(Notebandi is a Hindi hybrid
word for stopping circulation of currency notes often used by Hindi media and
those against Indian Government’s move at demonetising)
Either way, this Indian winter will go down as one that changed
the public narrative and altered the lives of common people in a big way. And it
has very little to do with the usual nip in the air or lack of it. Since November
8, when the Indian Prime Minister, Narendra Modi, went on the national
television, announcing that at the stroke of midnight, Indian currency notes of
rupees 1,000 (USD 15) and 500 will cease to be legal tender, the nation has
been in a tizzy.
What has followed includes long queues outside banks and
ATMs causing visible inconvenience to people, overworked bank staff, divided (social)
media opinions, uproars inside & outside the parliament and a government
that has been issuing instructions and changing them by the day. The media
reports have been showing winding queues of disappointed people waiting, as cash
runs out frequently at the various banks and ATMs. So far, various reports have
attributed 47 deaths to this move; with people dying as hospitals unwilling to
accept old notes refused treatment or due to gross physical & mental stress
faced in the process of exchanging discontinued currency.
The Quantum of Issue
The data released by Reserve Bank of India in 2016 puts the
total Indian currency under circulation at around 15 lakh crore Indian rupees (USD
231 billion). 80% of which, 13 lakh crore rupees (USD 185 billion) is in the
form of the two discontinued notes. As per noted Economist Arun Kumar, in his
interview in Caravan magazine, the estimated quantum of black money lying as
immobilised cash is only around 2-3 lakh crores (up to USD 46 billion).
India makes largest number of transactions in the world in
cash, making it an economy that is highly dependent on cash. In this milieu to replace
the huge value of discontinued notes is no mean exercise and by several
estimates may take anywhere between 3-6 months.
At the same time lack of liquidity in the market impacts
both the supply and demand side. This will mean that there will not be enough
cash available to invest in activities that produce value or consume the value thus
created.
The Differing Narrative
The supporters of the move have described it as the biggest
nation building move to flush out black money (undeclared cash often
accumulated by illegal ways) and fake currency notes. It is also the narrative
pushed by the government as demonetisation makes the black money useless and
curbs its use by the groups perpetrating terror on Indian soil. The narrative also
acknowledges inconvenience caused to commoners as temporary and bills it as a
sacrifice on the way to a nation free of black money and terrorism. The
government also does not agree that despite hardships to the people there has
been any lack of planning on its behalf. This narrative also dubs demonetisation
as an economic master stroke, since huge quantities of black money will not
come back to banks and it will leave a surplus of around USD 45 billion that
can be invested to grow the economy.
The group that has been opposing the move terms
demonetisation as an ill-conceived and badly planned move that has put economy,
business, agriculture and lives of poor, especially rural population to crisis.
The narrative pushed by the group is that it was an unnecessary exercise which
in order to flush out a minuscule amount of black and fake currency has drained
86% of currency notes from a highly cash based economy leading to short and
long term damages.
They also doubt the credibility of Prime Minister as his party had allegedly spent around 10,000 crore rupees (USD 1.5 billion) mostly in cash from unknown sources to win office in 2014. Besides, as per them, the move is to polarise people ahead of crucial state elections in Uttar Pradesh, a province with 204 million population. Some also allege that the move is to increase deposits in the Indian banking system which has been reeling under high levels of non-performing assets; and the defaulters are friends of the government whose loans will be squared off by the liquidity generated by this move. Most of the ill-gotten wealth is not stored in cash but either taken out of the country or invested in properties, gold and collector items. So as per them, Notebandi has brought down a mountain to do away a small molehill.
They also doubt the credibility of Prime Minister as his party had allegedly spent around 10,000 crore rupees (USD 1.5 billion) mostly in cash from unknown sources to win office in 2014. Besides, as per them, the move is to polarise people ahead of crucial state elections in Uttar Pradesh, a province with 204 million population. Some also allege that the move is to increase deposits in the Indian banking system which has been reeling under high levels of non-performing assets; and the defaulters are friends of the government whose loans will be squared off by the liquidity generated by this move. Most of the ill-gotten wealth is not stored in cash but either taken out of the country or invested in properties, gold and collector items. So as per them, Notebandi has brought down a mountain to do away a small molehill.
This group also pooh-poohs government’s claim of eliminating
black money, since sources of corruption, illegal wealth creation, fake
currency and terrorism still exist. The scrupulous will work overtime to
quickly bring things back to square one. As per them, the Prime Minister has
grossly failed in fulfilling his election promise of bringing back black money
stashed abroad and hence has created this theatrical act.
How is it impacting lives of the people?
Those who have loads of black money stashed outside the country
in foreign currency are the least impacted. The government already has list of
such people but has seen no visible action so far. Time will only tell if they
will be next but for now there is no tax man knocking on their doors.
The people that had immobilised cash in the country held in
these two discontinued denominations are the ones that have lost out big.
However, for obvious reasons they cannot be overt about it. Some of them may
even be playing to the lobby and supporting the move. Many of them are already
busy using ingenious ways to show higher cash in hand, which is then deposited
in a legit fashion with the banks. It is also alleged that some of the people who
were close to the government may have got wind of the change and converted cash
to gold, properties and other assets.
The 267 million Indian middle class is polarised lot today.
Experts, media and social media is awash with posts, articles, videos and statistics
to back each claim. The affluent part of the middle class is the one that holds
majority of 130 million credit and debit card in India. The inconvenience due
to cash crunch has not bothered this subsection much, as they have the option
of using electronic money. Possibly the real inconvenience will reach their
shores in two weeks when they will have to make cash disbursements to their
drivers, maids, cooks and other helpers.
The worst hit are the not so affluent parts of middle class and
the people below poverty line. India is house to world’s largest poor
population that survives on less than USD 2 per day. For a population of 1.2
billion, there are only 400 million bank accounts. The majority of these two
segments don’t have a bank account. These are the ones that are left high and
dry. Their paltry savings or the salaries they had days prior to announcement is
in the form of discontinued currency. These are the ones that are desperately queuing
up outside banks, often returning disappointed for days.
The poor have been hit doubly hard. Not only they are unable
to use the money in hand but also they are not receiving wages due to lack of
cash with employers. Most of them live on what they earn daily and that has
been disrupted.
The farmers don’t have money to sow their next crop and are
unable to sell their new harvest. Small vendors and businesses are similarly
impacted. It is also the season for weddings. The cash crunch has created
difficulties on this front too. It is also having a negative effect on the sick
and poor, who are being refused treatment despite instructions by the
government.
The industry and business in the formal sector will also get
impacted, but how much will be clearer from the macro indices that will be out in the New Year.
How is this likely to end?
Like any burning issue demonetisation will also drop-off
public scrutiny in couple of weeks, but to say that everything will be normal
is an overstatement.
It may end with both sides claiming victory by raising
decibels in the media and social media. The 270 million middle class will get further
polarised, some of who will shortly go on to vote during elections in 7 Indian
provinces, including big states of Uttar Pradesh and Gujarat.
Unfortunately, the poor will get poorer as they may not
survive this cash crunch very well. But does anybody care?
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