India’s demonetisation gamble backfires on Modi, say analysts

Almost all of the currency bills outlawed by the Indian government last November had been deposited by the 50-day deadline on December 30th, in a move analysts believe could prove a setback to prime minister Narendra Modi’s drive to fight corruption and unearth unaccounted-for wealth.

Officials associated with the process told The Irish Times that banks had taken in about 15 trillion rupees (€210 billion) by the end of December in 500 rupee (€7) and 1,000 rupee notes, which were demonetised on November 8th.

These two denominations totalled about 86 per cent of all currency in circulation across India.

The government had initially estimated that about five trillion rupees of the 15.4 trillion rupees rendered illegal tender would remain undeclared, thereby vindicating Mr Modi’s demonetisation gambit.

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‘Blow to Modi’

But analysts said the near complete depositing of the banned bank notes was a blow to Mr Modi, who appeared to execute demonetisation as a political strategy to revive the flagging fortunes of his Hindu nationalist Bharatiya Janata Party (BJP) government, by appearing to battle corruption.

He was also seeking to boost the BJP’s chances in crucial provincial elections in February and March.

India’s central bank, however, refused to provide any details regarding the amount of outlawed notes deposited, the time it would take to replenish the withdrawn currency or the reasons for the demonetisation drive.

Senior Reserve Bank of India officials refused to respond to inquiries in response to a petition filed under the Right to Information Act, on the grounds that these would "prejudicially affect the sovereignty and integrity of India".

They said such disclosures would adversely impact the “security, strategic and scientific interest of the state [as well as] relations with foreign states”.

Federal finance minister Arun Jaitley said earlier this week he did not know how much money had been deposited with banks.

“This [demonetisation] may go down in recent history as the biggest example of firing cannonballs to kill mosquitos, with huge collateral damage,” said Maitreesh Ghatak of the London School of Economics.

Others like Jayati Ghosh of Jawaharlal Nehru University in Delhi said that in the entire episode of demonetisation, the "government's arrogance and insensitivity have been breathtaking".

“But as the mess continues and the material damage grows, its ability to hoodwink the population cannot last for long,” she added.

Negative impact

Several recent domestic and foreign assessments indicated that India’s economy would be negatively impacted by the cash clampdown, threatening its position as one of the world’s fastest growing economies.

HSBC Securities, for instance, declared this week that the demonetisation had "hurt" India's economy in the manufacturing and services sector, and that corporate margins had worsened.

Meanwhile, newspapers and television news channels continued to report on the shortage of cash in banks and ATMs, especially across rural India, which are poorly serviced financially even at the best of times.