Friday, December 30, 2016

People are dying because of an audacious cash policy that India says will modernize its economy

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Indians wait outside a bank to withdraw money on the outskirts of New Delhi, India. (Altaf Qadri / Associated Press)

Shashank Bengali and Parth M.N

Usha Boinavad, a farmworker in western India who underwent a heart operation as a teenager, began suffering from chest pains this month. A doctor advised the 26-year-old to seek heart valve surgery in the nearest major city, 200 miles away.

She immediately ran into another problem: cash.

The procedure would cost at least $1,500, far more than what she and her husband had in their bank account. But with India in the grip of a severe currency shortage since the government invalidated 86% of the cash in circulation on Nov. 8, the couple couldn’t scrape together even $100 for transportation to the hospital.

Banks in their farming region have been slow to receive new bills, dispensing at most $30 to a few customers before closing their doors, leaving masses to walk away empty-handed. Like most rural Indians, the couple did not possess a checkbook or debit card.

Boinavad’s father decided to sell his two buffaloes, but the buyer asked him to wait a few days because he couldn’t find cash either.

It didn’t come in time. Boinavad’s pain worsened for several days until she died at her parents’ home Dec. 13 in Nanded, 300 miles east of Mumbai.

“If not for demonetization” — the name for the government’s policy — “she would still be with us,” said Boinavad’s cousin, Sanjeev Halde.

Few peacetime episodes in India’s 70-year history have proved as contentious or chaotic as the currency ban, which has unleashed tragic consequences across this cash-dependent economy and stained Prime Minister Narendra Modi’s reputation as a capable administrator.

Nearly two months after Modi canceled the value of the two biggest bills in circulation — worth about $7.50 and $15 — cash remains scarce and scores of people have reportedly died while waiting in line at banks and ATMs. Modi had said the “pain” would end by Friday, but fewer than half of the country’s 200,000 cash machines are working and strict limits remain on how much currency can be withdrawn from bank accounts.

The misery has also taken subtler forms: migrant workers unable to send money home to their families, small businesses forced to close, a slowdown in sales of everything from SUVs to spinach. Foreign banks have slashed their 2017 growth forecasts for India, which has been the world’s fastest-expanding major economy.

Modi’s government has struggled to explain why the policy, crafted in near-total secrecy, has been implemented in such a disorganized way. The central bank — the Reserve Bank of India, whose well-regarded Gov. Raghuram Rajan resigned amid disagreements with Modi’s government in June —  has found itself becoming a national punchline as it issues rule upon rule on deposits and withdrawal limits, some conflicting with one another.

Last 43 days have seriously undermined whatever credibility the RBI had built up over decades. Now laughing stock -- Reverse Bank of India.

“It is unfathomable why some of the smartest minds and most competent officials were unable to see that the currency transfusion will be a complex, difficult, painful process full of unintended consequences,” said Nitin Pai, co-founder of the Takshashila Institution, an independent policy research organization.

Modi has offered alternating explanations for why he took such drastic action. He initially said his target was tax evaders who had supposedly stashed away large hoards of undeclared wealth — forcing them to deposit it in banks by Friday, where it could be audited, or watch its value evaporate.

But 80% of the canceled bills were deposited in the first three weeks. Some experts said that indicated there was less so-called black money in the market than the government expected — or that much of it had effectively been laundered into legitimate accounts and would escape scrutiny from India’s much-maligned tax authority.

More recently, Modi has emphasized the need to reduce India’s reliance on cash, encourage more people to use bank accounts and electronic payment methods and modernize the economy.

Indian Prime Minister Narendra Modi has struggled to defend his chaotic demonetization policy, although opinion polls show he retains support.
Indian Prime Minister Narendra Modi has struggled to defend his chaotic demonetization policy, although opinion polls show he retains support. (Prakash Singh / AFP/Getty Images)

In that case, analysts said an overnight currency swap was too extreme.

“The shifting goal posts are a sign that the authorities are desperately clutching at straws to justify their terribly flawed decision on demonetization,” said Meera Sanyal, an opposition politician and former chief executive of the Royal Bank of Scotland in India.

Meanwhile, Indians have been outraged by stories of law enforcement agencies uncovering huge quantities of the otherwise scarce new bills. Tax inspectors in the eastern city of Chennai reportedly seized more than $5 million in new notes in a series of raids on well-connected businessmen, including $45,000 found at properties used by the state’s top-ranking civil servant.

Modi has expressed regret for the inconvenience but cast the policy as a nation-building project. One of the government’s top economic advisors compared the disruption to Hurricane Katrina’s effect on New Orleans, saying the economy would eventually rebuild.

“I know that my people have suffered,” Modi said Dec. 19 in the northern state of Uttar Pradesh, where upcoming elections could serve as a referendum on his policy. “But this is for the country, so you will not be disappointed.”

Cleaning the system from black money & corruption is very high on my agenda & we are working tirelessly towards it. 

Modi, elected in 2014 on promises to boost economic growth, remains popular, partly because of the shambolic performance of the political opposition. His Bharatiya Janata Party, or BJP, performed well in a pair of local elections in northern India this month, suggesting that many citizens are willing to tolerate the turmoil if it results in reforms.

“I think [Modi] must have thought it through,” said Sayyad Jamal, a Mumbai furniture seller who pleads with customers to pay cash but ultimately supports the policy “if black money is being eradicated.”

Experts say there is a powerful feeling of schadenfreude among the general public: a hope that India’s highflying, tax-dodging one-percenters will suffer more if the economy is cleaned up. But that could have limits.

ATMs in Mumbai and across India frequently run out of cash nearly two months after the government banned the two largest bills in an anti-corruption policy.
ATMs in Mumbai and across India frequently run out of cash nearly two months after the government banned the two largest bills in an anti-corruption policy. (Divyakant Solanki / European Pressphoto Agency)

“If their inconvenience does not diminish faster than their schadenfreude, the mood will turn against Mr. Modi,” Pai said. “It all depends on how quickly the [cash] transfusion can be completed.”

An analysis by IndiaSpend, a news site, suggested that the earliest that government printing presses could replace all $210 billion that was withdrawn from circulation is April 2017 — five months after the policy was introduced.

It could take even longer for sufficient quantities of bills to reach the two-thirds of Indians who live in rural areas and remain tethered to cash. Only 2.5 million rural Indians had enrolled in cashless systems in the six weeks after the announcement, according to a government task force assigned to increase the use of electronic payments. 

Raghunath Kasbe, who works for a local council in Nanded, recalled how his father, a farmer, lined up outside the bank near his village for two straight days in mid-November, yet failed to obtain cash. On the third day he returned and joined the line before 8 a.m.

Around noon, Kasbe got a call saying his father had collapsed while waiting.

Digambar Kasbe, 60, died of a heart attack, doctors said. His son said he had been worried about paying for seeds and the wages of laborers who work on their 3-acre farm.

“He was desperate because even my salary had been delayed … and it wasn’t going to come any time soon,” Raghunath Kasbe said. “There is no way we can do without cash.”—LA Times

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