Without Proper Design and Detailed Plan, Collapse is a Certainty

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Demonetization is not a new invention by Modi & Co. In the past many countries did it but none achieved even 10% of the targeted benefit. Morarji Desai's 1978 demonetization was an utter flop then. What made Modi to believe this would do wonders for him despite inherent risks and with no proper plan for mitigation and implementation?

Sheer Violation of Constitution:

Demonetization by an executive order is improper. Government should have proclaimed an ordinance and immediately enacted law. Misuse of authority without proper constitutional authorization indicates highhandedness of the Prime Minister Modi and his dictatorial tendencies.

Article 21 which reads as follows:-

Protection of Life and Personal Liberty: No person shall be deprived of his life or personal liberty except according to procedure established by law.

The hasty decision of demonetization has thrown out millions of people in "informal sector" etc without livelihood. There is no process of law which has been followed. Depriving livelihood is tantamount to depriving life and personal liberty, Supreme Court ruled in the past.

Our Jurisprudence is based on the Blackstone's formulation that: "It is better that ten guilty persons escape than that one innocent suffer".

Huge Cost:

Modi’s startling and sudden move to withdraw 500 and 1,000 rupee notes has left India with only 14% of its currency in circulation. Small businesses, real estate, gold and the informal sectors - which see a high component of cash transactions - have been affected as hundreds of thousands of people spend time in long queues to exchange currency rather than working. The informal sector (which is 40% of economy and provides 65% jobs and livelihood to 850 millions) has come to grinding halt and revival is estimated between 6 months to two years.

Besides a derailed economy due to demonetization, the nation also faces a burden of Rs. 12,000 crores on printing new currency notes. Economy recovery is not expected before 2 years time. GDP lost Rs. 2-3 lakh crores, growth rate is likely to be reduced by 2%, agriculture sector likely affected over 850 million, and the commodities supply-chain-retailing system crashed causing a possible shortage of goods in the coming days.

The new Rs. 2000 notes are as good as worthless since none in the market accept it for payment with very little change available with them. With less than 14% currency left in the economy, retail took immediate beating with sales less than 30% and informal sector coming at a grinding halt with no cash.

Common man need to pay to his vendors, a majority of whom still live in the cash economy for whom PoS terminals, plastic money, PayTm are all still fancy words. While in metros like Mumbai and Delhi people still have the possibility to use plastic money to meet most of the daily needs, in the semi-urban areas and villages, life becoming hell as ATMs are out of money, daily labourers are denied wages because their employers don't have cash and Kirana-wallahs frown when asked for credit for yet another day.

The mob psychology is working in full swing and that psychology is driving the common man into a panic mode, telling him to run fast to the nearest bank branches and ATMs to withdraw maximum possible amount permissible even if he doesn’t need that amount. It is getting clearer that economy is heading to politically motivated and fast reaching point of disaster. While many are still hopeful that this landmark initiative will reap dividends eventually, deeper analysis concludes it is not only poor politics but also an unmitigated disaster.

Cashless Payments:

The idea of a cashless economy sounds great. But it is viable only at high-end convenience stores, shopping centers, malls etc. along with the online shopping industry. The transaction overhead is an added cost to consumer indirectly or directly. Not all commodities have that much margins for seller to pay these costs. The fear of unfamiliarity is very fundamental and money matters are serious; hence the reluctance of consumers to shift from cash to plastic, even for across the counter transactions. As for online transactions horror stories of cyber-crime and sheer unfamiliarity with online payment systems is the basis of this reluctance. Cashless economy will become reality slowly with higher income levels, awareness, education levels and transaction costs coming down to affordable levels.

Modi's demonetization flight took off without flight plan and not knowing how to and where to land. In crash landing, who knows how many will perish and how many will survive. It seems Modi government thought of an ideal situation where people will laud the government and put their personal miseries behind. "Don’t preach the scriptures to someone who is hungry" – was forgotten. Panic is reflected in unstable government guidelines modifying every day creating confusion and chaos for the banking staff as well as common man.

Impracticalities:

Software modifications in ATMs can't be done in a hurry. Modifications are to be designed, planned for implementation. With changing procedures several ATMs are out of service and many ATMs do not adhere with government directives. Result - ATMs exhaust cash within an hour.

With short cash chasing too many goods undesirable deflation is a certainty. Later improved cash position inflation will impact economy.

Summary:

Why hasn't the BJP-led government first targeted the black money deposited in Swiss banks as it was promised during the election campaign? The situation of crisis, in the name of "fight against black money", has affected the poorest the most. Demonetization is bound to leave indelible impact on the nation. Shrinking economy leaves many jobless and recovery will never be the same again. Needless to say we may find ourselves pushed backwards by about 10+ years paying bitter price for Modi's adventures. Modi's decision seemingly is in his and BJP's political interest rather than in national interest and he will go down in history as India's greatest wealth destroyer.


Alok Kumar,
Senior Journalist & Analyst

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