WHEN Indian premier Narendra Modi last year demonetized the two top denomination rupee notes, the expectation was that black money held by the corrupt would be exposed, since the high-value notes would have to be exchanged at banks and thus a record could be kept of who was changing how much.
The Reserve Bank of India has just produced figures showing Modi’s remarkable move to turn the ill-gotten banknotes of the corrupt into what he said would be “worthless piece of paper” has been a complete failure.
All but one percent of the high-value notes were deposited or exchanged for new lower-value bills. Some $230 billion of the currency went back into the system. Only around $250 million was caught up in Modi’s financial dragnet, a figure, which pales into insignificance when compared with the amounts of the high-denomination bills that were processed.
It is certainly not the case that Modi was wrong about extent of corruption and the amounts that were held by bent officials, politicians and businessmen. Payola has disfigured life in India for generations and severely impacts government revenues. Modi, who is about to embark on a trip to China which itself is no stranger to widespread corruption, has on the face of it, suffered an humiliating defeat. And yet it could be argued that perversely, on two levels, this has actually been a triumph for India.
The first is the magnitude of the demonetization operation. Billions of smaller value banknotes had to be printed and distributed throughout the retail banking system at a time when it was essential to keep last November’s shock announcement secret. Banks also had to ready themselves for a huge influx of customers anxious to exchange or deposit their soon-to-be-worthless Rupee1,000 and Rupee 500 notes. There was a huge increase in the number of new bank accounts. The logistical and administrative demands were extraordinary. And yet, with the inevitable hiccups, the banks managed remarkably well.
And then there is the obvious fact that those who held their corrupt takings in these large denomination notes, have managed to get around the trap Modi thought he had laid for them. Overnight a broking network was set up which bought large banknote holdings at an often-deep discount. These notes were then parceled out in small quantities to hundreds of thousands of poor people, who were paid a commission to go and exchange them for smaller value bills. Another tactic among businesses was to pay workers months in advance, windfall sums, which it must be hoped the recipients have used wisely.
There is of course no way that corruption can be condoned but the reality is the way in which Modi’s snare has been side-stepped illustrates something very important about the new India and why it is now the world’s fastest-growing large economy. It displays the fact the Indians have a genius for business, the same sort of can-do enthusiasm which underpinned US economic growth in the nineteenth and twentieth centuries. There was a fear when Modi sprang his currency surprise late last year, that it would impact badly on the economy. The reverse seems true. As Modi contemplates his defeat he might also quietly smile at the entrepreneurial verve that has been displayed.
