would have left the more vulnerable citizen largely unburdened.
With around 3 percent of the Indian population paying income tax, formalisation of the economy would certainly do the country good in the long run. But such enormous societal changes must be adopted with a level-head, a clear strategic plan, and a competent government to roll them out. Given Modi’s dire legacy, and the impending votes this year, the people of India had best get searching.