India’s Demonetization Aftershocks: Poor Planning and Frustration

Source: Linkedin

Indian Prime Minister Narendra Modi’s demonetization policy was a brave move to fight against the money laundering and financing terrorism by removing 86% of the country’s currency from circulation. However, demonetization announcement has also sent shockwaves throughout the country’s economy and brought some confusion and frustration amongst local and foreign nationals. In a country, where more than 20% of the population lives in poverty and only half of Indian adults have bank accounts, demonetization seems to be unrealistic. The main question remains is that if demonetization was the result of an impulse or thought through. Was the technology companies, banks, mobile payment vendors and industry players being consulted prior to the announcement? Or to put it in a simple word; was any brain applied to examine the consequences?

In my recent trip to India, I faced two major challenges. Number one, I was not able to purchase any Indian Rupee in Singapore prior to my departure and number two after exchanging the S$100 note for two newly printed Rs 2,000 notes upon arrival in India (the exchange rate was extremely bloated), no one wanted to accept the note neither to return the change. Many retailers told me that they have no cash to return the balance. I wonder how many foreigners like me faced a similar challenge. Although, demonetization has created an opportunity for certain quarters to get rich over night but the negative perception about the current administration has risen since then. The long queues in front of the banks, the death of people standing in queues, and fake notes are just some of the post-demonetization consequences. Local politicians even accusing the government of poorly managing the aftershocks and call it “a massive scam”.

The demonetization policy is also expected to have a negative impact on inflation. Despite the sharp increase in retail spending during early hours of the announcement, consumers are refraining from making any unnecessary spending except essential consumer items. My personal observation after visiting two shopping malls in Bangalore and Pune was a low retail traffic and empty malls. In addition, as the inflow of new currency is slow, the supply and demand of food items fell and put more downward pressure on inflation. The main question being asked by all the stakeholders is that how much money will come in and how long it will take for the economy to stabilized.

From mobile payment adoption perspective, with low smartphone penetration (17%) and people access to the internet (22%), cashless transaction growth will be slow and change the society mindset is an uphill battle for any administration. To rub salt in the wound, there was no pre-announcement publicity due to the fact that the more prepared people are, the more opportunity you’re giving to people to find loopholes in the system. Whereas the downside of making it a surprise was that the government and the central bank were severely unprepared to manage the whole situation.

The key to success of demonetization in any country is to educate the public and to ensure all the stakeholders are prepared for the roll out. Demonetization will not happen over night either within a short period of time. It’s required proper planning such as local bank’s resources, sufficient supply of smaller denominations, and retail industry to keep the cash economy running. The surprise factor will not only dilute the good intention but will break down the India’s commercial ecosystem and disrupt the supply chain across cash-intensive sectors such as fishing, agriculture and grocery trade. In worse case scenario, it might lead to society unrest and political clashes as it is growing now.

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