Few of the achievements so far :

Among India’s middle class, Modi’s “surgical strike on black money” still appears to be popular. It’s the old “vegan fallacy” — if something tastes terrible, it must be good for you. Enough Indians are suffering that they believe it must be for a greater cause. It’s a moral project, not an economic one. Stand in line, we’re told, and you honor our brave soldiers at the border.

But considering the loss Indian Economy is bound to suffer, the achievement is negligible.

Cash recovery has been less than 6% of the total undisclosed income seized from tax evaders, shows an HT analysis of data from tax raids from the financial year 2012-13 onwards. In addition to cash, a great deal of black money is converted into gold and jewelry, real estate including land, shareholdings and so on. The present demonetization scheme does not have an impact on black money held in those forms which do not constitute cash holdings. [Why govt’s demonetisation move may fail to win the war against black money]

What’s changed in a week?

  • Well, for one, it’s become clear that the government was simply too cavalier in its planning. Now that 86 percent of India’s currency is no longer valid, the central bank has struggled to print replacement denominations — and the new notes are the wrong size for existing ATMs. Modi’s asked people to be patient for 50 days, but the process could take as long as four months.

You have to wonder if Modi truly sought expert advice, or relied once again on a small and trusted set of politicians to determine policy. India’s simply too big and complex for shock and awe. Large parts of the rural economy use cash for 80 percent of transactions and have been hard-hit. In seafood-mad West Bengal, for example, the fishing industry is in a state of near-collapse; in the wheat-growing states of the northwest, farmers halfway through the sowing season have run out of cash to buy seeds.

Few villagers have access to an ATM. Most have to trek to a bank branch to change their cash, which means losing out on crucial days of labor. Many Indians, particularly women, still don’t have an active bank account. Finance Minister Arun Jaitley wondered aloud how many poor people would even have 1,000-rupee notes — probably a rhetorical question, but surely it shouldn’t have been. Someone should’ve sought the answer before shutting down India’s financial system.

But will that support last?

  • The government’s plan is likely to be ineffective in the long term. Economists agree it will have no effect on the generation of black money through corruption.

Meanwhile, estimates of the amount of black money that will eventually be recovered vary widely. The optimists (wrongly) think enough cash will be destroyed by hoarders that the central bank will be able to pay a hefty dividend to the government. Others point out that a very small fraction of black money tends to be held as cash and that there are a dozen ways still available to launder that fraction. The government has largely failed to close these loopholes. Worse, rumors of the demonetization.

India’s Scramble to Switch 23 Billion Banknotes
Even in the best case scenario — that a significant proportion of the outstanding currency is destroyed — there’s no reason to suppose it was all black money and not the savings of regular citizens scared of harassment by tax authorities. Modi has dropped dark hints that this is just the beginning, raising fears that business should now worry about of constant tax raids and the reopening of decades-old cases. In fact, that that this is just the beginning, raising fears that business should now worry about of constant tax raids and the reopening of decades-old cases. In fact, that dark new age may already be here.

Even setting aside the painful adjustment, the long-term effects of this monetary shock on India’s informal economy could well be severe; a large proportion of marginal firms may not survive the loss of a fortnight of income. The informal financial sector — unregistered moneylenders who provide loans to businesses worth 40 percent of total bank lending — will be decimated.

The costs to the government could be equally high. Modi’s administration has put political considerations over economic detail once too often — and this time, it’s severely dented its image for efficiency and practicality. Even if the long queues vanish in the next few weeks, that damage to the government’s reputation is permanent.

View: India’s new strike against black money backfires – The Economic Times

Initially, people welcomed demonetization as it is said to curb black money, but later developments and reports have changed the initial response for a vast majority, including me. Only time will say what is the real outcome. Some of those news reports which contradict the claims of government.

  1. If the demonetization measure introduced by the government has to be successful it should result in immobilization of a large amount of black economy. The large volume of cash deposited by the public during the last few days in banks is actually white money.
  2. More than NDA or UPA we believed in Raghuram Rajan(who was the RBI Governor till September 4th). He had said that demonetization may not help in rooting out black money. Here’s What Raghuram Rajan Thinks Of Currency Demonetisation
  3. History of similar measures in various parts of the globe gives a different picture. A brief history of India pulling banknotes from circulation [Distrustful citizens and canny black marketeers: Lessons for India from the history of demonetisation]
  4. It was said that the move will crush fake currency, it too is put to question. There were currency notes worth about Rs17 lakh crore in circulation across the country, and according to the RBI, about Rs400 crore of this was believed to be fake currency. So basically to destroy Rs400-crore fake currencies, the circulation of total Rs17 lakh crore was blocked. While the black money converted into white may come into the banking system, how much of the fake currency will get weeded out? If the fake currency is already in circulation, it only means that one or two of the notes that you or I deposit in the bank will turn out fake. Who takes the hit in that case? The common man. ‘Counterfeit notes account for just Rs. 400 crore’’
  5. The poor have become mules to turn the black money of the rich into white as they charge a premium to do so. Poor people become black money mules for rich
  6. The super rich are left unscratched.The List: Who’s Who & How Much
  7. It is said to be politically motivated. PM using it in election campaign almost confirms this fact. 10 Reasons Why BJP’s Demonetization Move Is An Unmitigated — And Politically Motivated — Disaster
  8. There were reports that the currency had added security features which are said to be a hoax. It was reported that the new magenta Rs. 2,000 notes have all been printed at a facility in India but, barring the design, the security features remain the same as the old Rs. 500 and Rs. 1,000 notes, a senior government official. No time to add new security features in notes says official
  9. In January 2014. The Congress-led UPA government had announced that all currency notes issued before 2005 would be withdrawn by March 31 that year and must be exchanged for new notes with more safety features. The BJP’s Meenakshi Lekhi had ripped into then Finance Minister P Chidambaram.”The latest gimmick of the finance ministry to demonetise the notes before 2005 is an attempt to obfuscate the issue of black money stashed outside the country… This measure is strongly anti-poor,” Ms. Lekhi had then said.‘Anti-Poor’ Said BJP When Congress Government Had Announced Note Ban

Consequences of the demonetization shock

The big fish who have amassed huge wealth from black money, i.e., tax-evaded income, hold most of it as real estate, gold, and other real assets. Some of it is also held as assets abroad. None of these will be affected by demonetization. A relatively small portion is held as non-bank money to finance “black” transactions. This component is the target of demonetization.

There is also no guarantee that the problem of black money will go away forever. It is possible that after a passage of time the people will revert to their old bad habits and the black money problem will reappear in society. Moreover, the present scheme only covers the cash component.

THE COMMON MAN

People are confused as they don’t know whom to believe, and what really awaits them. The sentimental approach by PM is not enough to address the concerns. It will be helpful if the government is able to provide logical answers.

This has lead the Citizen’s of India to be divided into skeptics and believers in their view about demonetization. As days pass by the number of skeptics is increasing .

Demonetization can not be undone; the only option we have is to wait and hope(pray) that it somehow helps our economy.

Let me know if you guys have any opinions in comments section below.

Advertisements