[Their troubles were a sacrifice for the nation, Modi said at the time. Old notes would be handed back to the banks, and the vast reserves of untaxed “black money” being used for dodgy deals among fat-cat businessmen, dirty politicians and Pakistani terrorists would be invalidated in one fell swoop.]
By Vidhi Doshi
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A man counts Indian currency notes inside a shop
in Mumbai.
(FRANCIS MASCARENHAS/Reuters)
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NEW DELHI — When Indian Prime Minister
Narendra Modi announced the replacement of 80 percent of India’s cash in 2016,
he sparked a currency crisis that led to huge job losses and stalled growth as
it hit India’s vast informal sector.
For
months, people had to line up at banks and ATMs — sometimes for more than eight
hours — to withdraw limited amounts of cash to pay bills or buy daily
groceries.
Their
troubles were a sacrifice for the nation, Modi said at the time. Old notes
would be handed back to the banks, and the vast reserves of untaxed “black
money” being used for dodgy deals among fat-cat businessmen, dirty politicians
and Pakistani terrorists would be invalidated in one fell swoop.
Now, newly
released data from the Reserve Bank of India (RBI) shows that 99.3 percent of
high-value notes in circulation — worth around $216 billion — came back to the
banks. That means that those illicit hoards that the government was hoping to
flush out of the system were not in the form of cash and are still out there.
And the
long lines for cash, not to mention the losses in jobs and growth? Not
necessary.
“The RBI
has in effect said that the prime minister’s premises and claims were dubious,
and, in as much words, he didn’t know what he was talking about or getting
into,” said Mohan Guruswamy, founder of the Center for Policy Alternatives and
a former adviser to the finance minister.
India’s
economy runs mostly on cash, so Modi’s demonetization thoroughly shook the
country. The New Delhi-based Center for Monitoring the Indian Economy estimated
that the shock move caused the loss of 1.5 million jobs, though other
economists have put the number lower.
In the
weeks and months after Modi’s bombshell announcement, small-business owners
said their customers stopped coming because they had no cash. Marriages were
delayed because cash stacked up to pay for venues and caterers was now
worthless. Millionaires joked about borrowing cash from their maids to buy cups
of chai.
Some found
clever ways to avoid the long lines, such as bribing bank managers or paying
people to stand in their place. But many who stood in lines said they supported
Modi and his efforts to clean up India’s economy at the time.
Guruswamy
said the new data suggests that the entire policy was never thought out
properly. “All reports on [black money] categorically stated that the
undeclared incomes were mostly invested in properties and assets in India and
abroad and in gold and jewelry. The cash with people was cash in stock and
deployed for everyday business and living,” he said.
At a news
conference in New Delhi on Wednesday, reporters pelted Subhash Chandra Garg,
secretary of the Department of Economic Affairs, with questions about whether
the problem of the black money had been solved.
“I think
demonetization achieved a substantial number of its objectives,” he said,
pointing out that the new notes had “new security features” to make
counterfeiting more difficult and that digital payments in India are increasing
— both points that were disputed by journalists.
India’s
economy is now showing signs of recovery after the disruptions of
demonetization, the RBI report said. Growth rates, which slowed to a four-year
low, in part due to the “lingering impact of demonetization,” have now bounced
back.
But as
elections approach, the debacle could dent Modi’s reputation as an economic
magician with the answers to all of India’s problems.