Indian Demonetization

Most of us were delighted to see Narendra Modi  elected as India’s new Prime Minister some two years ago but, in an extraordinary display of bureaucratic ineptitude  lacking in intelligence and foresight, the Indian government moved last Tuesday to withdraw the country’s 500 and 1000 rupee notes. The ensuing chaos has led to even more misery for the long-suffering people of India.  Ostensibly, the move was intended to crack down on tax evasion, but PM Modi has been accused of bringing almost all economic activity down to a grinding halt as insufficient replacement currency notes, particularly smaller denomination notes, were not printed. All over India, people are waiting in long lines to trade in old notes for the new which are in extremely short supply. ATM’s are not adequately stocked with the new notes, and Modi has asked Indians to be patient. It could be a minimum of 3 weeks before sufficient new notes are printed. Meanwhile, its reported that no one has the money to buy their daily necessities, consumption could be on the point of collapse, and stocks of food and other commodities may perish on the shelf. Some claim all it has done is inconvenience a whole sector of low income people, in order to flush out some petty corruption. Untaxed money in one area employs some 35 million people in the construction sector which is now shutting down. This means that these workers may be returning to their villages with no means of support.

Most daily financial transactions in India are conducted only in cash. Businesses across the country have had to shut down because of the currency crisis. The economy and the public have been starved of money. Only the cash in your pocket or what happens to be in your bank account, if you have one, is available for your use. Even so, 50 and 100 rupee notes are a precious commodity and have all but disappeared. True to form, a black market has arisen in cash and in some places the exchange value of the old notes to profiteers is now more than 20%!

While government supporters claim that this ‘short term pain’ will be worth it to the man in the street, and that there will be long term benefits for growth in the economy, its critics have accused Modi of drawing all the blood out of the economy just to score a political point. The withdrawal of notes comprised some 86% of cash flow in India, with this money freely circulating daily. Modi is also accused of being absurd about thinking only now how this radical new initiative is to be implemented, AFTER it has been announced.
Tax evasion has been rife in India for decades. Fewer than 3% of Indians paid income tax in 2013! Evasion is commonplace, the cynics say,  practiced by everyone with government officials, bureaucrats and a whole army of tax accountants there to tell you how to evade taxation. Its a civil offense, no one is sent to jail, no one is afraid of being charged, the courts are so slow it can take decades to start a prosecution, so how can you get people to comply? The government has not introduced or amended any laws, only 4% of untaxed income is held in cash, so Modi has gone for the small end of the problem, his opponents say, and is indulging in tokenism.

What its really about, they say, is how Modi is now trying to show the electorate and his BJP party that he is still the man to clean up the economy befor major state elections in 2017. He is also half way through his term at the centre. So he has tried to focus on this new dramatic issue for the electorate. Critics also accuse his government of not delivering on promised new investment, on higher tax revenues, and on new jobs. His accusers also say that the government has inflated growth figures by adding as much as 2.2% to GDP, by changing the basis for calculation.

Mr Modi,  the Indian people need some immediate and effective action to clean up the currency crisis and the pain which your government has inflicted upon them.

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