How different is Maduro and Modi's demonetisation?

Indians have been more resilient than Venezuelans on reacting to it

RATIONALE

MADURO: Venezuela wanted to demonetise its currency in a bid to prevent smuggling gangs from exploiting the Bolivar which has lost considerable value since currency controls were introduced in the country in 2003. President Nicolas Maduro said that mafias were hoarding the Bolivar and buying subsidised goods in Venezuela only to sell them across the border in Colombia and Brazil. This according to Maduro was creating an artificial scarcity in Venezuela. Reports from Caracas suggest that merchants often weigh currency notes rather than counting them due to triple digit inflation. The International Monetary Fund (IMF) estimates that inflation may touch four-digit figures in 2017, making Venezuela the most economically battered country in the region. Maduro has said that by demonetizing the 100 Bolivar denomination, he can clamp down on gangs who are gaming the system.  

 

MODI: On the night of November 8 when Modi made the announcement, he stated two primary reasons for the move – tackling unaccounted money and fighting off fake currency being pushed across the border into India. While tackling black money was one of the election planks for Modi in India’s 2014 Parliamentary elections, the government failed to achieve much success. Despite repeated busts, there was also little that the government was able to do to tackle fake currency entering India. However, a few days post his November 8 announcement to demonetise Rs 500 and Rs 1000 denominations, Modi changed his goal-post completely as millions of Indians struggled to make ends meet without cash. Modi started selling his idea by saying that he wanted to move India towards a cashless society even though internet penetration and mobile phone usage still has a long way to go in the country. With most of the currency that was demonetised back with the banks, there is little that can be done

ECONOMIC CONDITIONS

MADURO: The value of the Bolivar currently is less than a cent against the US dollar. Venezuela is not just in the throes of a currency crisis but also facing the worst recession in the world as of date. World Bank data shows that the Venezuelan economy contracted by almost 11% in 2016 and is likely to recover slowly only by 2018. Its fiscal deficit has touched 20% of the GDP and the country is in urgent need of external financing. Sanctions imposed by the US has further exacerbated the situation. With oil products accounting for 96% of the country’s total exports, the fall in global crude prices has hit investment hard. The private sector has almost entirely collapsed along with the confidence of private investor’s in Maduro’s government. With such grave economic conditions, demonetisation has rendered most of the cash with Venezuelans redundant.

MODI: Modi’s promise of making India a manufacturing and digital powerhouse has failed to take off. World Bank data suggests that India’s GDP growth remained almost constant at 7.55% in 2015 & 2016. Although economic conditions were much better than Venezuela, India also has the burden of providing employment to the world’s largest population below the age of 35. India’s currency was much stronger than the Bolivar and its fiscal deficit was also within range. Unlike Venezuela, India has a much higher savings rate that protects people from the shocks of recession. So when demonetisation was announced, Indians were cushioned by favourable economic conditions.

PUBLIC REACTION

MADURO: After the President’s move to demonetise the bolivar, chaos gripped the streets of towns and cities across Venezuela. Reports suggest large-scale looting and robbery attempts on those who lined up to deposit old currency in banks. It also exposed realities of everyday existence in Venezuela. People lined up with 100 boilvars in boxes. Even those were barely enough to buy essentials for a day. There were reports of people running out of food and widespread hunger in the country. Protests broke out and Maduro was forced to postpone the implementation of this move which came as a relief for thousands of Venezuelans. What also didn’t help matters was that the government gave its people just 10 days to deposit the old notes.

MODI: There was initial panic across India after Modi made the announcement that declared the Rs 500 and the Rs 1000 denomination notes as illegal tender. People could still use the notes for the next two days but there were reports that people were refusing to accept the notes even before that. The Indian government announced that people could exchange their old notes till December 30, a goalpost which like many others was also shifted subsequently. There were serpentine queues outside banks as millions across India lined up to exchange currency notes. Reports suggested many deaths in queues and tempers fraying across the country. Opposition political parties tried to unsuccessfully mobilise people against Modi’s move. Stray incidents were reported from across the country of violence outside banks. But as compared to Venezuela, Indians did not come out on the street to protest. Indians were also calmer and more tolerant than their South American counterparts.  

REPRINTING OF CURRENCY AND RAIDS

MADURO: The Venezuelan president despite his hatred for the U.S gave the contract for the supply of banknotes to a Boston-based company. This company was to source the notes from Sweden for supply to Venezuela. The notes ranged from 500 bolivars to 20000 bolivars in the denomination. However, the chaos that ensued to replace 48% of the currency (representing 80% of the value) that was demonetised led to a delay in the arrival of new notes in the country. This also prompted Maduro to postpone the implementation of the move. Reports in Bloomberg suggest that the Venezuelan army recovered 88 million bolivars within a few hours of the government’s demonetisation move near the Brazilian border and immediately destroyed it. The army has also been instructed to swoop down on mafias if they try to hoard or illegally try to obtain the new bolivars as and when they arrive from Sweden in the country.

MODI: While India’s reserve bank stated that it had already started printing new currency before the government’s announcement in November, there continues to be a shortage of currency across India. A month after demonetisation, India’s reserve bank stated that it had managed to replace only a third of the currency that was taken out of circulation. Moreover, the central bank’s credibility took a massive blow when it had to retract its own statements about the amount of currency that it had injected into the Indian economy. India’s investigative agencies also started raiding and seizing new currency and gold in December. Reports suggest that bank officials in India colluded with money launderers and influential people in making new currency available to them. India’s corrupt banking system severely thwarted chances of success that Modi’s move might have.

ECONOMIC IMPACT

MADURO: While Venezuela’s economy was already in tatters, analysts expected the recession to further accelerate owing to the move. Private investors already wary of investing in the country again face prospects of falling demand with cash going out of people’s hands. Reports suggest that 40% of all people in the country did not have access to banking. The World Bank said that during the era of high oil prices Venezuela did not accumulate enough reserves to provide a buffer to it in times when oil revenues fell. This means that Venezuela would continue to depend on aid and external financing even to kickstart economic activity that would further decline after demonetisation. This could mean that the World Bank’s prediction of a 10% shrinkage in Venezuela’s economy in 2016 could be even wider.

MODI: Data from the RBI suggests that there has been a complete stalling of economic activity in India a month after demonetisation. Bank credit has flattened out while consumer demand has fallen. The Indian government has said that the pain would ease in the first quarter of 2017 but economists have suggested that the disruptive effects of demonetisation could well last up to a year. People in India were forced to shift to digital modes of payment. However, with internet penetration and infrastructure among the poorest in the world, Indians are yet to fully comprehend the intricacies of a digital economy. Millions of daily wage labourers across India’s industrial centres were rendered jobless or left unpaid by their employers. With cash shortage expected to persist, the economic outlook for India in the short term looks bleak.