Anger rises over India's demonetisation, economy badly hit

Patience is running out in India after people initially welcomed Prime Minister Narendra Modi's decision to demonetise 1000 and 500 rupee notes that accounted for 86 percent of the country's money supply.

In Muzzafurpur in Bihar state, customers vandalised a branch of the State Bank of India that had run out of new cash to replace old ones.

In Hyderabad down south, more than 250 people, lined up for cash, tried to break into a bank branch, forcing scared staff to shut down.

Hundreds of desperate customers threatened staff in a Bank of Baroda branch in Ahmedabad with ' dire consequences' if they left without replacing their cash.

Reports such as these are pouring in thick and fast from across the vast country on Tuesday, a fortnight after PM Modi announced his demonetisation move, promising to root out black money and bring to book tax evaders.

His efforts have ended up damaging the economy much more than the gains expected, say economists and public finance experts.

"It's absurd for the government to have announced the demonetisation overnight, as 85 percent of currency is held in 500 and 1,000 rupee denominations," Prabhat Patnaik, an economist and professor emeritus at Jawaharlal Nehru University, said.

"The government could have given about six months to a year to exchange the old notes with new ones, but not so abruptly," he said. "This move proves our government does not understand capitalism."

India's rural agriculture-dependent economy and also urban small trade, which employs 70 percent of the country's workforce, almost wholly deals in cash.

"So to suck out 85 percent of the liquidity is like sounding the death knell for the economy as a whole," said former finance minister P Chidamabaram of the Congress party.

He told a TV channel that the BJP had opposed a move by his government to replace pre-2005 high value currency because, at that time, they felt it was 'anti-poor'.

"Now their prime minister makes this sudden announcement in a move that will impact very adversely on the economy and the poor will be the worst hit," said Chidambaram.

Peasants in India's western Maharastra state said they had a good rainfall this year after three successive years of drought.

"We were looking forward to a real good crop that would have got us out of our debts, but now we have no cash to buy seeds, fertilisers or pay farm workers. We are ruined," said soya farmer Achyut Nene in a village near Nagpur.

In a belated realisation, the Indian government announced late on Monday that farmers could pay for seeds in old 500 rupee currency notes.

"But they can do that only in government stores, none else is accepting old currency," said Devinder Pathak, food policy expert, on a TV channel. "Farmers in India only buy five to ten percent of their seeds from government."

The Modi government is looking at a windfall of bank deposits -- 5.44 trillion rupees so far and growing -- that would recapitalise the banks which had run into serious crisis due to huge rise in non-performing assets due to bad loans.

"But just about 50-60 corporates account for almost 70 percent of these bad loans. Instead of going hard on these super rich who declared profits and dividends in their annual balance sheets but don’t pay back debts to banks, Modi has inflicted this huge punishment on the masses," said communist lawmaker Sitaram Yechury.

He told bdnews24.com this is a 'government of the rich, by the poor, for the rich'.

"They have not touched the black money stashed abroad that runs into trillions. They have not pulled up the corporates who don’t pay back bank loans. But they have ruined the poor and the middle classes by demonetisation," Yechury said.

He said Modi was trying to recapitalise the banks without touching the corporates who fund his election campaign.

Finance Minister Arun Jaitley clarified that his government was not writing off the bad debts, just reworking books.

But his assurance that 'all will be well within 3 weeks' seems to have backfired.

Two weeks have passed since the Nov 8 announcement and the government has been able to replace only 10 percent of the sucked out money supply so far.

Indian Air Force planes and helicopters are ferrying cash to states to ease the situation, but former deputy government of Reserve Bank of India KC Chakrabarty told bdnews24.com it would take the four mints at least seven months to print enough notes to replace the sucked out currency.

"This is a very dangerous move, something never attempted by anybody before," said Chakrabarty.

Former US Treasury secretary and Harvard University chief Larry Summers also debunked the move in a blog.

He said it would hardly have any lasting benefits.

"Without new measures, corruption will continue with a slightly different arrangement," he said.

Modi has said this move will destroy the country's black economy said to be as high as 20 percent of the country's GDP and also hit at the heart of terror funding by making Pakistan-printed fake currency obsolete and take India towards a cashless economy that is more transparent.

But income tax officials said cash accounts for only 6 to 8 percent of the black economy.

"Much of it is in ‘Benami’ properties, real estate, foreign currency or stashed in banks abroad," said tax consultant Mrinmoy Basu.

Since agriculture is not taxed in India, it transacts business mostly in cash.

"Is that black money! No. Modi seems to believe cash is black money, that is where he has got it wrong," said Congress leader Tiwari.

The opposition has forced adjournments in parliament, seeking a division on the motion which the BJP wants to avoid.

Even some of its allies like the Shiv Sena has opposed the move and joined Delhi and West Bengal chief ministers Arvind Kejriwal and Mamata Banerjee in presenting a memorandum to President Pranab Mukherjee demanding his intervention for a rollback.

Modi has attacked the opposition, branding them as backers of black money holders and chit funds.

Kejriwal has quipped: "We don’t need new currency, we need a new PM".

Congress vice president Rahul Gandhi has alleged Modi has not even taken Finance Minister Jaitley into confidence before he announced his move.

"If this move backfires, as surely it will, none other than Modi has to take the blame," said Gandhi, as he queued up before a Delhi ATM for cash.

But for the farmer and the fisherman who cannot sell his perishable products because buyers do not have cash to buy, the politics of demonetisation is not important.

"Our survival is at stake," says Jhantu Das, a fisherman in the Sundarbans in West Bengal.

"Nobody is buying my fish even for half the price. Few days like this and my family will starve," he said.

All economic activity -- not just agriculture -- has been badly hit.

From tourism to manufacturing, the cash crunch is eating into the vitals of the economy.

India's stock markets have been on a free fall, touching a six month low and wiping out all the gains made in 2016.

"Modi may outsmart the opposition but he cannot fool the people. If they cannot take the hardship anymore, he will be in trouble," said Times of India columnist Sagarika Ghose.