What are the consequences of demonetization policy in India?
India’s Prime Minister, Narendra Modi, shocked every citizen in the country with his unexpected decision to scrap Rs 500 and 1,000 literally overnight on November 8. Despite his good intentions, his plan to revert India to a cashless economy in an attempt to move the country forward has been a dangerous one.
With the prevailing issue of black money, millions of citizens hoarding cash to avoid paying income taxes, and funding of terrorism, India’s economy is not in its best condition.
PM Narendra Modi’s decision to invalidate the most popular denominations of currency overnight, which amounts to 86% of the total currency in circulation, caused mass amounts of chaos, fear, and overall uncertainty between Indian citizens. A combination of the brashness of the decision, as well as the carelessness of not taking India’s infrastructure and reliance of cash into account, has undoubtedly caused an extremely negative effect on the economy, at least for now.
What are the consequences that have arisen so far?
On November 8, the Reserve of India posted a notice that stated a number of rules regarding the currency demonetization, such as being able to exchange them at a bank (RS 4000 at a time), and withdrawing up to RS 2000 from ATMS per day, with the limit increased to RS 4000 after November 18. While these rules may seem simple enough, they quickly became the cause of chaos in India, whose effects became prevalent within hours.
Banks quickly became flooded with mass lines of people who needed to withdraw notes in order to make basic transactions. It is unsurprising that in a country with as large of a population as India, banks do not have enough of the now legal bills to give to people in order to replace the old, now unusable bills – many of these people have been waiting in long lines for days. According to reports, a number of people even died waiting in line to exchange bills.
“All these people are all suffering, but they end up fighting each other while queuing up outside the banks. They fail to understand the chain of causality, and cannot see that it is Modi who is behind their predicament and anger. They have fallen for a divide-and-rule stratagem.”
Moreover, a large portion of small-business owners lost huge amounts of business because customers did not have money to pay for goods and services. With only about 3% of India’s population being middle-class, according to Credit Suisse, and the majority being lower-class, the demonetization decision was absolutely dreadful. Many of these citizens do not have bank accounts or ATM cards and rely on cash to pay for all of their transactions, not to mention that many live in rural areas where the nearest bank or ATM is miles away. Now, their main form of currency has become unusable, just like that.
Demonetization from a macroeconomic perspective
One of the reasons linked to the demonetization decision was to strengthen the India’s economy, but in practice, it actually did quite the contrary. According to economists at Ambit Capital, India’s GDP is expected to fall from 6.8% to 3.5% in 2017. With India being viewed as an emerging nation to first-world countries such as Canada and the United States, the drop in potential GDP may have a negative implication for countries wishing to do business there.
It is impossible to predict what the outcome of this decision has for India’s economy in the future, as unprecedented measures are only done in an extremely rare case of a crisis, where the country is either in the aftermath of a major war or has levels of hyperinflation.
According to an analyst at JP Morgan: “No country has done this kind of shock therapy. We don’t have any precedents of doing anything of this sort. We are flying by the seat of our pants.”
While the demonetization policy may help India’s economy in the long-run, it has certainly put the country into turmoil for now, even more than a month after the decision was announced to the public. Modi’s emergence to the presidency has definitely turned around the country, but only time can tell whether it is for the better or worse.