How Modi Ruined Rural India with #Demonetization

It has been more than 7 months since that fateful day in November 2016 when Narendra Modi announced his harebrained scheme of withdrawing 86% of the circulating cash in the country overnight and making them worthless as legal tender – a move that was unknown even to his finance minister, according to reports, for the ostensible (and dubious) reason of secrecy.

At that time, many commentators, yours truly included, savaged the government and Mr. Modi (for, in this case, personal responsibility was clearly warranted, as the decision was privy to so few even in the ruling party) for a completely thoughtless, stupid, and ruinous decision.

I wrote in a piece in Frontline, that the move was seriously flawed because the penetration of non-cash means of commerce in rural India was very poor, and rural India would therefore be seriously hit by the demonetization move.

Many supporters of Mr. Modi defended him stoutly, suggesting, rather ludicrously, that a move that would remove 86% of the cash in the country overnight would have no negative consequences at all. Most leading economists the world over said that the move would cause a significant dip in India’s GDP. Former PM and renowned economist, Dr. Manmohan Singh, said in Parliament that the move would lead to a 2% dip in GDP.

When early economic indicators following the demo move did not show the economy in a tailspin, Mr. Modi took the opportunity to declare victory over his detractors by saying that:

[su_quote]Hard work won over Harvard.[/su_quote]

He forgot that there is a gap between lightning and thunder.

Well, now the shit has really hit the fan. As Harish Damodaran correctly said in the Indian Express on June 12, 2017,the current crisis in India’s farming sector is directly because of demonetisation, because rural agricultural markets are entirely cash-based, and so when Modi sucked the cash out of the system with his blundering scheme, there was a huge cash shortage. As a result, farmers were paid much less than what their crops were worth, because buyers simply did not have the cash to pay them more. Now, every state is being hit with demands of a loan waiver, because farmers are in severe crisis. The write-offs of these loans is going to further devastate the economy.

The most telling admission of failure is an article by one of the right wing’s most eloquent spokespersons, R. Jagannathan (aka The Jaggi), who is the Editorial Director of the Hindu rightwing mouthpiece, Swarajya. In an article recently, Jaggi has finally admitted that demonetization is a failure. Jaggi has correctly quoted and agreed with Damodaran’s excellent analysis, and further said that the total loss due to farm loan write-offs will be in the range of Rs. 2.57 lakh crores, or 2% of GDP, based on a Bank of America-Merrill Lynch estimate – a figure that reminds us of Dr. Manmohan Singh’s prediction of the loss due to demonetization – except that it now seems that the 2% is an underestimate, because it only talks about the loss due to farm loan writeoffs. It does not consider the loss due to the wholesale destruction of the economy and the farming sector. As Jaggi says,

[su_quote]This means the DeMo damage could be in the region of Rs 3.5-4 lakh crore at the minimum. (that would be 3% of GDP).[/su_quote]

As Jaggi also says,

[su_quote]DeMo will damage the fisc like nothing else before this. Two consecutive droughts did not do as much damage as DeMo.[/su_quote]

Not only that, DeMo has failed to achieve its main stated objective as well – the elimination of black money and counterfeit money. As Jaggi again says,

[su_quote]the fact that even five-and-a-half months after the demonetisation window for old notes closed on 31 December we don’t know how much money has come back to the system tells its own story. The total value of Rs 500 and Rs 1,000 notes outstanding on 8 November was Rs 15.44 lakh crore. If the deposits have hit this number or even exceeded it, it would mean not only a major embarrassment for the government, but also the RBI. It would imply that fake notes got exchanged for new notes.[/su_quote]

And this as well, from the same article:

[su_quote]there is not much evidence that tax collections have spiked due to DeMo or even that the tax base in expanding. The poor collections under the Pradhan Mantri Garib Kalyan Yojana indicate that no big disclosure of black money was witnessed, and even if we assume that a large chunk of the deposits made during November and December may have been unaccounted money, the government will have to unleash a tsunami of tax terrorism that will surely be counter-productive. The need of the hour is to bring normality to economic activity. The last thing we need, as we stand on the threshold of the implementation of the goods and services tax (GST), is an unchecked taxman let loose on unwary taxpayers when GST is likely to create its own fiscal chaos and disruption.[/su_quote]

What does all this mean?

It means that India is being ruled by AN INCOMPETENT PRIME MINISTER, at the very least (whether he facilitated corruption is a second question). He has ruined the Indian economy with a stupid, ill-considered move. An overweening belief in himself, to the exclusion of advice from even a close set of real economic/financial experts, is undoubtedly the biggest cause of this debacle. If Modi had even consulted those with some economic/financial knowledge in his own party, he would have realized that demonetization is a blatantly STUPID move. But the desire to block everyone out and reliance only on a small coterie of sycophants has caused this catastrophe. For comparison, consider that the 2G scam was alleged to have cost the exchequer 1.76 lakh crores. The Demonetization SCAM is going to cost the exchequer and the people of India 4 lakh crores. Will we see the same kind of outrage over this?

One thing that Jaggi did not mention is the obvious question: if fake notes were exchanged for good new notes, as he says, who benefited? Also, if all the money supposedly in circulation made it back to the bank, then was money laundered with the connivance of people high up in the banking system? Who benefited? How big is this scam?

 first published here


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Dr. Seshadri Kumar Written by:

Seshadri Kumar is an R&D Chemical Engineer with a B.Tech from IIT Bombay and an M.S. and a PhD from the University of Utah, U.S. He writes regularly on political, social, economic, and cultural affairs at

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