DEMONITIZATION

Change comes in many forms to different countries. Some embrace

change, some resist change, and some have change thrust upon
them. Take India, which was plunged into chaos on the night of
November 8th, 2016, when Prime Minister Narendra Modi, in a
48-minute address, announced that some 14 trillion worth of
500 and 1000 notes (roughly $7.50 and $15.00)amounting to
86 percent of all the currency in circulation in Indiawould
become illegal as of midnight. People would have until the end of
the year to deposit them in bank accounts (and pay whatever taxes
and fines the authorities decided to impose on them), but they were
no longer legal tender.

This unexpected shock-and-awe announcement, Modi said,

fulfilled a declared campaign objective to fight black money or,
put another way, cash made from tax evasion, crime, and
corruption. The prime minister declared that his announcement
would not only rid the nation of black money, it would render
worthless the counterfeit notes that were reportedly printed by
Pakistan to fuel terrorism against India.
The initial stunned reaction was followed by a panicky scramble to
unload the expiring notes: the very night of the announcement,
people rushed to petrol pumps to fill up their tanks, jewelers tripled
their sales, and loans were hastily returned. There were unexpected
consequences too: housewives who had salted away their savings
in biscuit tins for a rainy day found their years of thrift would soon
be worthless. In most cases, even their husbands had not known
how much their wives had saved.

But within days the real result of the Modi announcement became
apparentthe severe disruption of normal economic activity.
Inept implementation made a mockery of the initial shock-and-
awe. Not nearly enough new currency had been printed before the
announcement (some estimates were that only 4 percent of
replacement currency was printed), so banks did not even have a
fraction of the money needed to meet consumer demand for new
notes. Long queues snaked in, outside and around banks, foreign
exchange counters (including at the international airport), and
ATMs to change the old notes and withdraw new ones.

But the ATMs were largely empty, since the new notes had been
made in a different size from the old ones and did not fit the
existing ATMs. These needed re-calibration, a process that took
tens of thousands of engineers several months to complete. The
Government had not thought of making the new notes the same
size as the old to avoid this obvious problem.

An additional complication was the fact that there are not enough
ATMs in India: the country disposes ofonly 20 ATMs per 100,000
people, as compared to 77 in China, 114 in Brazil, and 279 in South
Korea. Even South Africa has 70 ATMs per 100,000 people.

In the meantime, thanks to the slow speed of the Mints presses,

cash was in short supply. Banks did not have enough money and so
restricted withdrawals to small amounts of cash that most
customers found insufficient. Though the permissible withdrawal
limits kept changing, being raised and lowered confusingly, they
went up with timeprovided the bank had the cash available when
one asked for it.

Such restrictions are arguably illegalunder which provision of law

can an Indian citizen be denied access to the money in his or her
own account? When, in Parliament, I asked the Finance Minister
to name one country in the world that disallows people from
withdrawing their own money from a bank, he could give me no
reply.

Thirty days after the prime ministers speech (in which he had
asked the public to bear with inconvenience for just 50 days), only
30 percent of the currency in circulation had been restored. The
Reserve Bank of India (RBI) told the Public Accounts Committee
of Parliament on January 18th that it was up to 60 percent. The
State Bank of India estimated that it would go up to 70 percent by
the end of February.The Governments own annual Economic
Survey 20162017, released on February 1st, then claimed that
replenishing the cash supply will be complete by March 2017but
that target too slipped. Cash shortages remained for months more;
the rate of printing new 500 notes fell below target. It took
another three months to remonetize the banking system.

The initial replacement notes all came in the form of an unusually

high denomination (2,000 or $30) that most people did not find
usefulespecially since the governments failure to print additional
quantities of smaller notes meant that for weeks no one was able to
make change for a 2000 note. Since over 90 percent of all
financial transactions in India are made in cash, and over 85
percent of workers are paid their incomes in cash, the everyday
economy was brought to a standstill in the last two months of the
year. The recovery in the new year was slow, and official figures
showed a marked slowdown in the countrys growth rate in the first
quarter of 2017.

If this points to an appalling lack of elementary planning on the

part of the government, the broader consequences have been far
worse. The economy has plunged into chaos, and the decision looks
more like a miscalculation than a masterstroke.

The lack of cash reduced both consumption and demand across the
board. A booming economy that boasted the highest growth rate in
the world suddenly became a cash-scarce economy. Production
went down in all sectors. Small producers could not get working
capital to keep their businesses going, and many had to shut down.
Daily-wage workers (a large majority of Indias labor force) lost
their jobs because firms did not have the cash to pay them.
 All indicatorssales, traders incomes, production, and
employmentwere down in November/December 2016; Indias
GDP, as estimated by former Prime Minister Manmohan Singh,
will shrink by around a full percentage point for the fiscal year. At
the end of January, former Finance Minister P. Chidambaram went
further, saying that he expected the rate to be no more than 6
percent in 20172018 and 6.5 percent in 20182019, extending the
bad news by another two years.

The Economic Survey 20162017 released on January 31st by the

Chief Economic Advisor to the government itself states that
demonetization is an aggregate demand shock, an aggregate supply
shock, an uncertainty shock, and a liquidity shock. It says that the
cash crunch must have affected the informal economy, which
accounts for nearly half of the overall GDP and about 80 percent of
the employment economyone which runs on cash.

Indias unemployment rate has shot up to a five-year high of 5

percent in 20152016. According to the All-India Manufacturers
Organization (AIMO), macro- and small-scale industries and
traders have incurred 60 percent job losses and a 47 percent
revenue loss because of demonetization. Not only are small-and
medium-sized enterprises shutting down; medium and large
infrastructure companies surveyed by AIMO have reported a 35
percent drop in employment and a 45 percent drop in revenue.
AIMO estimated even higher losses of jobs and revenue by the end
of March.

Current estimates tell us that real estate, construction, and

infrastructure, which provide the most employment after
agriculture, are set to lose over 100,000 jobs in 2017. The eight lakh
crore (8 trillion) construction industry, which employs 45 million
people, has virtually ground to a halt, with a drop of 80-90 percent
in income.
There has been an inventory pile-up due to low consumer demand.
Local industriesfootwear in Agra, garments in Tirupur
suspended work due to a lack of money. Several enterprises are
now struggling to their feet, whereas many have not been able to
resume at all.

The informal financial sectorrural moneylenders who provide

loans that amount to 40 percent of Indias total lendinghas all but
collapsed.

R ural India is in bad shape. The fishing industry, dependent

entirely on cash sales of freshly-caught fish, has been deeply
affected. This is even affecting coastal security, as I pointed out
during Question Hour in Parliament, because the cash shortage has
dramatically reduced the number of boats going out to sea to about
10 percent of previous levels, thereby reducing the number of eyes
and ears available to our intelligence agencies monitoring
suspicious activities in our waters.

Traders are losing perishable stocks and farmers have been

unloading produce below costsince no one has the money to
purchase their freshly harvested crops. Peas that Punjabi farmers
sold at 30 a kilo only a year ago were brought down to seven
rupees a kilo two months after demonetization.

The liquidity crisis has deeply affected farm production, farm

prices, and agricultural credit repayments. A study by two
economists at Delhis Indira Gandhi Institute of Development
Research found that in mid-November 2016, deliveries of rice to
rural wholesale markets were 61 percent below usual levels,
soybeans were down 77 percent, and maize nearly 30 percent. The
winter crop could not be sown in time, because no one had cash for
seeds, and the resultant harvest was lower than projected.

All this has been hugely destabilizing in the short term. The prime
minister asked people to be patient for 50 days, but those 50 days
are long gone and it is clear that the process will take much longer
before normal money supply is restored. As for the long term, as
former Prime Minister Manmohan Singh trenchantly observed,
quoting Keynes, in the long run, we are all dead.

The story of demonetization was of unnecessary suffering

throughout the country. As ordinary people clutching their savings
wasted hours standing patiently in queues that offered no
assurance of money at the other end, fatalism battled with
exasperation. Stories of individual tragedies were reported daily
of hospitals turning away patients who only had old notes, children
not being fed, middle-class wage-earners unable to buy medicines
for the sick, and as many as 135 people reportedly dying after
collapsing in bank queues or committing suicide. Ironically, the
richmore likely to hold credit cards and be cashlesshave been
relatively unaffected; the main victims have been the poor and the
lower middle-classes, who rely on cash for their daily activities.
Thus, those at the bottom of the economic pyramid are the
principal victims of this supposedly pro-poor policy. Yet they
have reacted with stoicism, swayed by the governments assiduous
public relations messaging that portrays their difficulties as a small
sacrifice for the nation. If our soldiers can stand for hours every
day guarding our borders, one popular, and hugely effective, social
media meme asked, why cant we stand for a few hours in bank
queues?

The impact of the demonetization in terms of the cash deficit and

its consequences has been particularly severe in Kerala, the state I
represent in Parliament, because of the distinct character of its
banking sector, in which the cooperative sector and Primary
Cooperative Societies play a central role.
Overall, the cooperative banking sector is much more active and
vibrant in Kerala than elsewhere in India. As a result, over 70
percent of the deposits in cooperatives in India come from Kerala;
over 70 percent of the non-agricultural loans and advances made
in India are made in Kerala; and over 15 percent of agricultural
loans and advances disbursed in India are disbursed in Kerala. But
the Reserve Bank of India prevented all 370 central district
cooperative banks and 93,000 primary agricultural credit societies
in the country from depositing or converting old notes after
November 8th, 2016.

Keeping the cooperative banks and societies out of the note

exchange process was particularly damaging for Kerala. Dairy,
agriculture, and the market for fish have all been severely affected.
Tourism, vital for Indias economy, was hit hard, albeit briefly.
Foreigners have been spared tragedy but not inconvenience, for
they were only allowed to cash a hundred dollars a day and often
had to go from bank to bank to get the money. In November 2016,
for instance, tourists returned without seeing the Taj Mahal
because their notes were not accepted at the ticket window, and
travel plans were curtailed by lack of new money.

Tourism works by word of mouth: how will one regain the trust of
foreigners that have already spread the word of their harrowing
ordeals in demonetizing India?

While it is clear that the government had not done its homework
before launching the schemeand in a manner typical of the Modi
Administration, had consulted very few officials within itit is not
the prime ministers style to be on the defensive. His propagandists
boasted of a surgical strike on black money, corruption,
terrorism, and counterfeiting. Over time, it became painfully clear
that those objectives had not been met. A surgical strike is
supposed to be precisely targeted, but it is clear that the collateral
damage is so extensive that the pain it has inflicted outweighed any
tangible gain, at least in the short term.

In the beginning of December 2016, new victims surfaced, ranging

from salary earners trying to get money out of their bank accounts
and pensioners unable to receive their monthly allowances, to
fathers and brides unable to finance long-planned weddings at the
peak of the Hindu marriage season. As late as the end of January
2017, Indians were surviving on less than half the cash that had
been in circulation at the beginning of November 2016. Shockingly,
this was all happening in a country where cash represented 98
percent of all transactions by volume and 68 percent by value.
While the cash is now largely back in circulation, memories of
demonetization have shaken many peoples faith in the currency.

Indeed, the Modi government itself has effectively conceded that

demonetization has failed and has had a severe adverse economic
impact on India. In its list of achievements touted in the Economic
Survey 20162017, the list takes note of assorted schemes
continued from the previous regime, but fails to mention
demonetization. The Survey also accepts that demonetization
resulted in growth slow[ing], as demonetization reduced demand
(cash, private wealth) [and] supply (reduced liquidity and working
capital and disrupted supply chains), and increased uncertainty
and job losses, decline in farm incomes, social disruption,
especially in cash intensive sectors. To this must be added the
economic cost of printing and replacing notes, estimated at 1.25
trillion.

Unfortunately, there is no evidence that any of the declared

objectives of the scheme will be attained. In a largely cash-fueled
economy, all cash is not black money and all black money is not
cash. In fact most of Indias black money has been invested in real
estate and other forms of property, gold and jewelry, investments
in property abroad, and round-tripping that has seen the money
return to Indias stock market as foreign investment via countries
like Mauritius. The Modi move, therefore, touches only a small
proportion of black money assets.
Worse, the government had hoped that the sudden move would
eliminate a large portion of the black money holdings altogether
from the governments liabilities, since it was assumed that many
hoarders would destroy their money rather than attract the
attention of the taxman by declaring it. Various agencies of the
government had initially estimated that around 25 to 35 percent of
the demonetized banknotes would not be deposited by the
stipulated dates. On November 23rd, 2016, the Attorney General of
India told the Supreme Court of India that the government
expected that notes worth four to five lakh crores (some $800
billion) would be rendered worthless by not being deposited.

But those who held large quantities of black money seem to have
been more resourceful than the government and have found
creative ways to launder their money, with the result that most of
the estimated black money in circulation has flooded into the
banks. Some well-placed friends of the ruling party were allegedly
tipped off before Modis announcement, leading to suspicions that
the well-connected may have had time to dump their black money
stocks. Though the Reserve Bank of India has so far refused to
release official figures, claiming to a parliamentary panel that they
are still counting the old notes received, experts agree that the
amount of black money that will eventually be wiped out will fall
significantly short of the initial estimates. Indeed, there may be no
liability write-off at all.

It has been widely reported that, by the end of December 2016,

around 95 to 97 percent of the demonetized notes in circulation had
reached the banking system. Indians abroad and the Central banks
of Nepal and Bhutan, which keep some of their foreign exchange
reserves in Indian currency, hold a part of the remaining notes. The
actual value of notes rendered worthless will be known only after
June 30th, 2017, which is the deadline for Non-Resident Indians to
exchange any demonetized cash that they may hold at specified
offices of the RBI.
However, it already appears to be clear that a maximum of only two
to 3 percent of the demonetized notes will remain undeposited,
unequivocally indicating that the demonetization exercise has
failed to achieve its primary objective of cleansing the economy.
The RBI Governor has conceded that there is no impact at all of
demonetization on the RBIs balance sheet.

And since corruption seems to be a way of life in India, it will not

be long before the old habits of under-invoicing, fake purchase
orders and bills, reporting non-existent transactions,and
straightforward bribery all generate new black money all over
again. The governments plan is therefore likely to be ineffective
beyond the short term, since it does nothing to control the source
of black money.

Indeed, in the first six weeks after demonetization, the Income Tax
Department announced it had seized 5 billion in unaccounted
cash from people hoarding currency they could not
explain.Strikingly, 920 million of their seizure happened to be in
brand new 2000 notes! Cases of corrupt officials, including bank
managers, being caught red-handed in illegal transactions have
been reported, all of which involved the new currency. Some bank
managers worked from 9 am to 5 pm telling people they had no
money, and then from 5 pm to 9 pm gave money through the back
door to money launderers for a fee.

Though I am by no means tarnishing all bank mangers for the sins

of a few, the fact is that in its drive against corruption the
government has created new forms of corruption. Black money
clearly continues to be generatedit has merely changed its color
and shape. Black money has become white by way of pink! And, of
course, 2000 notes will take up less space in the briefcases of the
corrupt than 1000 notes did.

The Prime Ministers other declared objectives have not been met,
either. Demonetization is not a necessary exercise to achieve the
objective of thwarting counterfeiting, and the governments citing
of such an aim displays considerable overreach. Media reports
confirm that counterfeit bills of our freshly designed currency notes
are already in circulation. This could, however, have been
prevented by enmeshing strong security features with the design.
It seems that the government has missed the opportunity of
ensuring the adoption of such security features in the new 500
and 2000 currency notes that it launched post-demonetization.
This indicates a lack of foresight and inadequate planning on the
governments part. There appears to be no special new watermark,
no security thread or fiber, no new latent image, and certainly no
nano chip, as BJP supporters were boasting on social media!
Will a mere change of color and size render the notes safe?
Shockingly, RBI has admitted that three different versions of the
500 note have been printed in haste. If all three versions are
authentic, one can reasonably assume that this is going to confuse
the public and make it easier for counterfeiters to get away with
their own fake versions.

B ut still, how big of a problem is this? A study conducted by the

Indian Statistical Institute in Kolkata, under the supervision of the
National Investigation Agency, estimated that the value of fake
Indian currency notes in circulation was about 400 crores, which
amounted to only roughly 0.03 percent of the withdrawn currency.
It also indicated that the ability of banks to prevent counterfeit
notes being deposited was limited, since their machines often fail
to identify fake notes and bank tellersoverwhelmed by the
pressure of the astronomically high level of deposit activity in the
50-day window periodcould not make the manual effort to
identify fake notes.

As a result, every indication suggests that several fake currency

notes have slipped through into the banking system and become
legitimized. Thus, far from hurting counterfeiters, demonetization
may have helped legitimize fake currency by having it exchanged,
amid the chaos, for new notes.

Prime Minister Modi also cited among his objectives the

undermining of terrorist and subversive activities. He even went so
far as to say, on December 27th, that through the note ban, in one
stroke, we destroyed the world of terrorism, drug mafia, human
trafficking and the underworld.

But empirical evidence collated from data on terrorist strikes and

fatalities from the Global Terrorism database and the South Asian
Terrorism portal shows that it is very difficult to establish a causal
relationship between the number of terrorist strikes on Indian soil
and the absolute levels of currency in circulation. In any case, we
are seeing reports of terrorists being caught or killed in Kashmir in
possession of large quantities of new notes. So where is the claimed
effect on terror financing?

Meanwhile, the goalposts kept shifting: the Reserve Bank of India

issued no fewer than a hundred notifications on demonetization
some 138 in 70 days until I stopped counting! Each of these was
intended to tweak an earlier announcement. Many are referring to
this once-respected institution as the Reverse Bank of India for
its frequent reversals of stance on such matters as the amounts of
money permissible to withdraw, the last legal date for withdrawals,
and even whether depositors would have their fingers marked with
indelible ink so they could not withdraw their money too often.

Demonetization has caused serious and seemingly lasting damage

to Indias fledgling financial institutions, most notably the RBI,
which conspicuously failed to exercise its autonomy, to anticipate
the problems of Modis scheme, prepare its implementation better,
and to alleviate its impact. The United Forum of Reserve Bank
Officers and Employees wrote to the Government on January 13th,
2017, pointing to operational mismanagement, which has
dented RBIs autonomy and reputation beyond repair. The
inexplicable silence of its governor, Urjit Patel, has reduced him to
a lamb. But this silence of the lamb is eating Indias citizenry
alive.

In one recent change of declared objective, the prime minister and

finance minister are now talking about moving India to a cashless
societyan idea and a phrase that was not mentioned even once
in Prime Minister Modis original November 8th, 2016, speech.
(This was hastily amended to a less cash society when the
absurdity of the proposition was widely pointed out.) But they seem
blissfully unaware of the fact that over 90 percent of retail outlets
do not even have a card reader at the point of sale, that half of
Indias population is unbankedIndia is home to 21 percent of the
worlds unbanked adultsand that the overwhelming majority of
their nationals still function in a cash economy. In fact, 97
percent of retail transactions in India are conducted in cash or
check. Few consumers use digital payments: only 11 percent used
debit cards for payments last year. Only 6 percent of Indian
merchants accept digital payments. And fewer than 2 percent of
Indians have used a mobile phone to receive a payment, compared
to over 60 percent of Kenyans and 11 percent of Nigerians.

As columnist T.J.S. George asked: Are we to assume that daily

wage earners, small-time farmers and sundry hawkers who dont
even know what is a bank will be happy to see the country getting
rid of cash, rather than vague things like illiteracy and poverty?
The plain fact is that the digital infrastructure for cashlessness
simply does not exist in India.The aforementioned Economic
Survey acknowledges that digital transactions face significant
impediments.

Though the government hopes many will use their mobile phones
for cashless payments, the Survey enumerates approximately 350
million people without cellphones (the digitally excluded); 350
million with regular feature phones, and 250 million with
smartphones. A mere 34.8 percent of the country has internet
access, and there are around 200 million users of digital payment
services. A 2015 World Bank study of bank-account usage and
dormancy rates across different regions found that only 15 percent
of Indian adults reported using an account to make or receive
payments.

In such an environment, a cash scarcity is economically crippling.

Moreover, most mobile applications and internet banking websites
are largely available in English, a language not understood by a
majority of the people.

There are also appalling deficiencies in cyber-security. Ours is a

country where cyber-crime flourishes; the governments drive for
cashlessness may be creating new vulnerabilities and new victims.
Expecting India to become a less cash economy at this point is
like removing 86 percent of a persons blood circulation and then
asking him to dance.

Studies confirm that most Indians who use cards use them just to
withdraw cash from ATMs; making payments by plastic is still
something of a novelty. Multiple storieswhich might have been
hilarious, if they were not so pathetichave been told of people
patriotically trying to use plastic at the few outlets that do accept
cards and being told the server is down; of salesmen frantically
rushing out onto the street from their shops with card-readers in
hand hoping to catch a better signal; and of single transactions
taking a dozen minutes because the card-reader keeps breaking
down in mid-execution.

India offers some of the slowest broadband speeds in the world,

and at least a third of the population has no reliable electricity
supplies. It is all reminiscent of Marie Antoinette: if they do not
have cash, let them use plastic!
The Government seems to be engaged in an exercise to furnish the
penthouse of a building whose foundations it has not yet dug. As
the Harvard Business Review noted, Indias digital state (it ranked
42nd out of the 50 countries we studied in our Digital Evolution
Index), does not engender the threshold of trust needed for
cashlessness to take hold in a meaningful way.

Worse still, there is a transaction cost involved in each digital

payment that is absent in any cash exchangeso using less cash
actually involves more expenditure for the payer. This obviously
affects ordinary citizens who are used to cash, which involves no
transaction costs for them. It is also expensive for merchants to
adopt digital payments, which affects them adversely. Merchants
highlight the high cost of even trying out these machines as a factor
that is driving down interest in acceptance of digital payments. I
was thinking of installing a card machine at my store. But the banks
asked for a 5,000 deposit, said one merchant in a recent study.
The government is doing nothing to ensure point-of-sale machines
are made available to traders, small retail outlets, and small and
micro enterprises, free of cost, as I suggested in Parliament, or to
remove charges for all cashless transactions.

The financial implications of moving to a less cash economy have

raised related concerns. Dark suggestions have been made that the
real beneficiaries of demonetization are the handful of companies
that specialize in digital payments, especially by mobile phone.
(Only 2 percent of Indias nearly one billion mobile phone users
have ever used their phones to make digital payments; although
this figure began shooting up after demonetization.) In addition,
digital transactions, by leaving a traceable record, add to the states
ability to monitor individuals expenditures. As former Finance
Minister P. Chidambaram asked,

why should a young adult be forced to disclose that she bought

lingerie or shoes or he bought liquor or tobacco? Why should a
couple be forced to leave a trail of a private holiday? Why should an
elderly person leave a record that he bought adult diapers or
medicines for his ailments? Why should the government or its
numerous agencies have access to our lives through access to Big
Data?

These are serious questions that call into account the Governments
insouciant announcement of objectives that were never presented
to Parliament for approval until three months later, when the
policy was irreversible and the damage had already been done.
Equally serious is the continuing concern about the legality of the
governments action. The entire demonetization exercise had been
conducted by the issuance of gazette notification no. 2652 by the
Joint Secretary, Finance, under Section 26(2) of the Reserve Bank
of India Act of 1934. This provision gives the Union government the
limited power to demonetize certain series of the countrys
currency through a notification. This provision does not, however,
give the government the power to freeze bank accounts through
limits on cash withdrawals, disrupt normal banking operations,
and impose mandatory disclosure requirements (such as identity
cards) while depositing cash into bank accounts or exchanging old
notes.

The relevant provision of the aforementioned Act unambiguously

states:(1) Subject to the provisions of sub-section (2), every
banknote shall be legal tender at any place in India in payment or
on account for the amount expressed therein, and shall be
guaranteed by the Central Government.

This means that the money every Indian holds in her hand or in the
bank is a debt guaranteed by the government to her. Currency thus
represents a public debt owed by the government to the holders of
banknotes. I promise to pay the bearer of this note ... vows the
RBI Governor on every Indian currency note. Every currency note
is a contract between the bearer and the state, something that has
been signed in good faith and ratified by the prevailing law of the
land. The questions that then ariseand have still been left
unanswered by the government and the courtsinclude: Can this
contract be repudiated unilaterally by the state? On what legal
grounds can the RBI write off notes that it had promised to honor?
And while we are considering the issue of legality, why has the RBI
not placed in the public domain the Minutes of the RBI meeting of
November 8th, 2016, that was supposed to have requested the
prime minister to make the announcement he did? Is it for fear of
revealing the real nature of the meeting would only confirm the
Banks surrender of its autonomy to the government? Only eight
out of 21 Directors attended, and four of them were officials. Only
four independent Directors were present.

This entire decision-making process was a Government exercise

trampling on the autonomy of the RBI, rather than a decision of the
institution meant to be in charge of Indias monetary policy.

Among the longer-term effects of this monetary disruption have

been unemployment and severe dislocation of Indias informal
economy; the collapse of many marginal businesses unable to
survive the ongoing loss of income; severe reductions in crop yields
and problems pertaining to agricultural credit; and the accelerated
flight of investment out of India.

Even more worrying is the prospect of a long-lasting decline in

Indias so-far robust economic growth, and the danger that it will
push more Indians who were in the process of escaping poverty
right back into it.

The burden of demonetization has undoubtedly been regressive, as

it has most negatively affected the poor and the unbanked, which
have had to lose their daily wages to stand in queues or have lost
their jobs because of non-functioning markets; and they are the
ones who are expected to transform their financial habits. The truly
cashless are the poorest Indians, who depend on cash for their daily
survival: as the Harvard Business Review puts it, this unfortunate
crisis is a case study in poor policy and even poorer execution.
Unfortunately, it is also the poor that bear the greatest burden.
While many Modi fans are blaming the implementation rather than
his intent, the fiasco was inherent in the design of the policy.
It is clearly a symbolic policyhigh ambiguity, high conflict, top-
down, centralized, and authoritarian. There was no policy
skeleton, and, worst of all, no cost-benefit analysis, no evidence
that alternative policy options were considered. It is clear no
impact study was done, judging by the blizzard of new official
notifications every day, tweaking and fixing the regulations.
The government has presided over a non-transparent policy
environment that seems entirely unconducive to the creation of a
cashless society.

This is a manufactured crisis. The government, for no public

benefit anyone can understand, has thrown a spanner into the
works of the Indian economy. It is an ill-conceived scheme, ill-
planned, poorly thought through, badly implemented, and
disastrously executed. Demonetization failed in its stated
objectives. Deep rooted problems, like corruption or terrorism, are
not amenable to blunt, one-off policy instruments. Demonetization
was the equivalent of an anti-stimulus policy intervention, and
the consequent drag on demand has been significant. The
government liked to boast of being the worlds fastest-growing
major economy; it is a boast it can no longer make, since, thanks to
demonetization, it slipped behind China again.

Modi came to power in 2014 promising to boost growth, create jobs

for Indias youthful population, and encourage investment.These
objectives lie in tatters with his ill-considered demonetization. He
abolished the central governments Planning Commission to signal
that the days of top-down statist control of the economy were over,
but his demonetization decision has brought back the worst days of
government control. His reputation for being an efficient and
competent manager is irremediably stained by the implementation
disaster. How long it will take for India to recover is anyones guess.