India’s currency reform was botched in execution
Narendra Modi needs to take measures to mitigate the damage his rupee reform has done
Dec 3rd 2016
INDIA is not the first country to introduce abrupt, drastic reform of its currency. But the precedents—including Burma in 1987, the former Soviet Union in 1991 and North Korea in 2009—are not encouraging. Burma erupted in revolt, the Soviet Union disintegrated and North Koreans went hungry. All the more reason for Narendra Modi, India’s prime minister, to prepare the ground before the surprise announcement on November 8th that he would withdraw the two highest-denomination banknotes (the 500-rupee and 1,000-rupee, worth about $7.30 and $14.60). Yet he did not and the result is a bungle that, even if it does achieve its stated aims, will cause unnecessary harm.
Shops stopped accepting the old notes at once. Holders have until the end of the year to deposit them in banks or swap them, either for smaller-denomination notes or for new 500- and 2,000-rupee ones. That 86.4% by value of the cash in circulation is suddenly no longer legal tender has already caused predictable and needless hardship. It is too late—and politically unthinkable—to start again (ses article), but Mr Modi should do more to limit the damage; and he should abandon the flawed leadership style that caused the mess.
Not the way to do it
The plan has laudable aims. Its initial popularity was based on the idea that the greedy rich, with their ill-gotten “black money” stored in stacks of banknotes, will get their comeuppance. Those who cannot justify the sources of their wealth will face punitive taxes. It also accords with Mr Modi’s manifesto pledge to normalise India’s black economy, estimated by the World Bank in 2010 to be worth about one-fifth of official GDP. The idea is that India will become more efficient, as more people and more money enter the banking system; counterfeit currency will become worthless; India’s woefully low tax base will expand; and government coffers will enjoy a windfall of cash expropriated from the corrupt.
It is a pity, then, that Mr Modi’s scheme to achieve these aims is so flawed. Banknotes are not just a way for the rich to store their wealth; they are also how the unbanked survive. As so often, the burden of this reform has fallen most heavily on the poor (see article). Over four-fifths of India’s workers are in the “informal” sector, paid in cash. Untold numbers have been laid off because their employers cannot pay them. Tens of millions have queued for hours at cash machines and bank branches, to get rid of the useless notes and get hold of some spending money. A new business has sprung up in laundering cash for a fee for those without the time or inclination to queue, or with more notes than they can account for.
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Cash is used for 98% by volume of all consumer transactions in India. With factories idle, small shops struggling and a shortage of cash to pay farmers for their produce, the economy is stuttering. There are reports that sales of farm staples have fallen by half and those of consumer durables by 70%. Guesses at the effect on national output vary wildly, but the rupee withdrawal could shave two percentage points off annual GDP growth (running at 7.1% in the three months to September).
With a bit of forethought, much of the mayhem could have been avoided. It turns out that the new notes are smaller and require all the country’s ATMs to be reconfigured, which takes 45 days. Some 22bn notes are affected, but printing capacity is said by the previous finance minister to amount to only 3bn a month. So even if fewer notes are needed, because more money will be in banks, printing them will take some time. The banks were ill-prepared to handle about 8.5trn rupees in new deposits in the three weeks after demonetisation. After they used the deposits to buy bonds, lowering interest rates, the central bank had to order them to park the new money with it, in zero-interest accounts.
If Mr Modi’s plea for patience for a 50-day period until the end of the year looks optimistic, so does the promise of “the India of your dreams”, purged of the corrupt and their loot. In India’s black economy of undeclared, untaxed income, all sorts of transactions, from medical bills to house purchases, are sometimes settled with suitcase-loads of banknotes. Yet even if the hoarders will be wary of another confiscation in the future, they will be tempted to make use of the new 2,000-rupee note just as they used the old 1,000-rupee one.
Moreover, Mr Modi was wrong when he said that the rich now need sleeping pills, while the poor sleep peacefully. In past seizures of illegal wealth, only between 3.75% and 7.3% was found to be kept in cash. The sleepless are those who need cash to get by; the truly rich are laughing all the way to their flats in London. The punitive taxes levied on black money that is deposited will feel like flea-bites. As for the counterfeiters, most estimates of the value of fake rupees are in the tens of millions of dollars, out of $250bn in circulation.
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Both for the sake of Indians and for his premiership, Mr Modi needs to mitigate some of the harm he has caused. He should find ways of printing the new money more quickly. More important, he should also lengthen the period over which notes may be exchanged or deposited and allow the old notes to remain valid as payments for a range of goods and services (tax payments, say, would seem logical).
Somewhat too sensational
Much in India needs reform—abolishing restrictive labour rules, for example. In the past such reform has often been stymied by a system that favours government by committee. Mr Modi has lurched to the other extreme. The perceived need for secrecy (to take cash-hoarders by surprise) fed into the innate sense he has of his own infallibility and his misplaced faith in his technocratic skills. By designing a scheme that was needlessly callous and which is becoming increasingly unpopular, he has squandered political capital. In future he needs to consult more widely, centralise less decision-making in his own hands and acknowledge that not all criticism is partisan or special pleading from the corrupt rich. India, fortunately, is not North Korea, and is aware that leaders are fallible. Its federal, democratic system will give voters plenty of chances to let it be known how badly Mr Modi has messed up his rupee rescue.
Results may vary
The parallels between Trumpism and Islamism shouldn’t be overblown
Dec 2nd 2016, 15:15 BY ERASMUS
SHADI HAMID is one of the most interesting and provocative figures on the circuit of Islam-watchers and Middle East pundits in Washington, DC. A senior fellow of the Brookings Institution, a think-tank, he has been raising his voice recently to make two assertions which seem, at first sight, to run in different directions. One is suggested by the title of his recently published book, “Islamic Exceptionalism: How the Struggle over Islam is Reshaping the World”. Very broadly, it argues that Islam differs from Judaism and Christianity in having a natural propensity to shape systems of government. Although Judaism and Christianity have had their theocratic periods, to put it mildly, the link between Islam and governance (broken only with the abolition of the caliphate in 1924) has been more durable and consistent, the book asserts.
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While some commentators make that very point in an Islamophobic spirit as a reason why liberal democrats should be wary of Islam, he constructs another sort of argument. In his view, it’s not realistic to expect the people of Islam’s heartland to opt freely for the exclusion of their faith from the sphere of administration. That reality has to be accepted. If secularism ever prevails in those countries, it will only do so after an extended period of gradual change, uninterrupted by brutal secularist coups: “the democratic process must play out for a long enough period so that Islam, Islamism and democracy can evolve in a natural uncontrived fashion.”
The second big point that Mr Hamid has been making, through articles in Foreign Policy and elsewhere, seems to sit a little awkwardly with the title of his book. Exceptional as Islam might be, there are some clear parallels, in his view, between the resurgence of Islamism and the rise of Donald Trump. As he writes, both exemplify the point that voters want something more than bureaucratic solutions to relatively minor problems. They want to be swept up into larger causes, whether those causes are defined positively or negatively. Francis Fukuyama, the prophet of the “end of history” after the end of the cold war, was over-hasty in asserting that the era of titanic ideological battles was over and would soon be supplanted by “economic calculation, the endless solving of technical problems, environmental concerns and the satisfaction of sophisticated consumer demands”. On the contrary, people still yearn for a sense of transcendence and meaning, and it could be provided either by a religion which aspired to determine all aspects of life, or by majoritarian identity politics. Mr Hamid attempts to make some elegant connections between his book and the even more recent observations he has made about the triumph of Trumpism. He writes:
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The overlap between Trumpism and Islamism is no coincidence. In my book “Islamic Exceptionalism”, which discusses Islam’s tensions with liberalism and liberal democracy, I argue that some public role for religion is necessary in religiously conservative societies...In less religious or post-Christian societies, a mainstream Christianity is no longer capable of providing the necessary group identity. But that doesn’t mean other ideas won’t fill the vacuum. In other words, be careful what you wish for: an America where religion plays less of a role isn’t necessarily a better one, if what replaces religion is white nativism.
Mr Hamid makes a fair political scientist’s point in drawing parallels between the popularity of Islamic parties and the success of Mr Trump. Both reflect the frustration of disempowered majorities, in other words, of historically dominant groups who feel they are not being allowed to put their stamp on society, as is their natural right, because unrepresentative elites are holding them back, or because overprotected minorities have a disproportionate share of power.
But Mr Hamid, while insisting that various forms of populism can usefully be compared, is also adamant about the differences, and hence about the ongoing validity of his point that Islam stands out. Although many evangelical Christians voted for Mr Trump (indeed more than did for Mitt Romney in 2012), his is most emphatically not a religious movement, Mr Hamid notes. On the contrary, the Trump phenomenon reflects the failure of Christianity to offer a convincing political formula for the 21st century, and the tendency of new ideologies to fill the void. As he put it to Erasmus: “Christianity has gradually lost its ability to offer a resonant politics for most Americans and Europeans. If religion can no longer speak to our politics, then people will search for something that approximates its certainty and conviction. What makes these [substitutes] more dangerous than a politics infused by mainstream Christianity or mainstream Islam is that they are less cohererent and principled.”
Another big difference, it might be added, is that in the American system, there are powerful legal and constitutional constraints on the ability of a populist president to impose his will in all matters, or to bully minorities. The American constitution is deeply entrenched and profoundly legitimate; in many Islamic and Middle Eastern countries, the constitution is still a work in progress.
One simple way to express the difference might be this. Between the causes of Trumpism and Islamism there may be some similarities; but given the sharply contrasting contexts, the results are much less likely to share a resemblance. That is the hope, anyway.
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