Modi’s demonetization initiative caused chaos

More than a fortnight ago Indian Prime Minister Narendra Modi announced that country’s 500- and 1000-rupee notes were no longer legal tender. The decision was taken purportedly to curb black money menace. Initially, this was hailed by some as a masterstroke against endemic corruption. But, signs are emerging that it may hit the economy hard.
Also, there are murmurs that perhaps the policy was designed as much to shock and awe observers with government’s commands of the country’s economy as to control India’s black money problem. It appears to be impregnated with monumental miscalculation and an offhand decision.
One must not forget that India runs largely on cash. But that is still in short supply nearly three weeks after Modi’s shock announcement that 86 percent of its currency would be withdrawn from circulation. The central bank has struggled to print replacement denominations. The new notes are the wrong size for existing ATMs and recalibrating them will take months. And banks have been forced to ration cash as they face huge queues. Many people have still not been able to change their old currency. Small businesses are suffering. Mostly are teetering on the brink of shut down.
This will lead country’s economy tailspinning into chaos.
India is a country of village and farmers where 60% of its population resides. The agriculture sector employs 70% of its workforce. The rural banking system is not very strong. And ATMs are, sometimes, twenty kilometers away.
Also, very few villagers have access to an ATM. Most have to trek to a bank branch to change their cash, which means losing out on crucial days of labor. Many Indians, particularly women, still don’t have an active bank account.
That has left farmers unable to sow their crops and produce markets all but empty, while small traders like the tea sellers that dot India’s streets say business has fallen off a cliff.
Modi’s asked people to be patient for 50 days, but the process could take as long as four months.
The sweeping overnight abolition of all high-value notes was supposed to bring billions in so-called ‘black’, or undeclared, money back into the formal system.
But experts are warning the ensuing cash crunch could have a dramatic impact on growth just as the economy was beginning to take flight.
The informal financial sector—unregistered moneylenders who provide loans to businesses worth 40 percent of total bank lending—will be decimated.
The former prime minister Manmohan Singh, a respected economist, told parliament the surprise decision would shave at least two percentage points
off growth and slammed the government for what he said was shoddy
implementation.
Experts including former US Treasury Secretary Larry Summers have questioned whether the scheme will even achieve its core aim of cutting tax evasion. Using monetary reform to drive people into a financial system might accomplish the exact opposite. Cash alternative could prove even harder to control than the national currency.