A tale of two demonetisations

MADAN SABNAVIS | Updated on January 16, 2018

venez   -  REUTERS

India’s systems seem to be holding up better than Venezuela’s, despite the logistical chaos in both countries

Narendra Modi of India and Nicolas Maduro of Venezuela will both be remembered for embarking on audacious campaigns aimed at demonetisation of their large denomination currencies. India is the largest democracy in the world while Venezuela is socialist, but for all purposes fairly autocratic. Hence the demonetisation exercise has been carried out in two different kinds of regimes.

We went in for this move on November 8 with almost immediate effect though several took advantage of having access to old notes till midnight. In the case of Venezuela it was announced on December 11, and was to kick in after 72 hours with the exchange window being kept open for 10 days. The withdrawal now stands till January 2 as it has been realised that, like in India, the supply of new notes has not kept pace with the demand. But unlike our case where the environment has been peaceful, the Venezuelan experience has been marked by a great deal of dissatisfaction resulting in violence.

Tango and cash

The Venezuela story goes as follows. It is one of the worst performing Latin American nations with hyperinflation. The IMF forecasts that it would cross 1500 per cent next year. The official currency exchange rate is one bolivar for 10 US cents, though the black market rate is 2 cents. The reason for demonetisation is to quash the operations of the mafia by blocking the border to Columbia which is the route for such money. At another level it has been alleged that such currency was being used to buy goods that had controlled prices which was responsible for hyperinflation, though there are not too many buyers for this argument. Almost 50 per cent of the cash in circulation is to be removed and replaced with higher denomination currency which can go up to 20,000 bolivars.

The Indian tale is more organised. The Government was absolutely keen on unearthing black money, and in the last two years started the exercise by addressing Swiss bank accounts while simultaneously starting Jan Dhan to equip all with bank accounts. An income declaration scheme which ended in September has been followed up with demonetisation which has removed all old ₹500 and ₹1,000 notes which are to be replaced with new ₹500 and ₹2,000 notes.

Immediate effect

While demonetisation was instantaneous, the people were given a longer window of 50 days for changing notes. Along the way the Government also revealed that the aim of demonetisation was to make India cashless and hence added transformational objective that went beyond black money. Efforts are on now to ensure that this infrastructure is created to ensure this transformation in the coming months.

While terror funding was part of the initial announcement there has been no move to impose any embargo on movement between India and Pakistan, unlike in the Venezuela case. We are getting rid of 86 per cent of the currency in the system, and hence the exercise is much bigger in scope.

In the case of Venezuela, economic compulsions have also been a driver as hyperinflation is not sustainable. But in our case there are no economic factors that have driven the move; they are moral and ethical issues. India is the one of the best performing economies in the world which is virtually in a take-off state and has low inflation to the extent that interest rates have been lowered steadily during the year. Besides, inflation has always tended to be more on the costs side and less on the demand front.

A commonality in the two cases is the implementation of the schemes where supplies of new currency have just not been adequate. The problems start from availability of paper to printing and distribution of currency to the banks which can stock their branches and ATMs with the same.

While the aspiration was to return to normalcy in 50 days to begin with, it is now accepted that given the logistical issues, we could be 50 per cent of the way through by year end. For Venezuela which has just embarked on this adventure, it could take longer given that the systems are much weaker than in India. The pain is likely to be deeper at the ground level there, while in our case there have been temporary economic distortions which will get corrected by the first quarter of FY18.

Interestingly, the reaction of the public has been very different in these two countries. In our case, people have understood the broader goal of black money and possible redistribution through effective government spending or transfers and have borne their travails with patience. While this may be waning, life has been peaceful notwithstanding some cases of death in queues due to non-availability of money. But clearly, there has been no protest from the masses so far which is creditable as these deaths have not been politicised, which normally occurs when issues like religion or caste are involved.

Mature reaction

This was a concern put forward by the Supreme Court when it observed that supplies of currency had to be segmented to eschew a social upheaval. It does appear that the country is mature; it realises that the malaise of black money is deep-rooted and has to be removed, and that the inconvenience is worth the trouble. As can be seen after 40 days, we appear to be moving towards normalcy, albeit at a very slow pace.

In Venezuela, conditions have not been peaceful. Violence has erupted in less than a week’s time with the people rioting and attacking banks and ATMs and causing a lot of destruction. This is probably why the government has extended the withdrawal date. The message behind the reason for demonetisation has not been clearly explained unlike in our case where there has been a proactive campaign to make people aware of the motivation for the same.

It does appear that these two examples will serve as paradigms for countries planning to attack the malaise of black money and other ills such as drug money through demonetisation. These two stories highlight what should be done before embarking on such an exercise and, more importantly, underline the challenges faced on the way that have to be addressed.

This may just be an interesting experiment to be considered for several other countries in 2017 with the dos and don’ts being known now.

The writer is chief economist at CARE Ratings. The views are personal

Published on December 20, 2016

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