Demonetization 9-2-2018

 

2, September 2018                     Demonetization

It’s been always two years since Prime Minister Narendra Modi of India threw the country into turmoil when he decided on a whim to invalidate old paper money. Modi’s secret plan, kept even from his cabinet, gave citizens 50 days to surrender 500-rupee and 1,000-rupee notes in exchange for new notes. Following the 5o day grace period, the old notes would be invalid. Poor citizens were disproportionately impacted waiting in in long lines severely impacting their businesses and lives. The purpose of the demonetization was to punish hoarders and tax cheats who would be forced to expose themselves to unwanted scrutiny from tax authorities.  According to figures released by the Reserve Bank 99 percent of the old bills eventually found their way back in circulation using devious but highly creative methods. Modi’s critics demanded the Prime Minister apologize to the people for disrupting their lives.

“This was a big mistake,” said Arun Kumar, an economics professor at the Institute of Social Sciences in New Delhi. “Employment was lost, output was lost and investment came down.”

Mr. Kumar said Mr. Modi’s decision clearly did not tackle the problem of illicit cash and was “a complete failure.”

The banks suffered a chronic shortage of new notes with ATM’s running dry. The enormous stress and suffocating heat drove several people to suicide while others suffered heart attacks. The cash base economy disproportionately affected the poor. Many economists believe the “demo” crimped India’s economic growth.

Others defended the government’s actions claiming that its actions would discourage tax cheats in a country where tax evasion is a challenging but satisfying “sport”.