Modi's Assault on Black Money Leaves Indians in Despair

A security guard tries to close the gate as people try to enter a bank in Mumbai, India, on November 10. Modi’s aim was to wipe out masses of undeclared black money hoarded by the rich and famous, by crooks and gangsters, by traders and many if not most businesses (especially real estate and construction) and by political parties. John Elliott writes that rarely can a country’s leader have caused such chaos impacting an entire population. Danish Siddiqui/reuters

This article first appeared on the Riding the Elephant site.

When Indians elected Narendra Modi as their ultranationalist prime minister two and a half years ago, they were voting for change in the way that the country is run, just as American voters did last week when Donald Trump was elected president (albeit by a minority popular vote).

But Indians did not vote for the countrywide chaos and misery that has hit them since November 8 when, late in the evening, Modi suddenly went on television to announce that, as part of a drive against corruption, Rs500 and Rs1000 bank notes would not be useable from midnight.

That decision—curiously called demonetization—stole the headlines from the over-night election count in America. It immediately took some 22 billion bank notes—86 percent of the $245 billion of currency—out of circulation, leaving only Rs100 and smaller value notes and coins as legal tender until small quantities of new Rs2000 notes began to be introduced three days later.

Modi departed a day after his announcement for Japan (where he agreed an historic nuclear power deal), leaving his finance minister, Arun Jaitley, to announce that it would take "two to three weeks" for adequate notes to be put into circulation.

Modi returned over the weekend when the upset that he had caused—dubbed "minor inconveniences" by Jaitley—had reached such a crisis point that he choked back tears during one of three theatrically emotional speeches.

He appealed for people to bear the "pain" till December 30, not just two or three weeks. "After that, I'm ready to face any punishment meted out by the people," he declared.

He said he "shared the pain," which of course he hasn't, because prime ministers don't queue at ATMs and bank branches, nor do they run cashless small shops, nor they have to feed a family without ready money. (Rahul Gandhi of the Congress Party did pop up at an ATM queue for media photographs.)

Rarely if ever can a country's leader have caused such immediate chaos impacting an entire population. It was an example of how Modi likes to spring dramatic surprises, but it also led to days of muddle and deprivation as banks closed, ATMs stopped functioning, shops pulled down shutters, families ran out of small change for daily necessities and armed police controlled massive queues and crowds when banks and ATMs began functioning again.

The banks and ATMs exchanged old notes for small quantities of new Rs2000 ones, though not quickly enough to deal with even a fraction of people who queued for long hours. Some 200,000 ATMs have had to be reconfigured because the new notes are smaller than the old ones.

There are reports of income tax raids on shops and businesses, and officials have warned that people depositing large sums of old notes would be penalized if they could not explain where the cash came from.

Various concessions were introduced, allowing old bank notes to be used for urgent purchases such as medical supplies, milk, air and railway (uncancellable) tickets, petrol and other fuels, cremations and burials and highway tolls.

There is general public support for Modi's drive against overall corruption, and Indians have for generations tolerated scarcity and discomfort along with muddled and inefficient government.

But the inevitable lack of warning and preparedness for a move of such massive proportions has tested both the support and the tolerance—hence Modi's impassioned speeches Sunday. There has also been widespread criticism of the lack of preparedness and the extent of the disruption.

Although it had been known for several months that the government planned to introduce new Rs2000 notes, only about ten people in government are believed to have known in advance about the plan to demonetize the old notes. Cabinet ministers were not even allowed to leave a confidential briefing on the evening of November 8 till after the prime minister had spoken to the nation.

Modi's aim was to wipe out masses of undeclared black money hoarded by the rich and famous, by crooks and gangsters, by traders and many if not most businesses (especially real estate and construction) and by political parties.

Many people believe, given the timing, that his main target was to hit the funding of regional parties in the state of Uttar Pradesh (UP), which would now be starting to use their stashes of Rs1000 and Rs500 bank notes in preparation for assembly elections due early next year.

In a country where little is ever straightforward, it is widely assumed that his Bharatiya Janata Party leaders in UP had somehow been warned to deploy their money before last week.

Modi has taken a gamble that the UP voters will not resent the misery that they have had to suffer, and will not vote against such an insensitive political party as the BJP.

Modi is also gambling that the misery will have been forgotten by the time of the next general election in 2019, and that voters will come to see that he did what had to be done to speed up moves against corrupt business and political dealings.

The government also hopes that people and small businesses will move to credit cards and other forms of electronic money, in line with its plans for rapidly spreading financial inclusion.

When I went to local shops last week, I used a debit card for some purchases, paid with Rs500 notes for gas and got credit from my fruit and veg seller who said he would be installing a credit card machine, though he would then have the problem of finding enough cash to pay his suppliers. These supply chains for food have broken down because of the lack of acceptable bank notes in the past week.

A young manager, who came to Delhi from a provincial city along with his brother and sister to build careers, told me that they only had enough cash between them for two days' food. He had queued that day for five hours at an ATM which ran out of bank notes.

There have been stories of people rushing to turn their hidden wealth into gold and other jewelry, and of others burning or burying bank notes to avoid penalties for unexplainable wealth.

The people who have been innocently worst hit are poorer people without access to banking, and various levels of the middle class who keep cash at home for special events and emergencies and will probably lose some of the money.

"Ordinary salaried people, retirees and small farmers who store their legitimate incomes in cash for future durable and rainy-day purchases will not be able to change all their money for fear of harassment [by officials] and not being able to explain how they got it," Kaushik Basu, a senior World Bank official and former chief economic adviser in the finance ministry, told the Financial Times.

He tweeted that the move was not "good economics" because the damage it would cause—including slowing down the economy—would be greater than its benefits. "This can be very disruptive, increasing the costs of small business and trade and causing a drop in aggregate demand in the economy, thereby slowing growth."

Critics also say that Modi's plan only tackles the past corruption and current hordes of black money, and does nothing to stop fresh hordes being accumulated when new notes are fully in circulation. That of course is correct, but he has tried to paint a broader picture, saying that his next targets will be real estate and other transactions carried out in benami (false) names.

In the past year, the government has tried to flush out undeclared wealth hoarded in India and abroad with amnesty-style schemes and the prospect of heavy penalties. Dealing with corruption was one of the main planks of Modi's election campaign.

That is not far removed from Trump's emotive "draining the swamp" and Modi can be expected to do more in the next two years.

John Elliott writes from New Delhi. His latest book is Implosion: India's Tryst With Reality (HarperCollins, India).