Demonetisation to impact Modi’s ‘Neighbourhood First’ policy

The Narendra Modi government’s demonetisation move may spell the death-knell for trade and border haats, hurting the Prime Minister’s ‘Neighbourhood First’ policy.

Ever since coming to power, Modi made it clear that the expansion of bilateral ties with neighbours will remain a cornerstone of his government’s foreign policy.

However, Modi’s November 8 announcement on demonetisation has rattled countries such as Nepal, Bangladesh, Bhutan, Sri Lanka, and Myanmar which encourage the use of the Indian rupee as a parallel currency within their borders.

“Some of our neighbouring countries use the rupee as a parallel currency to theirs because they trust it. When India says that it believes in giving priority to the neighbouring countries, it should prove it by action... the least they could have done was given us supply backup (new notes),” a senior diplomat, who refused to be identified, told BusinessLine .

Since operationalisation of the border trade agreement, a substantial quantum of business had shifted to normal trading, which earlier used to take place informally or through the barter system. This, in turn, has resulted in the rise of several small traders, on both sides of the border, who do deals in cash.

“Demonetisation has impacted Nepal, Bhutan, Bangladesh and even Sri Lanka where rupee is used large-scale and lots of transactions with them is based on cash. The question is how to legalise this,” said Neelam Deo, Director, Gateway House and former ambassador.

Some of these countries have also written to their missions here to supply them the new notes and make adequate provisions for exchange of the old notes.

According to Bipul Chatterjee of CUTS, a policy-advocacy body, the small traders and businessmen are going to be severely impacted due to the demonetisation efforts.

“In the long run it may be beneficial, but in the short run border trade and border haats will come to a standstill if their concerns are not met. The transactions in border trade do not take place in card or cheques, only cash is used. They are now stuck,” Chatterjee said.

The situation with Bangladesh is worse as a lot of businessmen and people travel to India for commercial and medical reasons. They are neither able to change the currency in their country, nor are they able to exchange it in India because they do not have bank accounts here.

Meanwhile, sources said some local moneylenders are exchanging the defunct notes in lieu of a high rate of commission.

According to All India Motor Transport Congress, almost 80 per cent of the transport operations (both cargo and passenger) cost is cash based. In other words, almost ₹.1,194 crore is required daily by the transport sector for its operations. Containers and cargo trucks pay their taxes in cash at respective borders.

Tourism, especially medical tourism, is another sector that has taken a huge hit because of the government’s efforts to curb black money.

Meanwhile, experts also suggested digitisation of border haats and making border trade fully automated by setting up ‘Integrated Check Posts’ (ICP) at the land custom stations.

“The government should now digitise border trade. We should follow the ICP model that has been set up between India and Pakistan. This will also stop a lot informal exchanges that take place in the border haats,” said Prabir De, head of ASEAN division at RIS.

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