In the last month, everyone in India – from my grandfather to the tea-seller across the street from his house – has had to queue up at banks. This is because of the country’s Prime Minister Narendra Modi’s roll-out of a “demonetisation policy”.
Modi announced on November 8 at 8.15pm that 500 rupee and 1000 rupee notes would be banned from midnight. The government said the move would curb corruption, counterfeiting, money used to fund terrorists, drugs and other crimes. This has caused grief for a lot of people in India, as most people depend on physical cash – they can’t afford debit or credit cards, and they don’t have access to electronic banking.
The opposition, the Indian National Congress party, has been blamed for ignoring corruption within the government, and ex-Prime Minister Manmohan Singh was frequently blamed for being a figurehead and a puppet for his party during his term.
Indians, fed up of the widespread corruption in their country, the counterfeit notes and money laundering, can see the reasoning behind the policy even if it’s disrupting their lives. The move means that politicians who benefit from the circulation of counterfeit money will see their wealth go down. People like my grandfather, though troubled that he has to go to all of this trouble to get his lower denomination notes (including the new 2000 rupee note), believe that this is a good move in the long run.
There are negatives to the policy as well. The shocking way in which Modi announced it, with no warning, could produce lasting negative effects. Shops stopped accepting the old notes as soon as they heard the announcement, making a huge portion of the money in circulation essentially worthless.
The notes that will no longer be legal tender need to be exchanged in Indian banks by the end of this year. Non-resident Indians (NRIs) based in Hong Kong and around the world will have difficulty exchanging the notes outside of the country, and they may not be able to afford to travel to India on such short notice. The negatives of the policy are mainly felt by the poor. People who can afford to fly back in to get their money exchanged have very little to worry about.
One of the ways in which the Indian prime minister could minimise the negative effects of the policy would be to find ways to print the new note denominations. He could also lengthen the period of time in which the old notes can be exchanged, meaning that the 500 rupee and 1,000 rupee notes would remain valid for longer. This would give people more time to exchange the notes, and ease their fears that their money will become worthless.
Modi made a bold move, but the negative effects can be short term issues if he’s just more lenient with his policy. I admire his commitment to combating the country’s corruption, but messing around with the economy’s most important building block – money – is a dangerous game indeed.