All of them nuked and none of them saw it coming. As the globe was glued to the US election, Indian Prime Minister Narendra Modi pushed the button on one of the most dramatic, elegant and effective anti-corruption measures the world has witnessed. He simply made the billions and billions of rupees they collectively held in cash, their black money, utterly worthless. Modi called his troops to a special cabinet meeting in Delhi last week. Every cabinet minister was ordered to attend. None were told why, only that there were no excuses for missing it. Mobile phones were banned in the cabinet room. Only one other cabinet member, Finance Minister Arun Jaitley, was aware of the plan, along with a handful of senior officials in the government and the Reserve Bank. It was a massive undertaking that must have required months of planning, but none of it leaked.
Modi sat his cabinet members down and then dropped the bomb. At midnight, he announced, every 500-rupee ($9.80) and 1000-rupee banknote — the two largest Indian denominations — would no longer be legal tender and would be withdrawn. After he’d finished talking, he turned to a cabinet colleague with a smile and said: “This is why I told you not to be absent.” The Prime Minister then drove to the home of the President, Pranab Mukherjee, to inform him of the decision. At 8pm, he went on television to inform the nation. Ministers were kept in the cabinet room until his speech aired. The two notes represent 84 per cent of the value of all of the cash in circulation in India, about 22 billion individual notes worth $278 billion. By The Australian’s calculation, that is 458 truckloads of cash. That’s a shipload of cash.
Over the next few weeks, people can deposit their cash in banks. However, any deposit of more than $500 will need to be explained and accounted for. Those who cannot justify the deposit will be taxed on the money, and a 200 per cent penalty applied. In effect, it would cost them more than the value of the deposit. They may as well throw the money out the window, and this is happening. A friend in the southern tech capital of Bengaluru was on the way to work last week when her driver stopped suddenly and reversed. He got out and picked up a 500-rupee note off the side of the road — it was the fourth note he’d picked up that day. There have been reports of this happening right across India. This friend, who works for a large real estate firm, said: “There will be people jumping out of windows over this.”
She was talking about real estate developers, who for the past 30 years have ridden a cash wave as Bengaluru has grown from a small state capital of about one million people to 10 million. She said the day after Modi’s announcement that the mood in the office was desperate. “One of the guys in the office had to be escorted from the premises by security he was so distressed and angry,” she said. He’d been working on a big real estate deal for many months, which included a large cash component. The investor, who was about to sign, is now not picking up his phone and cannot be found. Much of the money that has been made in real estate is in cash. Many have told of investors who have steel safe rooms built in their houses. They are full of cash — all of it now good for nothing but insulation. “My own landlord spends six months of the year in India and the other six months in Belize,” she says. “What does that say?”
In the days after the announcement, small retailers, without card machines, were particularly affected as people horded their 1000-rupee notes, the largest note in circulation. Reporters travelled out to KR Markets, a bustling bazar in Bengaluru, to see how traders were affected. The small vendors, the fruit and flower sellers, seemed to be largely unaffected, but anyone selling more expensive products was having a glum day. Wasim Khan, who managed a shop selling large cooking pots, woks and stoves, said he was yet to make a sale. He was angry with Modi for not giving retailers more notice. When the need for secrecy was explained, he said it was a good thing, as “black money is very bad”. It will be interesting to see how this affects the crooked funding of politicians and their campaigns. A study by the Centre for Global Development in the US, which charted concrete production in India, found that when a state election was held, there was a 15 per cent reduction in the amount of concrete produced and 38 per cent when national and state elections coincided. That’s because many politicians have invested their ill-gotten gains with shady developers they’ve corruptly helped. At election time, they need to bribe voters to stay in power and the sucking back of all that cash brings many construction projects to a halt.
Mr Modi said much of the terrorism in Kashmir was financed with counterfeit notes, the inference being that the money was coming in from Pakistan. Rama Nath Jha, the executive director of Transparency International India, believed it was a courageous move by Modi, but it needed to be followed up with strong anti-corruption legislation, reforms to property legislation and greater transparency in government procurement. The Prime Minister spoke out on de-monetization for the first time after he announced that Rs 500 and Rs 1,000 are no longer legal tenders. And he has given some much-needed clarity on the entire process. He said this is just the beginning and more such moves can be expected soon; he also said people must face some hardship for at least 50 more days. The process of depositing the old currency in the banks and withdrawing money from the banks and ATMs has been an ordeal for most of India. The country is literally surviving on pocket change and some have even run out of cash that is still in currency. Therefore, it was crucial the prime minister himself clarify on the on this cash crunch because of one of his most radical reforms since his coming to power.
The intention is to rid the country of black money and dig out tax defaulters and black money hoarders. However, as 86 per cent of the currency notes in circulation were de-monetized it has hit the common man too. With limits put on withdrawals along with mismanagement in the filling of ATMs. The man on the street seems not so happy with the process while he still supports the move. The common population has been put to a test of its patience in the larger interest of the nation; Willingly or unwillingly, they understand the reason behind the sudden implementation of the scheme. They don’t have much of an option now.
Modi said in a statement that the de-monetization process has been on for the last 10 months and his government has been working on curbing black money. The PM said that since his government came to power, it has unearthed at least 1.25 lakh crore of black money and the process will not stop even after December 30 — the last date to deposit the demonetized notes in banks to get the money back in legitimate currency notes. The demonetization was announced soon after the window to disclose black money and undisclosed assets closed. So, the process had been laid down much earlier. It would have helped if the government had planned how to ensure a smooth flow of cash back into the system through ATMs. And since the entire exercise was pre-planned there should have been no issue in giving the common man more access to Rs 100 and Rs 50 notes through banks and ATMs.
The PM said the sudden announcement of demonetization of high denomination banknotes was imperative for the effectiveness of the scheme and accepted any sort of punishment if the public feel he has done anything wrong. Opposition parties have been questioning his move since it was announced and even a national trade union has announced a nationwide strike next week in protest of the demonetization. However, going by economic principles, the process is a net profit move for the government and should help flush out dirty cash, spear out tax evaders and increase the revenue of the government. It’s clear now that demonetization of the notes is not the only move that Modi government will implement to dig out dirty money and that people must brace themselves for tougher days to come in the ‘national interest’.