2016 Demonetization in India: Missed Operational and Leadership Opportunities.

• Author: Soni, Bina

INTRODUCTION

In spite of having one of the fastest growing GDP of current times and with a rapidly growing population that makes India the second largest population at 1.3 billion (Rodrigues, 2017, March 29), 70% of the people live in rural India, often in living conditions like those in previous centuries. It is a trite but truly correct statement that India is a country where centuries co-exist. Even though both industrial and agricultural growth have significantly contributed to India's economy in terms of GDP, India continues to face problems related to poverty, corruption, parallel (black) economy, politics based on the caste system in many parts of India, and a growing gap between the rich and the poor over the last few decades. Perhaps this the reason why "a platform of anti-corruption and growth" (Welsh, 2014) was attractive to the Indians in the 2014 national election, when the National Democratic Alliance (NDA)--a coalition of political parties primarily comprised of Bharatiya Janata Party (BJP) and many other small parties--returned to power after 10 years with a thumping victory in the general election. Mr. Narendra Modi, the leader NDA, became the Prime Minister of Indian effective May 26, 2014. After slightly more than two years in office, Modi announced the most controversial economic shock of India: demonetization of large currency bills of 1000 and 500 rupee bills. Effective November 9, 2014, those large bills were no longer legal tenders. Those large bills were eventually replaced with new currency bills of rupees 2000 and 500. "In a country where 90% of transactions are cash-based," however, it created chaos and hardship for millions of Indians for months" (Dutt, 2017).

BACKGROUND

By its constitution, India is a federal republic governed by a parliamentary system where the elected head of the nation (the President) is not the head of the government. The parliament consists of two houses- Rajya Sabha (Council of States or Upper House of the parliament), and the Lok Sabha (House of the People or Lower House). Legislative proposals are brought before either of the houses as bills, which when passed by both of the houses are signed by the president and become an act of parliament. The current leader of the Upper House is Arun Jaitley, who is also the Finance Minister of India. Since 2014, Modi--the current leader of the Lower House and therefore the prime minister of India--is the most powerful person in the Indian parliamentary system of governance. His party won the majority in the Lower House, while the opposition parties continue to maintain the control of the Upper House--which is a continuous body with memberships staggered over 6-year terms with one third being re-elected/appointed every two year. The Upper House is anticipated to be under the NDA control until 2020 (Dubey, 2017).

Tharoor (2016, December 6) states that Modi came into power with the promise of ending "black money," that is the result of tax evasion, crime, counterfeit money printed in Pakistan to fund terrorism in India and corporate corruption. Modi also promised to bring back billions of black money stashed in Swiss banks by the elite in India and distribute it to the masses in their newly created bank accounts and invigorate the Indian economy further. Incidentally, in about 18 months in office under a scheme titled Jan Dhan (Wealth for All), the Modi government got roughly 218 million bank accounts opened for the poor with an average balance of Rs. 1700 or about $30 USD--a paltry sum but commensurate with the economic status of the poor (Varmal, 2016; Rodrigues, 2017). It was estimated that about 600 million poor Indians did not have access to a bank when Modi came to power (Lakshmi, 2014). This is really a praiseworthy accomplishment.

The Modi government, as per Gurdial Singh Sandhu of the Ministry of Finance, wants to bring the poor into the banking system and away from cash transactions so that "the poor get into the habit of small savings and get access to credit," while making the cash more productive (Lakshmi, 2014). Again, this is a praise-worthy goal but many doubt if the banks can really service those newly opened accounts.

DEMONETIZATION AND DISRUPTION

In face of opposition from the Upper House to his fiscal policies (Rodrigues, 2017, March 29), the prime minister of India, Narendra Modi, in league with the finance minister of India, Arun Jaitley, overnight demonetized 500, and 1,000 rupees notes that constitute about 86% of the Indian currency and add up to about 14 trillion rupees in circulation. That is, effective November 9, 2016, currency notes of 500 and 1000 rupees were no longer considered legal tender (Tharoor, 2016, December 6). The planning and execution of demonetization was done in utmost secrecy. Within three hours of the televised announcement by Prime Minister Modi, those currency notes were practically useless for commercial transactions. Indians were given till December 30, 2016 to deposit old currency in their bank accounts. It was rumored that deposits in amounts larger than Rs. 250,000 would be scrutinized by the Indian Revenue Services. People had the option of declaring their "black" money subjected to 50% in tax & penalty. Black money, not declared but detected later, was to result in 90% in tax and penalties. The three primary purported reasons for demonetization were: 1) to reduce the growing volumes of black money, which emanate from sources such as ill-gotten, untaxed, bribery, corruption, or criminal activities; 2) to stem the counterfeit currency bills that were in circulation; and 3) to curtail terroristic activities that were primarily supported by the counterfeit currency (Paliwal, 2017).

However, in terms of public policy, the execution of this demonetization policy by Modi and Jaitley has been very poor. As Tharoor (2016, December 6) states, the demonetization resulted in massive economic disruption, not so much for the rich who were likely to be using credit cards already, but more so for the poor and the lower...