Indian Prime Minister Narendra Modi’s surprise decision to ban the 500 and 1,000 rupee notes has sent shockwaves throughout the country, and some opposition forces are now taking to the streets to protest. The Associated Press:
Thousands of people demonstrated across India on Monday to protest the government’s sudden decision to withdraw large-denomination currency from circulation, a move that has caused enormous hardship to millions of people in the country’s predominantly cash-based economy. […]
Nearly three weeks ago, Prime Minister Narendra Modi announced that 500- and 1,000-rupee notes, worth about $7.50 and $15, would become worthless overnight and would be replaced by new currency in a bid to stamp out corruption and tax evasion.
The surprise decision pulled 86 percent of the country’s money supply out of circulation, leading to serpentine lines at banks, which often ran short of currency, showing that the government was ill-prepared for the move.
The details of Indian fiscal policy do not typically merit mention here, but the social upheaval caused by Modi’s sudden currency ban points to a wider phenomenon. India is undergoing a rapid process of modernization and transformation—a process that holds great promise for the livelihood of Indians in the long term, but that also brings short-term shocks, especially when the government seeks to accelerate the process.
Modi’s move is ostensibly targeted at large-scale tax evaders and hoarders of “black money.” But in a country where more than 90 percent of transactions are conducted in cash, the policy is having an outsized impact on India’s lower and middle classes. Almost half of Indians do not have bank accounts, and Modi has used the new policy to encourage citizens to embrace digital payments. In theory, that should help bring India into the modern world and let the government more efficiently collect taxes. In practice, however, the policy has so far provoked resentment while placing a disproportionate burden on India’s working class.
There is no doubt that India needs serious reform to transition away from cash, improve tax collection, and crack down on the illegal economy. Yet prominent economists from Larry Summers to Kaushik Basu are questioning whether Modi’s abrupt measure will achieve that effect. Most of India’s big fraudsters, after all, store their money in gold and silver or in offshore bank accounts. The new policy will inconvenience them much less than it will India’s middle class.
Modi’s policy is no doubt well-intentioned, and it may even pay off in the long term. But much like the global ban on heat-trapping hydrofluorocarbons that will price refrigerators and air conditioners out of reach for most Indians, the policy is likely to inflict short-term pain on the rising middle class it is supposed to help. In any case, the public response to India’s demonetization policy is worth watching. Expect more growing pains as India’s leadership and citizenry adjust to their growing role in the global economy.