Demonetization: “Surgical Strike” on the Poor?
John Maynard Keynes wrote: 'There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.' On November 8th, 2016 Indian Prime Minister, Mr. Narendra Modi took Keynes’ advice. In an unscheduled address to the nation, he announced that 500 and 1000 rupees notes would no longer be acceptable legal tender starting midnight, which was less than 4 hours away. The citizens had 50 days to exchange or deposit all the money they had in these currencies in the banks. These two notes combined made ~86% of the currency in circulation, and ~100% of wealth of many households at the time. Rendering them as useless pieces of paper was a move that was largely unprecedented, and definitely historic. Due to lack of context, no one knew what to expect. This policy, called Demonetization, was portrayed as a patriotic move by the government, intended to punish the rich and corrupt hoarding stacks of black money. In addition, the move was also supposed to counter the terrorist groups whose funding came primarily through fake currency and black money. It was supposed to cause just temporary inconvenience to the common people who had nothing to fear or worry about if they had done nothing wrong and paid all their taxes. However, the government miscalculated the move. Despite its portrayal as a move to end the parallel black economy and punishing the rich who had evaded taxes for so long, demonetization mostly burdened the poor, while it was a minor inconvenience to the rich at its best.
An analysis of the Prime Minister’s speech on the night he announced demonetization can help illustrate the narrative the government tried to sell to the Indian citizens. In his speech, Modi stuck to single elaborate narrative – one where the Indian economy was in a deeply troubled state because of corruption and black money. In his narrative, poor people were the heroes, living lives of integrity and suffering because of evil practices like corruption and tax evasion, which were mostly committed by the rich. Modi insisted that the struggle against black money had been going on for so long that time had come to take a decisive step, thereby portraying demonetization as a necessity instead of a choice. Further, he argued that it is, in fact, the common people of the society who wanted him to attack the rich because they are deeply troubled by continuous reports of stacks of money being found under corrupt government officials’ beds. Therefore, he put demonetization across as a step that was being taken because of popular demand by the honest common people of India. To motivate the general republic further, in order to support his yet to be announced scheme, Modi emphasized the link between the amount of black money being deployed in the market and the amount of inflation and prevalence of corruption in the economy. The conclusion of the narrative was that the government had to take this step in order to break the grip of black money and corruption. He called it a “surgical strike” on the rich and corrupt and their black money. During his speech, Modi conceded that there might be temporary hardships for the common people because of demonetization; but he made an appeal to their patriotic sense of duty by saying that he was confident that his citizens were always ready to make sacrifices if it would result in greater good for the country. This narrative of punishing the corrupt and rich resonated strongly with the common people. Thus, Modi managed to get majority of the country to support his policy. In order to provide credibility to the intentions of the government, Modi informed everyone that his decision was made in utmost secrecy to ensure that the corrupt had no time to prepare. This meant that the government would have to make some key preparations in the following days, leading to increased inconvenience for the people. By doing this, Modi and his government came across as impartial to the corrupt, even if they were from his own political party. In addition, while on the one hand it let people know that they should expect a few inconveniences in the upcoming days, on the other hand it also gave him a shield against the critics because this action was in the best interest of the motive behind the policy. The idea introduced in his speech to get people to support demonetization was emphasized by a massive social media campaign to gather and maintain constant support. Demonetization was put across as a “celebration of integrity” and “festival of credibility.” “If our soldiers can stand for hours everyday guarding our borders, why can’t we stand for a few hours in bank queues?” a popular social media meme asked (Tharoor). This nationalist rhetoric prepared the general republic to expect some inconvenience but also got them to support the government because they felt that finally someone was actually working for the common people. In the early days, this policy seemed to have the support of majority of the population. According to a study conducted by researchers in IIT Delhi in the days following the announcement of the policy, to analyze the emotions of the republic based on their Twitter reactions, trust was the highest percentage (22.15%) among all emotions displayed by the users followed by anticipation (15.94%) and anger (13.03%). It was based on this trust that the people had placed on their leader that the country began the mahayagna to rid themselves of corruption.
Statistics presented by the government show that the policy was able to achieve all this, and more. A report released by the government claimed that terrorist violence in the Kashmir Valley, a violence prone region, had declined by 60% post demonetization (Sharma DNA). It also noted that only one blast took place in the month of December 2016 (Sharma DNA). Further, Indian intelligence agencies noticed that the local terrorists in the Bastar division were reportedly in touch with people to convert old notes into new currency (Sharma DNA). Government also claimed that demonetization had escalated the pressure on terrorists to surrender in large numbers to the authorities since November 8, and brought down “hawala” transactions by 50% (Sharma DNA). The Finance Ministry data showed that the tax base had increased by 24.7% since the implementation of this policy, compared to a mere 9.9% in the previous financial year. This brought in tremendous amount of revenue in form of taxes that had long been evaded by the rich. All of these statistics showed that demonetization was a success. However, they only show part of the story. The impact was not faced equally by all (Tharoor). It was not the rich and corrupt, as the PM had promised, but the lower middle class and poor people who suffered the most.
Among all the ways that the poor suffered, the cash crunch caused by demonetization was probably the worst. In India, around 98% of the transactions, by volume, are conducted in cash. Therefore, suddenly making 86% of the currency useless left the population in a severe cash crunch. Particularly affected by the this were the poor and lower-middle class households, who often do not have bank accounts, debit or credit cards (Nagarajan), or access to any form of digital payments. While the 500 and 1000 rupees notes might have made a certain percentage of the wealth of the rich people, it made up almost their entire life savings for the poor who are usually not familiar with the banking system and prefer to keep all their money close for events like a daughter’s wedding, the kid’s school fees, or in the worst case, an illness in the family (BBC). Many of these families, including the daily wage earners, small business owners, and the taxi/rickshaw drivers, get paid in cash for all their work. Because of the severity of the cash shortage, the daily wage workers couldn’t find employers with cash to pay them (Tharoor). In the absence of valid form of money, the poor were left helpless when trying to perform the day-to-day transactions like buying food, or crucial payments like hospital bill, or arranging the funeral of a loved one. In the weeks following demonetization, there were reports of health services being allegedly denied to patients who lacked valid currencies (Nagarajan). The small businessmen were also affected by the cash crunch. The cash shortage, and uncertain future led to low spending, therefore, lower incomes for their businesses. Many small businessmen, lacking the capital to stay afloat, had to shut down (Tharoor). Lal Chand Jain, a garment’s shopkeeper in Delhi, was forced to accept old notes even a few days after the announcement to keep the sales modest. “The cash in the drawer soon dropped down to zero,” he said in an interview. “In a few days, we landed in a situation in which we also had to refuse customers who came with the new Rs 2000 notes as we had no change. Sales dropped severely” (Scroll). It is reasonable to assume that most of the people affected by the cash crunch belonged to the lower or lower-middle classes because the rich already had access to credit cards and had sufficient of money in their bank accounts to pay for day-to-day activities (Tharoor). The difficulties caused by the cash crunch were exacerbated by the unpreparedness of the government before the implementation of this policy and its continuously changing guidelines.
Since most of the low-income households store a large amount of their savings in cash, it was almost imperative for them to forego anything they were supposed to do in the days immediately after demonetization, in order to get enough money to survive their daily expenses. However, there were only 200,000 ATMs in India for a population of 120 crore (Ram). Further, the new notes were of different design and size than the older notes which meant that the ATMs had to be recalibrated which resulted in many of them being out of order even several weeks after demonetization (Tharoor). The amounts that could be withdrawn or exchanged from the banks were continuously changed by the government. Within a week after announcement of the policy, exchange of old currency at banks wasn’t allowed, and the ATM withdrawal limit was set to 2500 rupees (Hindustan Times). Therefore, people had to stand in lines often to withdraw enough cash for daily activities. All of these factors led to huge “Soviet-era-style-queues” outside the banks and ATMs (Basu IH), with people standing in line-sometimes for more than eight hours (Washington Post)-while bearing the heat without food or water so they do not miss their turn. A BBC journalist reported seeing “queues of people clutching wads of currency stretch halfway down the street.” Some people committed suicide because of the stress; others died of heart attacks while waiting in lines (Gettleman). As many as 82 people died in cash queues or related events (Tharoor). Although this should have troubled and inconvenienced rich the most, because they had the most amount of money to excahnge, their ability to pay helped them avoid the chaos. Besides, the rich “bundled their 500 and 1000 rupee notes and got multiple agents (“money mules”) to change or stand in lines for them” (Basu, IH). Some even bribed the bank managers to avoid standing in lines (The Washington Post) because they could afford to do so. Furthermore, they already had credit/debit cards or some digital access to their money in the most cash crunched period in the days following demonetization (Tharoor), so they did not have to drop all their work and stand in lines immediately after the announcement. The combined pressure of the cash crunch, loss of wages, extreme difficulty in getting the old currency exchanged, and an uncertain future also destroyed several industries.
One of the most affected industries was agriculture. In India, farmers have been a troubled group for long, but demonetization burdened them even further. The timing of demonetization especially affected the industry because most farmers were either in the midst of sowing or harvesting at the time of the announcement (Ram). Cash is used for most of the transactions necessary in these seasons. With the cash shortage in full swing, demand plunged and food prices collapsed to as much as one-third of what they had been for most of the year (Basu IH). Because of this, farmers had to unload produce below cost, because no one had the money to purchase it, and the winter crops couldn’t be sown on time, because no one had cash for seeds (Tharoor). This, in turn, led to low incomes and high stress for the farmers who are already highly susceptible to suicide (Basu IH). Further, many farmers did not have bank accounts. People who did have accounts, had previous loans from the bank. Submitting a check to the bank meant that the money would be applied towards the repayment of these loans in the middle of the harvesting season and demonetization when the farmers especially needed money. Therefore, the farmers were willing to accept nothing but cash. But due to the cash crunch, they had no customers. A leading news agency, DNA, reported the experience of a few farmers after demonetization who seemed to have several complaints. One of them, Kailash Patel, complained that while traders were pressuring the farmers to accept old currency, the district co-operative bank, where he had an account, was not accepting the old Rs 500 and Rs 1,000 currencies. Other farmers in the same report said that they were being asked to accept checks as payment for their produce. However, they didn’t have a bank in their village, so they had to turn down the customers because they couldn’t go to the city and stand in queues in the middle of the harvesting season. Even after all these losses, common people lived with the hope that their “sacrifices” would help bring the corrupt to justice and improve the state of their country.
However, the rich were able to avoid the trap laid by the government. The basic rationale behind demonetization, in simple terms, was that corrupt had a lot of money hidden from the government, stashed in their houses. This money is usually stored in the higher currency notes. If these currencies were delegitimized, the corrupt would either have to stay silent and suffer the losses or exchange money in the banks and thereby be answerable to the government if they had sums larger than the income they had reported previously. In order to do that, government had a 250,000 rupees limit on deposits in banks. Anyone who deposited more than the prescribed limit had to answer to the officials how they possessed so much money. If they weren’t able to justify the source of the money, 90% of the money would be taken in taxes by the government. In theory, this seemed like a good plan. However, government severely underestimated their enemies. According to the latest RBI (Reserve Bank of India) report, 99.3% of the banned notes were returned to the banks (Doshi, The Washington Post). This could mean two things. First, the truly corrupt hold their black money not as money at all, but as real estate, bank balances abroad, and jewelry (Basu IH), which would suggest that this policy was not well thought out. Second, the rich found a way to convert their black money into white without being caught by the government. Both of these scenarios are very probable, and the truth is probably a combination of both. Demonetization led to the creation of a black market to service people wishing to offload by breaking large amounts of illicit cash into smaller blocks and depositing them by teams of illegal courier (Basu BP). This market was obviously present to cater to the rich who needed to exchange their cash without coming under government’s radar. About 53% of the population has bank accounts, but most of them had signed up because of the government scheme and many such accounts were dormant. After demonetization, a lot of money was deposited into these accounts leading to speculations that the rich got rid of their black money by convincing the poor to deposit it into their bank accounts, only to return it later. By doing this, the amount deposited was below the scrutiny limit. Hence, the rich got to evade the penalties by the government, and some of the poor made money by helping out the rich. However, the deposit limit caused problems for the common people, like small businessmen, who were not it’s intended target. Since these businessmen conduct most of their business in cash, they had the hardest time in depositing their money. Although their money was legal, depositing over the prescribed limit meant dealing with government officials which discouraged them to deposit more than that in the banks. Instead, these people turned to the secondary black markets. This led to them losing a percentage of their totally legal money purely because of fear of harassment by the tax collectors (Basu BP). Thus, the inability to catch the rich made this policy extremely futile. What made it even worse, was that the traps laid by the government for the rich further troubled the poor who got caught in the chaos created by demonetization.
Seeing all these consequences makes us question the rationale behind the policy and how well the government had considered its consequences before pushing the country into chaos. Kaushik Basu, a prominent economist, has pointed out flaws in the government’s rationale by stating that there is no real relation between inflation and black money; rather inflation is caused by the excess money supply, in which case it doesn’t matter if the money is black or white (Basu BP). He has also attacked the motive of finding fake currency. According to him, catching fake currency helps no one- it neither helps catch the terrorists who minted them nor prevents them from minting more and injecting it into the economy. Rather it takes away money from someone who usually had no hand in its creation (Basu BP). Another common critique of this policy has been its effectiveness in the long term. Although the government managed to catch some amount of black money and fake currency in circulation, no measures in this policy prevent the same from being introduced again because the policy did not cut off the sources of the said illegal wealth. These doubts coupled with the extreme pains the common people had to go through point to the inefficiency and futility of the policy. Despite the problems faced by the public, it’s support for the policy, based on how it was packaged, also highlights a very important recent phenomenon: the resentment that the lower middle class and poor people have towards the rich.
Most Indians resent the fact that many of the richest among them have used black money to evade paying their fair share of tax and they are happy to suffer a few weeks of what Modi called “temporary hardships” to see them face justice (BBC). The fact that the policy, days after its announcement, had vehement approval form majority of the citizens, most of them in the lower end of the economic pyramid, shows the desperate want in that section of the demographic for an equitable society. It also shows the fact that the poor are tired of being excluded from the economic growth and having their welfare ignored by the society. Many poor people believe the rich to be the cause of their misery because they take away all the money sanctioned by the government to help the poor as it trickles down the bureaucracy. They are probably tired of the rich people always getting things done when they want because of their ability to bribe government officials, while they have to wait for months to get any government task done. This resentment is the result of increasing wealth inequality in India. In that sense, demonetization and the motive behind it were commendable as black money tends to exacerbate inequality because the biggest evasions occur at the top of the income spectrum (Basu BP). However, this doesn’t excuse the fact that the policy’s design and implementation left much to be desired.
Corruption and black money have been very important problems in India for a long time. Black money deprives the government of money to spend on infrastructure and public services like health care and education (Basu BP). Therefore, it is nice to see the government willing to take steps to work on those problems. However, the government should have studied the effectiveness of this policy more in depth before pushing the nation into such huge magnitude of chaos. The continuously changing policy guidelines show that the impact of the policy was not studied properly (Tharoor), which led to faulty design. There was no “policy skeleton,” no cost benefit analysis, and no evidence that alternative policies were considered (Tharoor). The unpreparedness of the government has been partly blamed on the secrecy that needed to be maintained in order to fulfil the motive behind the policy. However, the amount of problems it has caused the poor really makes us question if the tradeoff between inconvenience and secrecy was really appropriate, given the magnitude of impact the policy was going to have on the country and its future. Worst part about this scenario is that the “sacrifices” failed to accomplish what the government had promised the republic they would, and instead ended up severely damaging the people who made these sacrifices with a smile on their face hoping that those sacrifices will finally help their country get out of the tentacles of corruption. The main question then, is that while Mr. Narendra Modi wanted to do a surgical strike on the corrupt and their black money, did he end up ordering a surgical strike on the poor? The evidence seems to suggest so.