Indias daring demonetisation move

Indias daring demonetisation move
Indias daring demonetisation move

The impact of the Indian government's move to decommission some high value notes from circulation will fully pan out in the New Year. The 50-day window sought by Prime Minister Narendra Modi for completing the demonetisation of high value Rs 1,000 and Rs 500 notes is now over but the jury is still out on the impact of the move that is, arguably, the most daring, and far reaching, economic reform ever undertaken by any Indian government. Though it is still too early to draw any definitive conclusions, two things are crystal clear. One, demonetisation has given a divided and dispirited Opposition an issue to cry foul about and raise its shrill anti-government pitch by more than the proverbial two notches and, two, despite the Opposition's best efforts, the people of India have, by and large, supported the Prime Minister's bold initiative, notwithstanding the considerable pains they have had to endure. But the foreign media has missed the woods for the trees, as it has been wont to do about several things Indian. 'The Economist', arguably the most revered publication in the world, has dubbed demonetisation “Modi's bungle”. The tone of coverage in the BBC, 'Guardian' and 'New York Times' has ranged from being initially laudatory to being outright critical. Despite unstinted support from the ground, the rollout of demonetisation, as even Modi's most ardent follower will admit, could have been better implemented. But regardless of that, once completed, this initiative, at one stroke, will deal a massive blow to the shadow or “black” economy, improve tax compliance and, possibly, lead to an increase in the country's GDP unreported economic activity enters the formal economy and is captured in official statistics. It will also hit at the roots of several problems ailing the Indian economy and address many of the pain points that deter foreign investors from entering India. Just consider some of the issues that scare away all but the most intrepid of investors:

  • A byzantine bureaucracy where unaccounted cash is usually the best lubricant
  • Having to engage “consultants” who pay speed money on your behalf from their “fees”
  • A government perennially short of cash because many transactions take place outside the tax net
  • Manufacturers of equipment in the West who often receive requests to route shipments through tax havens to facilitate over-invoicing in order to generate black money
The demonetisation of high value currency notes has struck a death blow to all these activities. The Narendra Modi government has largely succeeded in eliminating top level corruption in the government. Now, customs inspectors and petty tax officials will be doubly wary about raising specious objections with the sole intention of seeking rents. This is certain to improve India's poor rank of 76 in the next edition of the Corruption Perception Index brought out by Transparency International. Modi's latest gambit is only the first move in a long and protracted battle against black money. There is no evidence yet that the common man is upset at Modi for the short-term inconvenience that many are going through. If Modi can deliver on his promise of freeing the country from the scourge of black money, he will have achieved the impossible. And this alone can improve India's rank in the World Bank's Ease of Doing Business Index, in which it currently languishes at the 130th position. Modi's followers and critics will be watching to see which of these promises are realised and which ones fail the test. For this alone, 2017 promises to be an interesting year.
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