India wants to go digital and cash becomes outdated overnight. Prime minister Modi certainly wants to do the right thing. But with the demonetization move his calculation just doesn’t add up, writes Katja Keppner.
Why does a head of government declare 86 percent of the cash on hand in his country to be invalid in a shock-and-awe move? Without any prior warning. Did he really believe that such a monetary shock therapy would free India from its black money? That 98 percent of the Indian population who do not pay any taxes, will do so in the future? That the national economy of a country, where 90 percent of transactions are carried out in cash, can slide into a “cashless future” – virtually overnight? There is evidence that he really thought so!
The end does not justify the means
India’s Prime Minister Narendra Modi has the reputation of being a real workhorse. A lone fighter, whose ambitious goal is to lead India into a new future.
To lift the country’s miserable out of poverty. To attract investors. India is to grow, shall turn digital and has to be transformed into a cash-free economy. On Twitter, Modi proclaimed that by invalidating the 500 and 1,000 rupee bills he had turned every single citizen into a soldier in his fight against corruption and black money. His objective is right – but the end does not justifiy the means.
For more than three weeks, people have been standing in long lines to get cash from ATMs. With their hands full of useless rupee bills, cheques or ATM cards. But many are left out in the cold, empty-handed. In some cases, the daily cash limit has been reached, in other cases the ATM simply quits working. The banks are completely swamped. In rural areas the situation is even more dramatic: There are villages where no cash has been in circulation for days. People barter and pay in kind. Can this be the future?
After initial appaluse and cheers that people hiding black money had been caught with their pants down, the sentiment in India is about to change. New rules are being issued on a daily basis, an indication that the Modi administration had been poorly prepared to deal with the aftermath of the announcement. Exemptions are being declared and revoked on a regular basis. Counterfeit bills of the newly issued 500 and 2,000 rupee notes are already in circulation.
Trust: the real value of a currency
Modi’s demonetization gambles with the confidence of more than a billion Indians. It seems as if Modi has underestimated the value of this political currency. Because an economy can only grow if there is trust in a country’s currency. Some economists have already called Modi’s currency policy as “blind” and “dumb,” since Modi has apparently ignored that more than half of the Indian population still doesn’t have proper access to banking services.
Many of those 600 million people have to walk for a whole day or travel on a pick-up truck to the next town to go to a bank. Most of them don’t even understand what they see on the display of an ATM – not to talk of comprehending the significance of a PIN code.
Exactly these people are the ones who are suffering right now. They don’t have easy access to their banking account via a mobile app on their smart phone. They cannot order goods and services online while sitting on their couch, like many millions of middle-class Indians do every day. Coolies and other day laborers complain that their children don’t have enough to eat. Street hawkers complain that they are not able to sell their vegetables, let alone buy new merchandize. Farmers complain that they don’t have cash to buy new seeds. The ones who have cash, are hoarding it instead of spending it. The economy is under shock. And nobody believes in Modi’s promise anymore that this shock will be overcome by the end of the year. Neither that the new rupee bills will banish India’s black money. The prime minister has simply lost his bet.