A failed policy and its aftermath


There is only one conclusion one can draw from the annual report of the Reserve Bank of India (RBI) on demonitization and that is not very flattering to Prime Minister Narendra Modi.

The much-hyped demonitization, it turns out, was a miserable failure in its stated objectives and an unmitigated disaster in its unintended consequences.

It was on Nov. 8, 2016 that Modi announced that all 500 and 1000-rupee notes (86 percent of the currency in circulation) would be banned in four hours’ time. This, he said, would flush out untaxed wealth being hoarded by wealthy Indians, help digitize the economy and defeat terrorists and criminal gangs, starving them of much needed funds.

People were given several weeks to exchange their demonetized currency for new notes at banks. But new notes could not be printed fast enough and in sufficient quantities. This led to a currency crunch that left tens of millions of Indians cashless or standing in line for hours to retrieve small sums of cash.

That Modi’s mother also stood in line was of little consolation to tens of thousands who had to return empty handed after waiting long hours in front of ATMs that were running out of cash within hours of being stocked.

Nothing revealed the atrocious way the policy was planned and executed more than the fact that nearly two hundred thousand automated teller machines in the country were not recalibrated to receive the new bank notes.

Media reports spoke of how people were finding it hard to avail new currency from banks and ATMs. There were also reports of women and elderly citizens collapsing while standing in the queues.

Was all this monetary upheaval worth the trouble?

Now the Reserve Bank of India’s annual report, released on Thursday, reveals that 99.3 percent of the money withdrawn from circulation had been returned to banks.

This suggests that either there wasn’t as much black money out there as the government claimed or people found ingenious ways to deposit their hoards of cash, defeating the government’s plan to wipe such unaccounted wealth from the economy — a key rationale for the move.

The governments major failure was it did not realize or ignored the fact that an economy where cash is used for about 98 percent of consumer transactions can’t afford to lose that much currency in a few weeks without creating major hardships.

And hardships are the only thing people remember about the demonitization. Sudden disappearance of cash froze agriculture and small businesses, disrupted supply chains, and destroyed demand for everything from autos to property.

Reports in the aftermath of Modi’s announcement spoke of loss in consumer confidence, slowing of construction, fall in fixed investment rate, closing of factories and rise in unemployment.

Even in Gujarat of which Modi was the chief minister for 13 years before becoming prime minister in 2014, the output from the textile industry was cut nearly in half, prompting layoffs and despair.

In fact, Modi’s demonitization policy has failed on every possible yardstick, including those the government invented well after the decision was taken, fearing that the original objectives may not be achievable.

If the RBI disclosure has embarrassed Modi and unnerved his Bharatiya Janata Party, it is only because his record on economic front is not enviable.

Projects like “Make in India” and the Ganga cleanup have been failures. He no longer talks about bringing back black money from abroad.

Modi still remains the most popular politician in India. But the problems and uncertainties created by the demonitization and poor performance on the economic front reveals the many chinks in his shining armor.

The fear is he may lean more heavily on Hindu nationalism to keep his flocks together. He may turn more and more to divisive issues such as cow protection and Ayodhya which, while energizing his supporters, may put the Congress and other opposition parties on the defensive.