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SWOT analysis of the demonetisation move

In an exclusive broadcast, PM Modi shook the country by announcing surgical strike on fake currency and black money, unparalleled in its scale and scope, by demonetising Rs. 500 and 1,000 notes effective from 9th November, midnight. Note that this came exactly 27 years after the fall of the Berlin wall.

We are in the second week since this decision came. The outcome cannot be accurately predicted, neither can the sound implementation be ensured amidst such large-scale disruption, especially in a complex, multi-layered society like India. One way to analyse such high impact policy proposal is to compare its expected benefits with the expected costs.

It is the time that we do an in-depth analysis of the strengths and weaknesses that are integral to this hard-hitting measure. We must also analyse the broader opportunities and threats to identify the potential problems or say, the cost to the society that needs to be recognised and possibly addressed. We shall also look into the politics of this move.

STRENGTHS:

Black Money and Counterfeits: Two primary reasons were touted for this drastic move – to hit at black money and to check counterfeits. This move left the parallel black economy choked and gasping. The elimination of fake currency is inevitable, and one also hopes that a check is well in place while these notes are routed through banking channels. It will be a tremendous achievement.

Countering Terror & Crime: While the government has clearly pointed out the use of fake currencies by terror outfits, some have spoken about uses of cash by criminals. This move has already halted many terror operations and has the potential to force a significant shift in the terror infrastructure.

As the large chunk of Hawala money is delivered to separatist leaders and local politicians to fuel protesters, the four-month-long unrest in the valley is also getting wiped out in the absence of cash inflow, security agencies believe. Besides, the lack of Hawala money would also hit the Maoists activities and other insurgent groups across India, especially in the northeast region, intelligence officials said.

Timing: No timing is perfect, but in hind-sight, the timing seems obvious. If we connect the dots, the very first decision of Modi Govt was to establish a SIT on Black Money. Then came the massive roll-out of the Pradhan Mantri Jan-Dhan Yojana (PMJDY) nearly completing all citizens’ access to bank accounts. The next was crack down on hoarders /foreign accounts (approximately RS. 80,000 Cr was collected). Then followed the Income Declaration Scheme, with a deadline of 30th Sept 2016. Another window of opportunity was given to people to declare their amassed wealth. (Rs. 65,000 Cr collected) Now, if you still have the Black Money, the government will ensure that either you declare and become mainstream or else face the hammer. Commendable chronology!

Reformist Stance: Demonetisation is not a foolproof measure, but it attacks the black money problem with unprecedented force and at multiple layers. If the objectives are achieved through sound implementation, this will show a strong signal about India’s anti-corruption drive and also its reformist stance.

WEAKNESSES:

Preparedness: The entire banking and postal system were caught unaware. The government says that it will now take two more weeks to configure all ATMs. The situation is testing in small towns, most ATMs are still not dispensing cash, and some branches are easily running out of cash. It seems that the planning ahead of such massive event lacked matching preparedness.

But the government could not have stashed large cash in banks and reconfigured ATMs. It would have led to the corrupt getting wind of the announcement and overnight getting much of their illicit wealth converted.

Logistics: There is always the risk that the infusion of the new currency notes is not sufficient to satiate the demand for currency. The government has fixed certain limits, which for all practical purposes seem moderately small.

Unaccounted Wealth: There are many means to store wealth; in cash, foreign currency, gold, real estate, and several other instruments. Out of which hard cash is relatively unattractive as it earns a negative rate of return, whereas, other modes of unaccounted wealth are laundered, and becomes much harder to identify. So this strike is only on black-cash and not on the entire parallel economy per se.

Cutting Corruption: Demonetisation does not promise that there will not be any future corruption. Crooks are always creative and will find ways to circumvent this demonetisation. At best, this is a reset button.

Sluggish Economy: This process would increase bank deposits with an obligation to pay interest. Can the financial institutions mobilize these funds fast enough and be able to disburse as loans, especially in a sluggish economy?

OPPORTUNITIES:

Windfall Profit: The Chief Economic Advisor of the government has argued that this decision would lead to transfer from black money holders to the RBI and then to the government. For the cash that does not return, should the RBI simply decide to reduce its liabilities and create a profit? It won’t be unwise in this exceptional case of the fight against black money but may send wrong messages. RBI may take some time and carry the liabilities on its balance sheet for the foreseeable future but should not announce this in advance.

High cost of Future Crimes: Cash facilitates crime because it is anonymous and big bills are easy to carry. By inflicting a cost, demonetisation cripples the ability to engage in future corruption. It is far easier indulging in crime with substantial cash in hand. The costs of crime will become much higher and will have an indirect but powerful impact on future corrupt practices committed with the help of currency.

Checks on Loose Sectors: Black money spawns in an economy in areas where the checks and balances are weak and have larger cash component in their transactions like commodity hoarding and trading, movie production, campaign finance, and of course real estate. Since liquidity dries up, hoarders’ and black-marketers’ holding power collapses leading to prices collapse. Demonetisation will result in a correction in these markets, either by a reduction in prices or a reduction in business. We will see the outcome in time to come. However, these corrections will move the market to equilibrium reflecting genuine demand and supply in the real economy.

Less-Cash Economy: Cash greatly facilitates transactions and hence we should aim for a less-cash economy and not cash-less. A less-cash economy is an excellent balance between maintaining ease of financial operations and also curbing malpractices.

Financial Inclusion: It also provides a boost to the government’s financial inclusion drive, pushing more households towards efficient banking and payment infrastructure.

THREATS:

The Cost of Harassment: A massive logistics exercise was undertaken causing countrywide panic and confusion. If the government does not invest all its energies into replenishing and re-calibrating ATMs, festering inconvenience will lead to backlash and has potential to undo the intended good work. Daily wage earners, truck drivers don’t have much time to stand in line every day. People can only do this for a limited time. It will also give the opposition a stronger opportunity to carry sustained attacks.

Lower Economic Activity: Overall the adoption of electronic payment instruments is slow, and the infrastructure is weak. During the transition period, the shortage of the lubricant of economic activity disrupts the smooth working of the economy. As a consequence, in coming weeks, business is likely to be sluggish. In informal labour markets, daily wage labourers are not able to get enough work. Many other markets that depend on full or partial cash payment are also affected. These costs will show up in the form of lower GDP (it counts all output, with tax evasion or not) during the affected period.

Panic and Confusion: This is the biggest threat. The political discourse is at the lowest. The opposition parties have been quick to fuel and magnify public annoyance over the teething problems. Misinformation and confusion is being propagated on an hourly basis to see to it that somehow this move is unsuccessful. Even majority of the TV channels, instead of being helpful or providing tips to people, are indulging in fear-mongering. OpIndia.com has busted many such rumour mongering.

THE POLITICS:

Some have accused the government of taking the decision because of electoral considerations. Today in India, there is a mass hysteria about black money. The electorate has given clear signals that this is one of the issues that they care the most. It could be the real context of this calculated political gamble.

Those backing the government are saying this is a genuine attempt to solve a massive long overdue problem. Even those who do not support the government agree on the scale and seriousness of the problem, while they disagree on intentions and means.

The political capital invested in this is enormous. All political parties will be hit badly, including the BJP. It incidentally will hit BJP’s one of the core support base in the short run, who are mostly traders.

CONCLUSION:

The biggest hurdle in India is the lack of State capacity. But the government and the RBI are taking steps to make life easier for people and should flood the Banks and ATMs with new notes without delay so that panic is removed.

The next few months are going to be painful and disturbing and should be seen as an emerging economy trying hard to reform its corrupt self. Our generation has not seen a revolutions. Fortunately, they are witnessing as well as indulging in it. Watchmen, carpenters, maids, shopkeepers, cooks, sweepers, almost all are showing relatively calm, positive and mature understanding of the after effect.

No defining change comes without some pain. Behind the joy and hope of unification of two Germany’s, lurked the pain of actually merging the two. It took the deep reserves of the famous German grit and many painful years to not just recover, but emerge as the one of the world’s chief economic engine.

When an economy is suffering from cancer, the only way to deal with it is painful doses of chemotherapy. With intense follow-up and awareness campaigns, the government can have people on its side even during their continuing hardship.

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Shwetank Bhushan
Student of Indian history. Random blogger. Passionate painter. Sports fanatic. Movie buff.

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