The Indian Government carried out a rapid surgical strike last week by demonetizing the 500 and 1,000 Rupee Notes, with the aim of curbing “black” money and eliminating terrorist financing from across the border.
People were obviously shocked as the Prime Minister announced it late on 8th November evening, with almost immediate effect. There was no time left for anyone to “spend” their money denominated in the above two Rupee notes, and since the notes became illegal tender almost right away, people were stuck with millions of such currency notes. While the idea was to eliminate black money, and various ideas have been on the table for a long while, the way it was executed was typical of the style developed by the Indian Prime Minister, Mr Modi. He has been on a mission against black money from the time he assumed office but has been stymied by gridlocks in the system, and even by non-cooperation witnessed in overseas jurisdictions where Indians stash their illicit monies (such as Switzerland). But it appears that he is not a man who would give up easily. The black money hoarders have been hit hard by the new executive order (which has been challenged in Court by the way) as most of them stored the higher denomination notes.
The other group of people who have been hit below the belt are the terrorists from across the Pakistani border, who have always brought in fake Indian currency of higher denominations, and used the same for their terror-making purposes in the Kashmir Valley and elsewhere. Now that would be stopped forthwith by a determined Prime Minister, who is hell bent on stopping them from crossing the border as well.
Of course, in any such well-intentioned measure taken by the government, there will always be collateral damage. Millions of poor people have been affected because they do not have access to bank accounts which are mandatory for crediting of the currency notes (only INR 4,000 will be paid out in smaller denominations, or in the new INR 2,000 currency note, and the balance of the money that you bring in has to be credited to your own bank account). India is a cash economy, and also has a parallel economy which is run entirely with cash. Given the predominance of cash, it is no wonder most people try to keep less number of currency notes by adopting the 500 and 1,000 currency denominations. I always keep 500 Rupee notes when I travel as these are convenient for transacting, and a 500 Rupee note is just the equivalent of SGD 10.50 – in India the 500 Rupee note now delivers what 2 x 100 Rupee notes used to deliver in 2008, given the serious inflation which has occurred over the past 8 years. Hence, it is no wonder people step out of their homes with at least 4 or 5 x 500 Rupee notes when they go shopping. Credit and Debit Cards are not popular. Recent stories of how ATMs have been compromised and Debit Cards have been copied do not generate confidence. Cheques are not accepted in shops. That leaves most people with plentiful cash.
Mr Modi’s action is not a political initiative. I think it is a specific action plan put together with the collaboration of the Reserve Bank of India and other leading banks, with the main aim of curbing the growth of black money. From that perspective, I believe it is a very good initiative with aggressive execution. Such an action sends a strong message to all in the country, including politicians, industrialists, lobbyists, commoners, et al, as well as terrorists. It also sends a powerful message to overseas Indians.
Of course, I think it is not correct to let millions of “small” people with urgent requirement to convert 500 Rupee currency notes suffer, when the government-owned banks have run “dry” of the required change of small denomination notes. It is also not correct to hand over the new 2,000 Rupee notes to these folks, as their primary need is to spend small money, and this new note (most of the country is yet to see these new notes) is difficult to convert to smaller 100 or 50 Rupee notes which are in huge demand today. India always has problems in the planning and quality of execution, though the Prime Minister is teaching India on the speed of execution and its logical necessity. This situation is no different, and the government will do well to have a more detailed planning for the implementation of future such initiatives – the Prime Minister has promised more steps targeting black money in the coming months.
The country has to get ready, and should start to think “small” – I mean, spend money in small currency notes from now on. Hoarding of the new 2,000 currency notes will not be a good idea, as it is supposed to be traceable with some unique characteristics.
The other collateral damage was caused to millions of tourists who visit India during the current season of cool weather, who have been left holding 500 Rupee notes with no possibility of exchanging at their airports of departure. May be they will remember their India visit during this particular occasion of demonetization and frame these notes when they are back home in their respective countries. One day, these invalid currency notes might fetch a premium in the market, who knows?
Obviously, the politicians are the most affected as they stash huge amounts of cash all over the place for their illicit activities such as vote buying, and buying of members of state assemblies/parliament, influencing ministers, etc., They will be cursing the super human efforts of Mr Modi in obliterating their ill-gotten wealth.
There have been numerous WhatsApp messages about the demonetization topic, and some of these show the now invalid notes being used to hold peanuts, as a joke of course. I have several of these notes and have to find a way to convert; there are millions of people overseas who have the same problem. May be we will sacrifice these notes for the benefit of India and endorse the attempt to convert black money to white eventually, though it is going to be a long, long time before that is accomplished even to the extent of 90% of the currency notes in circulation in India.
I would like to complement the Indian Prime Minister for this initiative, but at the same time would like him to pay more intense attention to the execution process and elimination of inconvenience to the poor and downtrodden folks who need to lead their lives in a routine manner instead of queueing up for the entire day at the ATMs (which are not working) or at the bank branches.
Let us hope this initiative will produce the planned and desired effects for the Indian economy,
13th November 2016