Automated Teller Machines (ATMs) have run dry once again in several parts of India, bringing back ugly memories of November 2016, when the Bharatiya Janata Party-led government decided to devalue high-rank currency notes at four hours’ notice.
India’s Finance Minister Arun Jaitly has said the current cash crunch is temporary. The country’s central bank – the Reserve Bank of India (RBI) – in a statement on April 17 contested that there is a cash shortage.
It said a few pockets may have felt the shortage due to logistical issues. The bank said it is stepping up the process of printing bank notes, especially 500-rupee notes, in all its four printing presses and “taking steps to move currency to areas which are witnessing unusually large cash withdrawals”.
However, reports from across the states said there is a shortage of cash at ATMs, with some people claiming the crunch was a result of hoarding. Bankers on condition of anonymity said there has been a unusually high demand for cash, especially in the last two months.
The 2016 move by Prime Minister Narendra Modi to devalue high-value notes to fight corruption and fraud, check the flow of black money or unaccounted wealth and curb terrorism brought to a standstill the lives of millions of Indians who ran out of cash literally overnight.
The unprecedented cash crunch resulted in serpentine queues outside ATMs across the country – resulting in 33 deaths just in the first week after the scheme was unleashed on unsuspecting citizens. Some died due to shock, others while standing in queue, media reports said.
Demonetisation and the Black Economy
While Modi believed his masterstroke of derecognising 86 per cent of currency would boost the Indian economy, business pundits have refused to buy this argument – not then, and surely not now.
Yashwant Sinha, a former finance minister, has gone on record to say that demonetisation failed to achieve even a single one of the objectives listed by the government on November 8, 2016.
Deepak Nayyar, professor of economics at the prestigious Jawaharlal Nehru University, believes the economic reasoning behind the decision was flawed and the main objective was political.
Arun Kumar, an expert on black economy, points out that the negative impacts of demonetisation on the unorganised sector and the rural economy in particular are so severe that even future generations will suffer. In his book “Demonetisation and Black Economy”, Kumar has detailed the futility of this exercise.
He argues that demonetisation failed to destroy black money. “One, very little of black money is held in the form of cash, so demonetisation was not going to destroy much of the unaccounted wealth. Two, even if the government did want to track down unaccounted cash, demonetisation itself was not the best way to go about it since it hurt the entire population while trying to ensnare a small number of holders of illicit cash,” he writes.
Kumar’s suggestion is that a better alternative would have been to collect, analyse and follow up on information on large cash withdrawals from banks and thereby identify possible flows of unaccounted wealth.
He says if the government was keen on demonetisation, it could have explored “other less destructive options”.
In August 2017, the RBI’s annual report which stated almost 99 per cent of banned currency notes had been deposited back in banks put the government in a tight spot as it nullified the massive exercise. Tax evaders managed to legalise their black money by using proxies for deposits and making their cash valid.
The World Bank, in its latest report released this week, also acknowledges the disruptions from demonetisation and the implementation of the Goods and Services Tax to India’s economy.
However, it says the economy is recovering from the twin effects and has predicted a growth rate of 7.3 percent for India in 2018.