Prime Minister Narendra Modi’s “trailblazing” move to scrap high-value banknotes could become a costly political joke if he fails to deliver on the promise of eliminating illegal cash and fake currency, Chinese experts have said.
They also say the informal sector is bearing the burden of the demonetisation move.
The scrapping of the currency has been closely followed by Chinese media and experts -- for one, it is in the middle of an anti-corruption drive led by President Xi Jinping since 2013.
Two separate critiques of the move by Chinese experts have questioned whether the decision to scrap Rs 500 and Rs 1000 notes would in fact be enough to tackle unaccountable cash.
Much has been pinned on hope, the experts said.
“The government is placing considerable hope in the demonetisation of the old banknotes: It is expected that many participants in the underground economy had to expose themselves in the light when attempting to explain to the bank or government the origins of the large amounts of cash they hold,” Liu Xiaoxue, associate professor at the National Institute of International of Strategy of the prestigious Chinese Academy of Social Sciences, wrote in the magazine, China-India Dialogue.
But it is difficult to predict the outcome, Liu said.
“Predicting the effects of this unprecedented measure would be extremely difficult. Past experience has shown that the black market is closely tied to changes in economic structure and tax systems as well as public awareness,” Liu said, adding: “It would be impossible to eliminate the black market completely via a simple currency replacement campaign.”
Shi Lancha a visiting scholar at Tsinghua University called the move a “blitzkrieg” and said Modi’s move had “snowballed into an unprecedented emergency in India”.
“While it takes political courage to launch such a trailblazing and massive campaign; it actually takes far more wisdom to give it a happy ending. Given the fact that people have to pay an absurdly high price for the expected reform, if BJP fails to deliver its high-sounding rhetoric and promises, then Modi’s much-lauded ‘master stroke’ or ‘big bang reform’ will likely be reduced to ‘nasty partisan conspiracy’ and even a ‘costly political joke’”, Shi wrote for the state-controlled tabloid, Global Times.
The success of the scheme depends on three challenges, Shi said.
“First of all, Modi has to pacify the disruptive ripples bred by the move and assuage the affected Indians effectively. Second, he has to buttress the policy’s beneficial effect by long-term measures. Last but not least, he has to weave the partisan calculation into the anti-black-money campaign in a smart way,” Shi argued.
“After all, Modi has to handle these three challenges skillfully to optimise the policy outcome, while preventing it from backfiring on himself and his party.”
Announcing the highest value and most popular notes in India illegal overnight has led to enormous problems, the scholar said.
“For example, millions of small businesses, which are especially important given India’s huge informal sector, have been hurt most seriously, as they almost rely entirely on cash transactions. Several murder or suicide cases relating to the chaos have been reported. Although measures like increasing deposit caps have been announced, local situations are hardly improving.”
There could be a political angle to the move, Shi argued.
“While Modi may find pacifying chaos in the short-term and correcting structural distortion in the long-term are both hard policy goals, the partisan politics appears to be the only low-hanging fruit he can readily pluck. In the last decade, undocumented sources like cash donations accounted for around 75 percent of the funding for India’s political parties. Given this, the sudden clampdown on black money may also be seen as Modi’s clever electioneering for the upcoming elections in Uttar Pradesh and Punjab.”