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Today's Paper | November 24, 2024

Updated 12 Dec, 2016 02:49pm

Rupee ban could unleash India's economic potential

When immorality is tolerated at the table ─ or under it ─ it enters the conversation and becomes a part of life. It stains deeply personal milestones like buying a house or celebrating a marriage.

Eventually, corruption becomes as normal as drawing a breath.

In India, corruption is a tough villain, almost invincible. More devious than any Bollywood baddie, it is everywhere but nowhere. Real but incorporeal, it is difficult to destroy because it leaves no trace or paper trail.

Until last month. On Nov 8, corruption came under the cross-hairs of Indian Prime Minister Narendra Modi, with his decision to cull the two highest-denomination banknotes, the 500-rupee and the 1,000-rupee notes from circulation. By value they made up around 85 per cent of Indian currency.

When the move was announced in a 40-minute televised address to the nation, most of the world was watching another democracy poised at a decisive point ─ the election between Donald Trump and Hillary Clinton.

Modi presented his policy as a chance for every citizen to fight corruption. The underlying logic was that these were the notes used most often by the corrupt, who evade taxes and fuel an underground economy.

Known in India as black money, this parallel economy is estimated by the World Bank to be at least one-fifth the size of India's gross domestic product. Notes in these denominations were also found to be counterfeited by terrorists and used to pay for bombs and bombers.

At midnight of Nov 8, 85pc of the country's cash, worth nearly S$300 billion, became just a pile of paper. If stacked up, it would be 300 times the height of Mount Everest. If laid out, five times the distance to the moon and back.

For an economy where most transactions ─ 98pc by volume and 75pc by value ─ are in cash, the shock can't possibly be overstated.

Yet, there is a strange and surprising calm in its wake. Queues at banks to exchange the worthless money for new or smaller notes have been serpentine but, remarkably for India, largely orderly thus far.

Because not enough new notes were printed and because the ATMs needed to be retooled to dispense them, a limit was set on how much could be withdrawn at a time.

Yet, social media posts displayed mostly forbearance and snarky humour. It's more than a little puzzling how inconvenience could be lightly worn in a matter as personal as the government rationing access to money in your own bank account.

India's opposition parties said in Parliament last Friday that 100 deaths had been linked to demonetisation and demanded the government apologise and roll back the move.

But this is by no means a popular demand. It's almost as though a nation, its great promise betrayed time and again by poor leadership, has stretched a cautious hand to Modi.

Opinion in the media has been less forgiving. One month into demonetisation, economists say the move will hit India's growth rate, with evidence mounting of shrinking manufacturing and consumer spending.

Fears are that crop harvests will be hit too, because farmers are in bank queues when they should be in the fields for the winter sowing season.

Lawrence Summers, the former US treasury secretary, writing in the Financial Times, described the move as "the most sweeping change in currency policy that has occurred anywhere in the world in decades".

Although Summers advocates abolishing the US$100 note and has welcomed the phasing out this year of the €500 note ─ the so-called Bin Laden note because of its use by terror financiers, drug dealers and money launderers ─ he saw the Indian attempt as disruptive and triggering no real change.

The Economist thought Modi had done a botched job out of a misplaced faith in his technocratic skills.

Kaushik Basu, a former World Bank chief economist, writing in The New York Times, called it a major mistake, albeit a well-intentioned one.

Popular Times of India columnist Shobhaa De wrote that Modi was living in a bubble, "an isolated, lonely man" committing "political harakiri".

As I see it, Modi has struck a chord with the honest, hard-working folk who have long watched politicians not only turn a blind eye to corruption but also enable it.

In its sheer ambition, Modi's move compares to American president Franklin D Roosevelt's dismantling of the gold standard, with which he pulled the US out of the Great Depression.

Roosevelt jolted the Americans in April 1933 when he gave them about a month in which to exchange gold ─ coins, bullion, certificates ─ at the Federal Reserve for US$20.67 an ounce.

Two months later, the government delinked the dollar from its gold reserves, discarding the monetary norm of half a century which was preventing it from aggressively pumping in money needed to revive the tailspinning economy.

Post-independence, India has seen only one other action of this magnitude to alter the trajectory of the nation ─ prime minister P V Narasimha Rao's economic liberalisation in the 1990s, which reversed decades of socialist policies and steered an almost bankrupt India to globalisation.

Mahatma Gandhi, Jawaharlal Nehru and others among the first generation of post-colonial Indian leaders were influenced by Western thought and recognised the need for modernisation.

While Gandhi, the father of the nation, forswore any role in policy or government after independence, Nehru delighted in Western ideals. He enthusiastically brought home the progressive mores of the time, turning India into a planned, protected economy, with decidedly mixed results.

In contrast, the second generation of Asia's leaders, such as Singapore's first prime minister Lee Kuan Yew, saw the merits of the West but also its pitfalls and drew upon their own cultures, with startling economic success.

Modi's attempt to combat corruption, if rewarded with even a measure of success, could unleash India's potential by consolidating all economic activity.

Consider that astonishingly few Indians, just 1pc, pay income tax. The country ranks 76th out of 168 in Transparency International's corruption perception index ─ a shameful place for a democracy and emerging economy to occupy.

However, Modi's crusade can be undermined by the toxic political baggage he carries.

Nurtured by a Hindu militant organisation and espousing nationalist ideas, Modi was the chief minister of the western state of Gujarat during the 2002 communal riots, in which more than a thousand people, mostly Muslims, lost their lives.

On the other hand, technology is his greatest friend. His demonetisation move has swiftly morphed into a push for digitisation which will make the economy more efficient and transparent at one stroke.

In a country of 1.2bn, a cashless economy is a distant goal. There are fewer than 1.5 million machines that can handle card transactions in stores.

Some 1,800 people share one machine in India, compared to 60 in China and 25 in the US. More Indians than Americans are online these days, just behind the number of users in China, but that looks more impressive than it is.

Only 13 out of 100 rural Indians have Internet access. One of two ─ 600 million people ─ still do not have bank accounts. And half of them have no government ID required to open a bank account.

If it continues to go forward, the push against corruption has the potential to eventually bolster India's place as an engine for world growth even as China falters.

It may even offer a lesson to China, which is beset by the very same affliction of corruption. In fact, China's Global Times approvingly noted the move.

"Modi's move is very bold. We cannot imagine what would happen in China if the country bans its 50- and 100-yuan notes," the daily said in a Nov 26 opinion piece.

"By observing India's reforms we will draw lessons, which would in turn help us understand our own reforms."

– By arrangement with ANN

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