I refuse to believe that such an intelligent and dynamic Prime Minister as Mr. Modi, is adamant on wrecking such havoc on multitudes of Indian citizens. Here, I have tried to put on Modi’s hat and using rational thought, I try to parse his move.

I am Modi. In March 2016, I know that national banks are in distress and results of first and second quarter are going to be bad for banks. International turmoil (Brexit, etc.) is bad for Indian economy and world events are also going to limit RBI’s bandwidth to support the Indian Economy. I also want to transform the economy into cashless (or reduced cash) economy which will bring its own benefits to the Indian economy. Lastly, there is the menace of fake currency notes.

I know that I cannot simply cease to use large denomination notes. India is still a cash based economy where more than 90% transactions are in cash. The banking and electronic funds transfer is not as pervasive as some of the developed countries. Removing all high value notes will be reducing the money supply too much and will lead to deflation and severe economic hardships.

I know that there is a difference between black money and Informal Economy. The informal economy does not come in any statistics of growth, production or GDP as it is completely cash based and hidden from government. But being hidden does not make it illegal. Exemption for filing Income TAX return is Rs. 2.5 lakh, exemption from Sales Tax is Rs. 25 lakh, exemption from Excise and Service Tax is Rs. 1 Cr. Therefore, a majority of the population simply does not need to file anything and whatever they are doing will not fall in the ambit of black money. By some estimates, more than 90% of cash is actually employed in the in-formal economy which is estimated at about 20% of India’s GDP.

I know that Indians are savers by nature. A person earning 1 lakh per year will probably save a few thousand per year. Most of this saving will be in cash for emergencies. These savings are not black money as they are the cumulative result of savings from exempted or tax paid income over last 10-15 years. Some may have more, some may have less but this saving is lying under the mattress rather than a bank account.

I know that demonetization will not make any significant dent in Black Money as most of it is already in physical assets. Only transient black money which is on its way to consumption or is in the middle of changing hands will be caught if currency is invalidated.

I know that Oct-Nov-Dec is the festive season, when spending is at its peak, and if I want to target the maximum amount of black money in circulation, this will be the time.

Knowing all this, I launch demonetization. I hope –

People with large amount of illicit cash will scramble to convert their cash into physical assets. Hence, secrecy is important. They will also convert all their cash into new notes, given enough time. Therefore, this has to be swift. Although this will trap a very small percentage of black money, something is better than nothing. Elections are approaching in a few states. Timing for this move is perfect and will catch my opponents flat footed. Without their war chest, and public support behind me, I will make a killing in the elections. Surprise and speed are essential. Therefore, the logistical challenge of cash replacement is going to be enormous. This will cause liquidity issues and trade will come to a standstill. However, I think this will be temporary and things should be back to normal. I will be able to convince the public this bitter pill is for their own good. The faster the replacement, the better. People will be forced to put all their savings in banks. There will be crores of people who will have saving amounting to more than 2.5 lakhs (they have been saving for years). When these savings are deposited, it will be almost impossible for these folks to prove that this money was accumulated over multiple years and will be coerced into a Tax Bracket. I have money in banks (re-capitalization) and I have increased the tax base. People and companies with high levels of cash-in-hand (an accounting term), will be forced to deposit the money in banks. These intelligent folks had high cash in hand in the first place, for some legitimate reason. Maybe it’s the nature of their business. Maybe they have expenses planned. Once the new currency notes arrive, these people will immediately withdraw all the money and get back to their business as usual (no re-capitalization). Such people and businesses already pay taxes (no increase in monetary base). This transient money will do me no good unless I put some kind of withdrawal limits and force this money to stay in banks.

Day 1-Day 5 after Demonetization

My scheme seems to be working. Everyone has greeted it with positive support. My enemies are speechless. Everyone is convinced that things will be back to normal in a few days and I will be hailed as the best PM of India ever.

Day 5-Day 50 after Demonetization

Where did I go wrong? Why suddenly am I looking at mounting frustrations. I had the support of the masses but looks like the masses have turned against me. This may be due to –

It took too long to replace the currency. My printing presses are overwhelmed. By some estimates, it will take more than six months to complete the exercise. I can force the banks to stay open longer for a few days. But I cannot force them to work overtime for more than a week. Corruption is back. All bribes are now being taken in new currency. Due to liquidity crunch, the economy has stalled. I mis-judged the amount of spending during the crucial season of marriage. Now the economy will take 4-6 quarters to recover. The farmers missed out on the crucial sowing season and the outlook for agriculture has turned sour. This will be a disaster.

Beyond Day 50, after Demonetization

What did I do wrong? Why has the scheme failed? This may be due to –

People with large wads of cash employed large number of people as cash mules. Paying them daily wages, people gamed the system and converted their old currency stash into new. My primary objective has failed. All the cash, that was deposited into banks is now being withdrawn. Most of it, sadly was for legitimate reasons and tax-exempt. My hope of re-capitalizing banks have evaporated. I was hoping the new notes will not be counterfeited this fast. Due to haste, I did not add any new security features in the new note. Now I will have to issue new notes. Due to liquidity crisis, the economy was underperforming for 1-2 quarters. Most of the marginal business units have shut down leading to higher un-employment. Due to disruption in agriculture and their finances, more farmers are poorer. The state of rural economy is worse than what I had imagined. I was hoping to put in more severe controls on cash transactions, but the weakness of economy will prevent me from going forth. I was going to re-structure the markets for traditional black-money. Real-estate, Gold, Silver, Forex, etc. were up for major changes. But the weakness of economy and general opposition and public sentiment against me, prevents me from doing this. This experiment of demonetization failed, as such efforts have done in the past. Now I am equated to Muhammad bin Tughluq.