Indian PM Modi's move on currency is plain stupid

But like many moves undertaken by Modi, this one is another that is rank stupidity. He may want India to move to a mostly digital economy and may offer the excuse that black money is used to finance the old bete noire, terrorism, but he has gone about it like a bull in a china shop.

Modi made the announcement on prime time TV on 8 November that all 500 and 1000 rupee notes would cease to be legal tender in four hours!

There are many reasons why the move has caused chaos. For one, new notes that are supposed to replace the old are not available in sufficient numbers. ATMs cannot yet dispense the new notes.

{loadposition sam08}And India — something Modi did not apparently realise — has a fairly large number of people within its borders. People cannot just queue up and have anything, least of all money, replaced in anything even remotely resembling a hurry.

Narender Modi: good idea, bad implementation.

Moving to a digital economy cannot be achieved in an afternoon in India. There are too many places where only cash is transacted. While middle-class people have started using credit cards, they are a small fraction of the 1.2 billion who dwell within the country.

India's economy started opening up in the early 1990s and the move to digital transactions would be welcomed by the many companies that have moved there to do business. But the lack of digital devices to accept payments and the lack of proper identification in many cases are both major drawbacks. Additionally a majority do not even have bank accounts.

Now Modi's stated objective is a laudable one. But it appears to be similar to the case of a man who goes to a toilet, completes his business and then starts looking for toilet paper.

Modi is not the first to have the idea of flushing out "black money". Back in 1967, the then Indian finance minister Morarji Desai had the brilliant idea of raising taxes well beyond their existing level; the maximum marginal tax rate was raised as high as 97.75 percent.

Desai, who was better known for drinking his own urine, reasoned that people would pay up and that India’s budgetary problems would become more manageable.

Instead, the reverse happened. India has always had a problem with undeclared wealth, a kind of parallel economy. The amount of black money increased by leaps and bounds after Desai’s ridiculous laws were promulgated.

Seven years later, in 1974, the new finance minister Y.B. Chavan brought down rates by some 20 percentage points, but by then the damage had been done. The amount of black money in India today is estimated to be anything from 30 to 100 times the national budget.

No deal of any size in India can be done without paying part of the price under the table. I had great difficulty in 2004 in selling a flat I owned, simply because I wanted all the money paid above the table. And that flat was being sold well below the market rate so that I could complete the deal soon and return home. But without a black money component, nobody wants to do a deal.

Since Modi's announcement, Indians are resorting to all kinds of devious things to get rid of their hoarded money. Some are buying precious stones and gold but even those are running out of stock. Others are trying to exchange their 500 and 1000 rupee notes for lesser denominations but even that has its limits.

Modi's move came without any warning, at least to the majority of the populace. It is unlikely that black money will be eradicated in India as a result of what he has initiated; it will grow again once the new notes are in circulation.

Black money is too ingrained into India's culture to ever disappear. And the next time any politician tries something like Modi has done, people will not be caught with their pants down. All that money will be sitting in some other location other than under a bed or in a cupboard at home.