Prime Minister Narendra Modi is working “more than ten hours a day” just on ensuring that the 8 November money measures announced by him ensure a smooth landing for the economy rather than turbulence. This despite the fact that the plan actually owed its origin to the Reserve Bank of India and the Ministry of Finance, who persuaded the PM to go forward with an idea which will affect (and has affected) over a billion citizens of this country. Prime Minister Modi showed moral courage in coming forward and accepting ownership of the currency swap scheme announced on 8 November, and has since then publicly backed every twist and turn in that policy by the monetary and fiscal authorities. Senior officials say “Prime Minister Modi was presented with the issue in such a way that turning down the scheme was out of the question”. Through the plan, concerned officials wished to “shield those in high positions in banks across the country from the consequences of the crony-oriented lending that they had been doing, specially since 2006”, the year when Narasimha Rao’s liberalisation policy was fully substituted by the UPA into a faux Nehruvian economic policy that combined Fabian socialism with Wall Street ways. “Officials argued that a windfall of up to Rs 550,000 crore would flow to the banks through the enforced extinguishing of currency notes issued by the RBI, and that this would recapitalise several banks that were in effect bankrupt, thereby allowing them to lend again”. The Prime Minister was assured that “steps would be taken to ensure that the common man suffered minimal discomfort” and that “the informal economy would accelerate its absorption into the formal without jobs being affected”. It needs to be mentioned that it is the formal sector that is responsible for not repaying bank loans of a value crossing Rs 750,000 crore, which will be several times the value of tax evasion by the informal sector. NPAs are being written off by banks at an accelerating pace over the past six years, with still more businesses declaring themselves unviable by the month.

The velocity of circulation of currency affects demand for the same, and the effects on the economic system post 8 November, combined with worries of further drastic steps including more demonetisations, is leading to hoarding of currency notes, thereby necessitating a higher volume of currency needing to get pushed into circulation. A senior official estimated that it will take eleven months for currency stocks depleted by the 8 November shock to get replenished. Holding on to low limits on cash made available to depositors will affect consumer spending. An interesting and possibly positive sidelight is that numerous NPAs are quietly being settled with old notes, although banks officially deny that this is taking place. Vehicle loan collections are up, especially former bad loans, as holders of the extinguished currency seek to deploy cash any way they can. However, NBFCs, which are a vehicle for funding small businesses, are facing non-payments of up to 50%, despite efforts by the RBI to boost confidence. And while card sales are up, Cash On Delivery (COD) sales have sharply fallen, and this forms the bulk of such business. There is a 30%-40% drop in restaurant and FMCG sales, with few expecting a quick rebound. The relentless official drive against cash transactions will result in numerous small stores and “kirana” establishments shutting down, as not many would be able to make the transition to fully digital payments. Even “dhabas” will begin shutting down, as many would not be able to afford the 21% sales and Value Added transactions on electronic transactions. A fall in economic growth over an indeterminate period of time will result in lower tax collections, leading to pressure on the Income Tax Department to squeeze as much as possible from taxpayers through use of technicalities. Bribe takers are offering handsome discounts for payments in new currency or in the form of gold and diamonds. The effect of the 8 November currency swap on overall employment is unclear, although jobs are being shed across the country on a daily basis.

The recession after the 2008 collapse of Lehman Brothers cut India’s growth rate to 6.7% in 2009 as compared with 9.5% the previous year. Each 1% decline of GDP means around Rs 150,000 crore gone. Housing was an important segment of good economic results during 2006-09, but in the absence of lower stamp duties the introduction of the Rs 2,000 note is expected to perpetuate black money in the sector. As for the unorganised sector, while it often does not pay direct taxes, through employment and income, the sector adds to indirect tax collections as well as demand for several of the items produced by the formal sector. A problem is that India’s tax structure is so convoluted and cumbersome that several units will go out of production once they get into the tax net. Although there is much talk about lower tax rates down the road, few are willing to risk investing money in the economy as a consequence of such an expectation.

Interestingly, key proponents of “swadeshi” are in favour of switching from cash to plastic in a country where plastic is largely in the hands of foreign players, mostly from the United States, or in some cases, China. Ultimately, it is investors in these two countries who will be smiling all the way to the bank as millions in India move from cash to plastic to make payments. Which is why some argue that despite the contrary view of the RBI and the Ministry of Finance (both of whom are in thrall to the “Cashless Country” concept), cash needs to be accepted as a primary medium of exchange for at least a generation more, even while genuinely Indian owned companies get empowered to compete with the foreign owned giants that now dominate the India market for non-cash transactions.

Confidence in the value and stability of a currency is core to the monetary health of a country, hence the refusal of US authorities to ever make any denomination of the US dollar inconvertible. This despite the dollar being the most counterfeited currency on the globe. Repeated devaluations and demonetisations of the Indian rupee have resulted in a high percentage of citizens of India switching to gold and other assets in place of the rupee as a store of value. While unaccounted money does get hoarded in India, especially by politicians, officials and businesspersons, much of this gets converted into assets such as land or gets converted into foreign currency and wired abroad through secretive but well established hawala channels operating through Nepal, Singapore, Dubai and Mauritius. However, officials moving in step with Prime Minister Narendra Modi’s plan for transformation of the Indian economy by the close of his term in office say that the Prime Minister “accepted the recommendation of his Principal Secretary, Revenue Secretary and RBI Governor to immediately disallow circulation of the now defunct Rs 500 and Rs 1,000 notes”. “The Prime Minister raised several queries, especially on the impact on the common man, and only when it was conveyed to him that steps were being taken to minimise hardship did he agree to the measure”, a long-term civil servant revealed, adding that “the subsequent silence of some top officials is inexplicable” in view of the fact that they were the prime movers of the 8 November demonetisation. The source added that “the effects on the poor have been uppermost in the PM’s mind and it is to this point that he kept returning time and time again”.

The snafu relating to the size of the new currency notes was placed at the door of the RBI by a senior official, who pointed out that “everything from the design to the printing of the Rs 2,000 notes came from Mint Road (in Mumbai)”. The US dollar is the same size irrespective of denomination, while ATMs in that country avoid dispensing even $50 notes, focusing only on $20 notes so as to minimise hoarding of dollars. “If the RBI is sincere about working to implement PM Modi’s desire for an end to black money, it should print many more Rs 100 notes. Instead, the focus of the Central bank over the past six weeks has been the Rs 2,000 note”, which is very susceptible to being sucked into the “black” i.e. undeclared economy. “The economy needs lower denomination notes, of which there is a deadly shortage since months because RBI has for the past eight years catered mostly to the well heeled by concentrating on the production of Rs 500 and Rs 1,000 notes, rather than the more humble Rs 100 or Rs 20 and 10 that are essential in those sectors of the informal economy which create the most jobs”, an official now based in Mumbai pointed out. He added that “Prime Minister Modi has been careful not to interfere with the decisions of the RBI”. However, “perhaps the PM needs to be careful about some bureaucrats who painted a hyper-optimistic picture about the immediate fallout of the currency scheme” announced by the Prime Minister on 8 November 2016, advised a senior official who is in sync with the Prime Minister’s innovative views on transformation of governance.

“The RBI is concentrating on Rs 2,000 notes that are the easiest to store and to transport in place of plastic because it wants to show that a higher value of currency has been printed”, a source claimed, adding that “the Central bank seems to care very little about small retailers and the common man, both of whom are facing a shortage of small denomination currency notes owing to the lack of an adequate contingency plan by the bank”. The official added that “only PM Modi has the authority to request (RBI Governor) Urjit Patel to ensure that the painful shortage of small denomination notes end through adequate supplies by the RBI”. “The shortage of currency combined with yet another demonetisation has led to a steep fall in the confidence of the people in the Indian rupee. They are going in for US dollars instead”, claimed a senior official, warning that “within a few more weeks, several hundred thousand small enterprises will close down unless the RBI gets its act together”.

Officers in sync with Prime Minister Modi’s plans expect that during the next week itself, he will ensure that policies get tweaked in a manner than is people-friendly and not babu-friendly, and that “by 30 December, the economy will be running far more smoothly than it ever has”. The citizens of India are waiting eagerly for such an outcome to come about.