Before the shock waves generated by Donald Trump's triumph over Hillary Clinton in the US presidential race of November 08 died down, Indian Prime Minister, Narendra Modi detonated a bombshell of sort by demonetising all 500 and 1000 rupee bank notes of the Mahatma Gandhi Series. The shock waves from the seismic tremor generated by the explosion reverberated from Kashmir to Kanyakumari. Its ripples also travelled across the continents much to the dismay of nearly 30 million Non-Resident Indians (NRIs). They are literally at their wit's end to dispose of their discontinued bills held abroad or lying in banks' lockers in India.
Bangladesh residents holding high-denomination Indian currency notes suddenly find themselves short-changed by what many analysts have labelled as Modi-fied move. Bangladesh tourists visiting India were also caught in the maelstrom; many reportedly thrived on dal-bhat procured with whatever smaller denomination of Indian currency they were left with. Many were forced to sell their 500 and 1000 rupee notes at heavy discounts.
The move is seen as premier Modi's commitment to flush out black money and to fish out the fake notes that are thought to be used for funding terrorism. Reduction of corruption, drug trade and smuggling are also on the card as spinoffs from the demonetisation strategy.
Demonetisation is not new in India. The last time the Indians experienced demonetisation of bank note was in 1978 when the Janata Party coalition government had demonetised banknotes of 1000, 5000 and 10000 rupee. This time around the effects of demonetisation are more widespread than those of 1978. Indian economy has grown many times bigger and money has entered into what until recently was non-monetised rural sector. The sheer volume and number of high denomination notes that are now circulating in the economy is mind-boggling. The annual report of the Reserve Bank of India (RBI) of March 31, 2016 reported that on October 28, 2016 the value of banknotes in circulation in India was Rs 17,770 billion (Rs 17.77 lakh crore) equivalent to about US$260 billion. Of the bank notes now in circulation, 500 and 1000 rupee banknotes account for nearly 86 per cent of the total value of bank notes in circulation.
As expected, reactions to the demonetisation process have been very sharp-a few laudatory but mostly scathing. Several banker bosses appreciated the move. So did some leading businessmen. Chief Ministers of some states lent their support for this step. They were joined by Indian National Congress spokesperson Randeep Surjewala and the President of India, Pranab Mukherjee. By and large, international response was also positive which heralded the move as a bold crackdown on corruption. International Monetary Fund (IMF) issued a statement supporting Modi's efforts to fight corruption by the demonetisation policy.
These sugar-coated voices have, however, been weighed down by the pangs and groans heard across India for the hardships and inconveniences it caused. The scarcity of cash due to demonetisation led to chaos and long queues at ATMs and banks across India. ATMs were running out of cash after a few hours of Modi's announcement. Sporadic violence was reported in New Delhi. People attacked bank premises. Ration shops were looted in Madhya Pradesh. Several people died standing in queues to exchange their old banknotes. There have also been deaths attributed to lack of medical help due to refusal of old banknotes by hospitals. The death toll was 25, as of November 15. Marriages were cancelled or postponed due to lack of money to pay for the caterers, venue and other expenses. Housewives who secretly stored money for bad days faced the painful necessity of pulling it out from the hideouts and risked losing it to their overpowering spouses.
World Bank Chief Economist, Kaushik Basu, said that the 'damage' is likely to be much greater than any possible benefits. Former Finance Minister P Chidambaram ridiculed the demonetisation move, saying banks doling out cash to citizens was "proof" that 'achhe din' have arrived. Prabhat Patnaik, a former professor of economics at the Jawaharlal Nehru University, Delhi called the move 'witless' and 'anti-people'.
Chief Minister of West Bengal, Mamata Banerjee called the new declaration "drama". Hers was the loudest voice; she also used the occasion to close ranks with the opposition leaders across India to promote her image from local to national leader.
Eminent Indian columnist, Kuldip Nayar noted that the government is searching the black money in wrong place. In his syndicated column he quoted Swiss Banking Association report of 2006 to say that as much as $1,436 billion dollar Indian black money was stashed in the Swiss banks. That money, he said is more than the deposits of all countries put together; this amount is about 13 times larger than the country's foreign debts. He also lamented that in spite of the Supreme Court's directive, the government is dragging its feet on corruption. "I have never seen India so deeply immersed in corruption as it is today," said the veteran columnist and warned against throwing out the baby with the bath tub.
The war on corruption is not likely to cut ice in the home front too. People owning black money rarely keep it in cash. There are also many ways of shuffling black money away from the prying eyes of the authorities; the preferred mode being sending it abroad in offshore centres. Many people have used their black money to buy gold, diamonds, paintings, properties etc. Demonetisation will not touch these people.
Even those who have black money in the form of bank notes are exploring ways to exchange it for the new ones. Some are converting black money into white by making multiple transactions at different bank branches. Some have hired people and sending them in groups to exchange their money at banks.
One news item gleaned through the internet says that in 2015-16, almost 650,000 counterfeit notes were detected in commercial banks of which almost 4, 00,000 were in the Rs. 500 and Rs 1,000 category. The fight to stop counterfeit bank notes will temporarily sterilise these notes but they will soon resume their business as usual. If anything, the new 2000 rupee denomination notes will make their work easier by 50 per cent.
In the meantime innocent people who unwittingly accepted fake currency will stand to lose their money while the counterfeiters will continue to enjoy the fruits of their crimes. The solution to stop counterfeit notes is to incorporate adequate security features in the bank notes and creation of awareness among the public on ways to separate the counterfeit notes from the genuine ones. Simultaneously, law-enforcement agencies should intensify their surveillance to nab the culprits. Admittedly, demonetisation will have temporary impacts on reducing terrorism, drug trade and smuggling but it will not be long before they regroup and renew their trade with renewed aplomb.
The replacement of demonetised notes by new Rs. 2,000 and lower denomination notes will cost a king's ransom. The current costs of printing Rs 500 and Rs 1,000 note are reportedly about Rs 2.5 and Rs 3.0 respectively. One estimate says that if this additional money (a spectacular Rs.6.666 trillion) had to be printed using Rs 100 notes, it would cost RBI about Rs 119billion (11,900 crore). To this must be added the costs of sufferings caused to the people and businesses on account of lost hours and energy spent on exchanging money and drop in sales and productivity.
In the final analysis, the idea of flushing out black money through the demonetiation route appears to be rather presumptuous or what the economists would call a zero-sum game. This aspect needs to be kept in the mind of the authorities in Bangladesh who might be tempted to tread the path blazed by the charismatic Indian leader.
The writer is a former Executive Director of Bangladesh Bank. [email protected]