analysis

Updated: Nov 09, 2016 20:02 IST

The government of India has decided to dispense with immediate effect Rs 500 and Rs 1000 notes and replace them with new Rs 500 and Rs 2000 notes. This Prime Minister Narendra Modi said was part of his government’s effort to fight corruption, black money and fake currency. Everyone has recognised this as a bold move, his supporters are ecstatic as they usually are about every decision of his.

There is no doubt that currency changes are a blow to the fake currency problem. It certainly destroys the value of those hoarding cash. There are suspicions that businesses will try and retrospectively declare goods and services as sold before November 8 and deposit the money in banks, but there will be a lot left under the rug that will need to be disclosed. The move will not affect the super-rich who usually convert their wealth into land, gold and foreign property.

Notwithstanding the benefits, there are reasons to believe the currency swap is a political blunder. Writer Amit Varma has, among others, tweeted that this is a mistake, pointing out, for instance, that the measure will adversely affect BJP’s base of small traders. He’s right; if a party has consciously kept out foreign direct investment in multi-brand retail (excepting food products) to protect the 10-12 million small traders in the country then what’s the point of threatening their cash reserves? Like counterparts elsewhere, Indian businesses are notorious for evading taxes and thus any attempt to disrupt established practices of unaccounted cash transactions is bound to be deeply resented. One can expect a wave of negative sentiment to radiate through (small) business communities quickly. A nationalism that trashes Pakistan is welcome, a nationalism that wants you to come clean on personal finances is not – regardless who the leader is.

The BJP seems to have calculated that the poor will enjoy the prospect of the rich squirming about what to do with their ill-gotten cash and admire the PM for the nerve to take on the wealthy.

That may be true in theory but the disruption this measure causes can override that sentiment quite quickly. The Modi government seems to have underestimated how the process of lining up in banks to deposit money will infuriate people, including the lower middle class and urban poor. Just imagine, for example, how the experience will be for a poor woman in the cities who stores cash at home, rather than in banks. The family’s money has suddenly become illegal; she is likely to take leave from work, join a long line in a bank; she will have to go through the indignity of asking someone else to fill her bank deposit slips and will seethe when someone inevitably jumps the line and wonder why the government made her do all this. Every person with a Rs 500 note in the country will have to endure a variant of that experience. Imagine the chatter in the queues where mirth and rage alternate and where it will collectively dawn on all present that all this is a pointless use of time.

There is already chaos reported in the cities with petrol pumps refusing to accept old notes and ATMs seeing long lines. What is extraordinary is that the government has effectively ordered a pause to commerce as many millions know it, without any prior warning.

There is the claim about black money that needs to be evaluated. This experiment is predicated on the belief that many will surrender their ill-gotten cash even if they have not disclosed it during the tax amnesty. They may not choose to in order to avoid embarrassment, scrutiny and prosecution – and to that extent demonetisation entails the destruction of value (rather than its creation) and so it does not allow for the redistribution of income which is what the recovery of black money is all about. If the Modi government does manage to recover a lot of money, it will have to pass on the benefit to the people in substantive ways like significant cash transfers or, if it is ambitious, perhaps try a universal basic income initiative.

For now the transition will be painful. The technology and customer service experience at most banks is not at a level that can cope with the volume of demand in the coming days. High on the list of things that governments loathe are crowds gathering in public spaces to discuss government policy. The Modi government will be summoning such very audiences in banks this week onward. No policy sounds good when you are standing for two hours in a queue at an Indian public sector bank.

The views expressed are personal. The author tweets as @SushilAaron