Without much coverage at all in the West, India has just been engaged for the past few weeks in one of the world’s biggest socio-economic experiments since the Cultural Revolution in China. With only four hours warning on November 8, Indian Prime Minister Narendra Modi cancelled the two big banknotes – the 500 rupee and 1,000 rupee notes – that comprise 86% of the country’s cash. In a country where nine out of ten economic transactions are conducted in cash – India’s cash to GDP ratio is four times that in the likes of Brazil, Mexico and South Africa – the upheaval has been immense.
Modi has given the Indian public (and the country’s foreign tourists) until December 30 to change their old banknotes for new 500 and 2,000 rupee versions of the currency, assuming they can find the banks and ATMs able to dispense them. People can legally lodge their old cash in bank a/cs, but if those deposits exceeded 250,000 rupees, evidence needs to be presented that taxes have been paid on the money. That’s been Modi’s supposed goal: to hit the nation’s counterfeiters and money hoarders, and thereby bring into the economic mainstream the’ black money’ associated with (a) an informal economy estimated to comprise 20 % of India’s GDP and (b) the country’s networks of bribery and corruption.
Many real estate transactions in India are done in cash, too – by some estimates up to a 70% level – so Modi’s action is also intended to take a good deal of heat out of the housing market. Whatever else can be said about Modi, no-one can accuse him of timidity, and token gestures.
Traditionally, vast amounts of cash change hands in India daily, outside the tax system. Unfortunately for the poor though, most of the small transactions that comprise the heart of the economy are conducted in cash. Given that 70% of the country’s population live in rural areas without banking services, the sudden disappearance of much of the nation’s major banknotes was bound to create intense hardship, to freeze the wheels of ordinary commerce and even to cause deaths.
Leaving aside for a moment whether Modi’s higher goals will actually work, the initial phase of the implementation has been chaotic. Millions of Indians have been forced to stand in immensely long queues for hours outside banks, to change limited amounts of their money, up to a limit of 20,000 rupees in any one week. Insufficient quantities were provided of the new banknotes and/or of the 100 rupee note that has become the fallback form of the nation’s currency. Also, ATMs quickly ran out, and then it was discovered that the new banknotes are too small to fit into many of the country’s ATMs.
While there is probably never a good time to administer this kind of shock treatment, Modi’s timing struck many observers as being particularly callous, in that it occurred at a time of year when many Indians – rich and poor – require extra cash:
It is planting season on the vast Gangetic plain – the breadbasket of the country – and farmers complain they do not have the cash to buy seeds and fertiliser.
It is also the start of the marriage season, and across India heart-broken brides and grooms have seen their elaborate wedding plans beached as the cash dried up.
And, as always, the poor are the worst affected. Day labourers, for example, suddenly found it impossible to find work and, as a result, many of them and their families have been going hungry.
This is not the first time India has headed down this route. Highly disruptive de-monetisation attempts also occurred in 1946 and 1978, which suggests that any gains this time will be temporary, and the same old black economy/corruption practices will re-appear, just as they’ve done before. In the meantime, the rural poor will have been hit the hardest, since they live in regions without banks and need to hold what wealth they have in cash. Small shopkeepers and small traders – normally a backbone of support for Modi’s BJP political party – have also been suffering from the disruption that de-monetisation has caused to daily trade. (At the same time, these same traders are struggling to get their heads around the triple-tiered GST tax system due to be implemented across India by April 2017.)
De-monetisation will have less impact on the big players, who tend to put their money in gold, in real estate investments, in jewellery, or stash it offshore:
Politicians, property developers and dealers, traders, doctors, lawyers and sundry white-collar professionals are some of the biggest hoarders. A lot of the illegal cash is actually held in assets – real estate, jewellery – and in banks outside the country.
As the de-monetisation process has unfolded, some of India’s wealthy have begun laundering their cash through the poor’s so called Jan Dhan bank accounts, which were set up in 2014 to try and bring more of the poor into the banking system. Bribes are now apparently being paid to buy access to Jan Dhan accounts, in order to stash money. In response, Modi has pleaded with India’s poor to leave any of these big deposits in their Jan Dhan accounts where they are, while he tries to devise ways to prosecute the money launderers, and eventually give the money back to the nominal account holders, regardless of the bribes they’ve taken. All part Modi’s populist attempt to minimise the political backlash against de-monetisation.
Some observers believe that Modi’s motives have been mainly political, not economic, all along. With elections looming in Uttar Pradesh, Modi has certainly crippled the ability of his opponents to campaign, given how cash handouts traditionally determine the day-to-day operations of Indian campaign politics. (As the incumbent, the BJP enjoys readier access to funds via its crony capitalist allies.) For its part, the Hindu newspaper has found two US economists with vastly differing opinions on the benefits of Modi’s actions which will cause a significant contraction to India’s GDP.
US Berkeley economist Pranab Bardhan has been strongly critical:
.“Most business people do not keep their black income under a mattress… Of course, they keep some amount in cash for various current transaction needs, but I doubt it’s more than a very tiny percentage of total black money,” he said. “Apart from the tremendous hardship that the poor people are going through, the large informal sector in the economy will find it very difficult and time-consuming to recover from this big blow. Those who think the shrinkage of the informal sector is a good thing, do not realise that this will not suddenly push the informal sector to start using credit card or mobile wallets, or that there are not many formal sector jobs waiting for those who lose their livelihood in the informal sector. The bungling and mismanagement in the implementation of this highly intrusive and disruptive policy so far suggests “maximum government, minimum governance” exactly the opposite of what the Prime Minister had promised in 2014. He and his loyal Finance Minister keep on advising poor people to go digital (“eat cake”).”
So far, Modi’s actions seem to have caused less public anger than might have been expected. If, as reported, Modi chooses to ends this process with a one-off redistributive cash handout to the country’s poor in order to compensate them for the pain they have endured, he may even come out ahead. What this episode shows is that India now has at its helm – for better and for worse – the kind of politician who is willing to gamble hugely on the future of his country, regardless of the suffering en route.
Labour’s victory in Mt Roskill will be a great relief to the ‘worst case scenario’ worriers in its midst, but it isn’t much of a pointer for election year, 2017. What Saturday’s result has shown is that a hard working locally-known Labour candidate – in a context where National put up a poor candidate, and the Greens generously offered not to field a candidate at all – can indeed be elected by a comfortable margin in what has traditionally been a safe Labour seat. Just how that translates, if at all, to the national stage next year is anyone’s guess. Still, Labour is so starved of good news right now that it will happily bank this victory.
And, finally a seasonal good news story.
Hat tip to Anne Russell, for this link.
A drunken moose stuck up an apple tree? That’s the real Christmas spirit. Sometime later this week, I’m going to do a Christmas music column, but for now…from the mid 1980s, the US indie band The Long Ryders share the misery of spending Christmas…in a hellhole like New Zealand.