PM Modi’s New Strike against Black Money Backfires

What looked like a masterstroke by Prime Minister Narendra Modi now seems to be a grave miscalculation. Modi is now sounding like he might agree. His latest speeches have been outlandish. In one, he happened to laugh at the ones inconvenienced by the ban while in another, he broke down while speaking of the sacrifices he’d made for the country, and warned that he may be assassinated by forces desperate to protect their loot.

It’s become clear that the Modi government was too cavalier in its planning. Now that 86 percent of India’s currency is invalid, the central bank has majorly struggled to print replacement denominations and the brand new notes are the wrong size for the existing ATMs. The PM has said to be patient for 50 days however the process could take as long as 4 months. Did Modi truly sought expert advice or once again relied on a small, trusted set of politicians to determine the policy?

Rural Crisis:

India is simply too big and complex for ‘shock and awe’. Major parts of the rural economy use cash for 80 percent of transactions and have been hit hard. Very few villagers have access to an ATM. Most have to tread all the way to a bank branch to change their cash, thereby losing out on crucial days of labor. Many Indians, especially women, still do not have an active bank account. Arun Jaitley (Finance Minister) wondered how many poor people would even have 1,000-rupee notes?

Popular among the Middle Class:

Among India’s middle class, Modi’s surgical strike on black money still appears to be popular. If something tastes bad, it must be good for you is what they believe traditionally. Enough Indians are struggling that they have faith it must be in a greater cause. It’s a moral project and not an economic one. You honor our brave soldiers at the border they say if we stand in line.

Economists and Estimates:

Economists agree to the fact that it will have no effect on the generation of black money through corruption. Meanwhile, estimates of the amount of black money to be recovered widely vary.The optimists think enough cash shall be destroyed by hoarders that the central bank shall be able to pay a hefty dividend to the Indian government. Others point out that a small fraction of black money tends to be held as cash and that there were a dozen ways still available to launder that fraction. The Modi government has largely failed to cork these loopholes. Worse, rumors of the demonetization were circulating before PM Modi’s announcement, leading to suspicions that the well-connected might have had time to dump their cash piles.

The Struggle to Switch ‘23 Billion Banknotes’:

Even in the best case scenario there was no reason to assume it was all black money and not savings of regular citizens scared of harassment by the tax authorities. Modi has dropped dark hints of constant tax raids and the reopening of old cases. In fact, that dark new age might already be here.

The long-term effects on India’s informal economy could be severe. A large proportion of marginal firms might not survive the loss of a fortnight of income. The informal financial sector of unregistered moneylenders who provide loans to businesses worth 40 percent of total bank lending will be extinguished.

The costs to the Indian government could be equally high. Even if the long queues vanish in the coming few weeks, the damage done to the reputation of the government is permanent.

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