2016 Demonetization in India: Missed Operational and Leadership Opportunities.
In spite of having one of the fastest growing GDP of current times and with a rapidly growing population that makes India the second largest population at 1.3 billion (Rodrigues, 2017, March 29), 70% of the people live in rural India, often in living conditions like those in previous centuries. It is a trite but truly correct statement that India is a country where centuries co-exist. Even though both industrial and agricultural growth have significantly contributed to India's economy in terms of GDP, India continues to face problems related to poverty, corruption, parallel (black) economy, politics based on the caste system in many parts of India, and a growing gap between the rich and the poor over the last few decades. Perhaps this the reason why "a platform of anti-corruption and growth" (Welsh, 2014) was attractive to the Indians in the 2014 national election, when the National Democratic Alliance (NDA)--a coalition of political parties primarily comprised of Bharatiya Janata Party (BJP) and many other small parties--returned to power after 10 years with a thumping victory in the general election. Mr. Narendra Modi, the leader NDA, became the Prime Minister of Indian effective May 26, 2014. After slightly more than two years in office, Modi announced the most controversial economic shock of India: demonetization of large currency bills of 1000 and 500 rupee bills. Effective November 9, 2014, those large bills were no longer legal tenders. Those large bills were eventually replaced with new currency bills of rupees 2000 and 500. "In a country where 90% of transactions are cash-based," however, it created chaos and hardship for millions of Indians for months" (Dutt, 2017).
By its constitution, India is a federal republic governed by a parliamentary system where the elected head of the nation (the President) is not the head of the government. The parliament consists of two houses- Rajya Sabha (Council of States or Upper House of the parliament), and the Lok Sabha (House of the People or Lower House). Legislative proposals are brought before either of the houses as bills, which when passed by both of the houses are signed by the president and become an act of parliament. The current leader of the Upper House is Arun Jaitley, who is also the Finance Minister of India. Since 2014, Modi--the current leader of the Lower House and therefore the prime minister of India--is the most powerful person in the Indian parliamentary system of governance. His party won the majority in the Lower House, while the opposition parties continue to maintain the control of the Upper House--which is a continuous body with memberships staggered over 6-year terms with one third being re-elected/appointed every two year. The Upper House is anticipated to be under the NDA control until 2020 (Dubey, 2017).
Tharoor (2016, December 6) states that Modi came into power with the promise of ending "black money," that is the result of tax evasion, crime, counterfeit money printed in Pakistan to fund terrorism in India and corporate corruption. Modi also promised to bring back billions of black money stashed in Swiss banks by the elite in India and distribute it to the masses in their newly created bank accounts and invigorate the Indian economy further. Incidentally, in about 18 months in office under a scheme titled Jan Dhan (Wealth for All), the Modi government got roughly 218 million bank accounts opened for the poor with an average balance of Rs. 1700 or about $30 USD--a paltry sum but commensurate with the economic status of the poor (Varmal, 2016; Rodrigues, 2017). It was estimated that about 600 million poor Indians did not have access to a bank when Modi came to power (Lakshmi, 2014). This is really a praiseworthy accomplishment.
The Modi government, as per Gurdial Singh Sandhu of the Ministry of Finance, wants to bring the poor into the banking system and away from cash transactions so that "the poor get into the habit of small savings and get access to credit," while making the cash more productive (Lakshmi, 2014). Again, this is a praise-worthy goal but many doubt if the banks can really service those newly opened accounts.
DEMONETIZATION AND DISRUPTION
In face of opposition from the Upper House to his fiscal policies (Rodrigues, 2017, March 29), the prime minister of India, Narendra Modi, in league with the finance minister of India, Arun Jaitley, overnight demonetized 500, and 1,000 rupees notes that constitute about 86% of the Indian currency and add up to about 14 trillion rupees in circulation. That is, effective November 9, 2016, currency notes of 500 and 1000 rupees were no longer considered legal tender (Tharoor, 2016, December 6). The planning and execution of demonetization was done in utmost secrecy. Within three hours of the televised announcement by Prime Minister Modi, those currency notes were practically useless for commercial transactions. Indians were given till December 30, 2016 to deposit old currency in their bank accounts. It was rumored that deposits in amounts larger than Rs. 250,000 would be scrutinized by the Indian Revenue Services. People had the option of declaring their "black" money subjected to 50% in tax & penalty. Black money, not declared but detected later, was to result in 90% in tax and penalties. The three primary purported reasons for demonetization were: 1) to reduce the growing volumes of black money, which emanate from sources such as ill-gotten, untaxed, bribery, corruption, or criminal activities; 2) to stem the counterfeit currency bills that were in circulation; and 3) to curtail terroristic activities that were primarily supported by the counterfeit currency (Paliwal, 2017).
However, in terms of public policy, the execution of this demonetization policy by Modi and Jaitley has been very poor. As Tharoor (2016, December 6) states, the demonetization resulted in massive economic disruption, not so much for the rich who were likely to be using credit cards already, but more so for the poor and the lower middle class. With the decrease in trade, production, and employment, especially in the small and the informal sector of the economy, the previous economic growth of India came to a halt. The previous prime-minister of India, Manmohan Singh, predicted that India's GPP would shrink by 1-2% during the fourth quarter of 2016 itself (Tharoor, 2016, December 6).
As explained by Tharoor (2016, December 6) and Gopinath (2016, November 24), people rushed to limited numbers of ATMs to withdraw limited amounts of money (due to a shortage of currency in other denominations), and to banks to exchange their Rs. 500 and Rs.1000 currency notes, again restricted to exchange up to Rs. 2000 to Rs. 4,500 at a time. Thus, people stood in lines for hours to exchange or deposit expired bank notes and were unable to withdraw their own money from the banks beyond a certain amount.
According to several reports (Gopinath, 2016, November 24; Sharma, 2016, December 4; Tharoor, 2016, December 6), the short-term economic and social consequences of the demonetization policy, especially for the poor and lower middle class, was immense: many families did not having enough money for food; weddings were cancelled or were in trouble because of the cash crunch; sick people were unable to get treatment, and some surgeries had to be cancelled; farmers, and fishermen were unable to sell their perishable produce or if they did manage to sell, it was at a big loss; many small farmers were unable to buy seeds for winter planting; trading came to a virtual halt in many village, towns, and cities (Gopinath, 2016, November 24; Sharma, 2016, December 4; Tharoor, 2016, December 6).
The long-term consequences of this ill-planned public policy were also expected to be negative by Gopinath, (2016, November 24); Sharma (2016, December 4); Tharoor (2016, December 6). With the halt in agriculture, trade, production, and employment, especially by small businesses, India's GDP was anticipated to possibly reduce by 1-2 % in 2017. Many small businesses closed; farmers faced bankruptcy; rural financial institutions were massively damaged, and possibly so was the Reserve Bank of India. What was worst, the problem with black money may continue to persist due to creative new ways of money laundering, especially by the rich and the elite who have most of their money in Swiss banks, invested in real-estate, and gold. Therefore, India's economic recovery was projected to take months or even a period longer than one year (Gopinath, 2016, November 24; Sharma, 2016, December 4; Tharoor, 2016, December 6).
As further suggested by Tharoor (2016, December 6), the demonetization policy was flawed by design and very impractical, seeing that 90% of financial transactions in India happen in cash and 90% of retail stores do not have card readers. Clearly, no economic cost-benefit analysis was done before the implementation of demonetization, as well as no alternative policy options were even discussed by the policymakers. With all the adjustments made to the policy since implementation, the execution and impact of the policy was not well thought out. According to Tharoor (2016, December 6), Modi has succeeded in making the public policy environment even less transparent than before and he may be losing the trust of many in the process.
One of the authors of this article happened to be in India and experienced the impact of demonetization first hand. It became very obvious that the operational planning and execution of demonetization was not planned at all. In the first 15 days, almost every day the government was announcing the changes in how much money could be converted and how much money could be deposited or withdrawn. There was a total chaos in the country. Banks had literally mile-long lines with visible dark sides of human emotions. Within the first two weeks of demonetization, about 70 deaths were attributed to money "withdrawal hardship," such as exhaustion due to long lines, old currency or large new bills not accepted for transportation to the hospitals, as well as by the hospitals (Peck, 2016). There were tourists in the country who were stuck with large bills that they could not change unless they visited one of the international airports with a limit of Rs. 5000 per week (less than $100). However, the lines at the airport too were impossible to navigate. Many tourists could use their credit cards at expensive five-star hotels, but did not have cash to eat at cheaper restaurants that do not accept credits cards. So, the questions is: where did the government go wrong with the operational planning and execution of the 2016 demonetization?
1. The government wanted to replace trillions of rupees in circulation. Given the time constraint, they decided to print large currency first: Rs. 2000 and 500 bills. Of course, the printing started months in advance and in utmost secrecy. That allowed the government to replace all the currency in value (larger bills of Rs 2000 vs. older bills of Rs. 1000) quickly after the announcement of demonetization but people were stuck with large currency bills that no one was able to break for small purchases. The author, as mentioned earlier, was personally stuck with a large bill that no taxidriver was able or willing to break. There was total chaos in the retail business. People and businesses were unwilling to part with small currency bills, even when they had plenty in their possession, as they were unsure to get more when needed. Instead of printing large replacement currency bills in extreme secrecy for months in advance, a better strategy would have been--as suggested by a member in the Lower House in a debate over demonetization--to print smaller denominations that were not demonetized (Rs. 100 bills) in larger quantities without anyone suspecting the impending demonetization. This would have reduced, if not totally eliminated, the ensuing chaos that negatively affected average people and small businesses.
2. The replacement currency bills were of different physical dimensions than the demonetized currency bills. This required all the ATMs to be recalibrated, especially since there were not enough non-demonetized bills of Rs. 100 to dispense. Based on one of the authors' personal experience, even till May 2017, many of ATMs in the country in rural areas and suburbs of large cities were not calibrated to dispense new currency bills.
3. The total chaos at the banks had a feel of a "bank run" from the great depression era. A large number of people would show up day after day to deposit or exchange their old currency at the bank. Only a small percentage of people in lines were served during the early days after demonetization. A lot of frustrated people would simply go home to return the next day with the hope of reaching the bank counter for service. If proper operational planning was done, the government could have guided the banks to use a crowd control scheme, such as allocate different time slots or different days to account groups (based on the alphabet of their last names or ending account numbers). That way, only a smaller number of people would arrive every day and the instances of exhaustion due to standing in the hot sun for long periods could have been avoided.
4. The government was changing rules on depositing and withdrawal almost every day during the first 30 days after demonetization. For example, it was announced on November 8 that old notes worth Rs. 4000 could be exchanged at a bank counter and that the limit was increased to Rs. 4500 on November 13. But this was reduced to Rs. 2000 on November 17. On November 24, exchanges were no longer allowed, but only deposits were allowed. Similarly, it was announced that emergency and critical services, such as hospitals, fuel stations, airports, and railways could continue to accept old currency bills. On November 9, the list was expanded to include metro stations, pharmacies, toll plazas, etc. The list was further expanded on November 10 to include school fees, taxes, penalty/taxes to central/local governments and utility bills up until November 24. However, later, the deadlines of some of these were extended beyond the originally announced deadlines (Ray, 2017). The changing rule clearly indicated that government had done extremely poor planning in advance and was in a reactionary mode to people's hue and cry.
5. Even though the government was anticipating that Rs. 5 trillion out of Rs. 16 trillion in circulation would be rendered worthless, banks reported to have received 97% of old banned notes by December 30, 2016 (Singh & Pradhan, 2017). A possible explanation for such a high percentage of deposit is that a large number of the counterfeit currency bills were accepted by banks. Many rural banks did not have the required equipment to identify those counterfeit currency bills. Also, the long lines at banks put added pressure on the bank employees to clear lines, rather than focus on identifying those counterfeit currency bills. Another explanation: a large number of bank employees were involved in illegal activities to help people convert black money into white by depositing money into fake accounts (Dabas, 2016). This was another category of operational planning failure.
LEADERSHIP AND POLICY FAILURES
As stated above, 97% of banned currency notes were deposited in banks by the December 30, 2016 deadline. It is clear that demonetization did not achieve one of its intended goals of eliminating about Rs. 5 trillion of "black money" as worthless (Singh &Pradhan, 2017). Based on the research done by economists on demonetization to fight criminal activities and "black money," focusing on cash alone is not enough since the rich often invest their black money in real-estate, art, and jewelry. Therefore, to minimize social and economic disruptions, economists such as Kenneth Rogoff suggest gradual implementation of demonetization over several years and suggest permanent elimination of all high-denomination notes and not replacing Rs 1,000 by Rs 2,000, as was the case with Modi's plan (Gopinath, 2016, November 24). Therefore, India's recent demonetization public policy was poorly executed, since the prime minister and the finance minister of India tried to bring about change without a proper safety net and contingency plans.
In terms of leadership theories, Prime Minister Narendra Modi exemplified pseudo-charismatic leadership by falsely claiming to bring about transformation in the nation, especially for the masses. And the finance minister, Arun Jaitley, acted like a transactional leader with his focus on change, solely in the interest of the country's economy. However, Burns (2003) distinguishes between change and true transformation. Change merely substitutes one thing from another, which Burns attributes to transactional leadership. Whereas, transformation is similar to the metamorphosis in form or structure (Burns, 2003), as seen in a caterpillar transforming into a butterfly. Accordingly, transformational leaders encourage their followers with a new sense of meaning in their work and a new sense of worth related to their work. They empower their followers in a participatory and democratic manner.
Modi was supposedly doing that in his speeches in political rallies before his election as prime minister and even now after the demonetization. However, his message is delusional, since it gives a lop-sided vision of a cashless society where the masses will be able to use mobile apps to do financial transactions and where all citizens of India will have bank accounts to handle their finances. As stated earlier by Tharoor (2016, December 6), India's demonetization policy was flawed by design and was very impractical, since 90% of financial transactions in India happen in cash and 90% of retail stores do not have card readers. Thus, Burns (2003) looks upon such charismatic leadership with suspicion and sees it as confusing and undemocratic, even though it may help in bringing about change in a country. For Burns (2003), a good leader is an ethical leader who practices transforming values as order, liberty, equality, justice, and pursuit of happiness. Therefore, according to Northouse (2013), Modi can also be called a pseudo-transformational leader.
British economist, Richmond Tawney, has expressed concerns related to inequality created by humans where many lack the wealth and opportunities to better their lives, let alone pursue happiness (Burns, 2003). Transformational leadership can help to overcome the monopoly of the elite over power and resources through economic and social planning. However, the finance minister, Arun Jaitley, turned out to be transactional leader, more focused on mere exchanges between leaders and followers rather than their followers' welfare (Northouse, 2013). The current demonetization public policy will benefit only a few at the expense of the masses (Tharoor, 2016, December 6), especially in terms of economic growth that will result from banks having more money to invest in the economy (the BSE SENSEX Index has moved from about 26,000 on December 30, 2016 to about 32,000 by June 30, 2017) and a cashless economy (Sharma, 2016, December) that will further benefit only cell phone service providers, e-wallet companies, and banks.
POSSIBLE LEADERSHIP SOLUTIONS
If we were to be consultants to prime minister Modi's demonetization public policy, using a combination of Core Knowledge, Heifetz's practical leadership philosophy (Heifetz, 1998), and Schein's approach in Humble Consulting (Schein, 2016), we would have worked with India's leadership differently in response to the economic and social problems that the country has been currently facing. The economic crisis that India is facing in terms of black money and corruption is messy and complex (Schein, 2016). It needs to mobilize adaptive work by India's formal authority (Heifetz, 1998), both at the Lower and Upper Houses in the Indian parliament.
India's economic crisis is a result of the socio-economic and political dynamics that the country is facing due to growing globalization, loss of jobs, and closing of businesses due to corporations moving in from other nations. The crisis is also a problem resulting from the changes that have come into the corporate world that have also crept into small sector industries. There is growing corporate greed and the tendency to influence the rising aspirations of the urban population of India who want even faster growth of the Indian economy (Rodrigues, 2017, March 29), while much of the rural areas are still far behind in development. This, in turn, has influenced the politics of the nation, leading to dehumanization of politicians of India. This change in culture and the accompanying move away from the basic mission of democracy for all in India has led to exploitation of the Indian economy for personal gain, both by those in the business world and in politics. Therefore, when tackling corruption caused by black money, Modi and Jaitley were seeking a technical answer to an adaptive problem.
In the absence of a quick and easy technical solution to their complex messy problems and an unstable economic environment, Modi and Jaitley needed a new leadership model. According to Schein (2016), we would advise the leadership in India to take adaptive moves that do not necessarily solve the big problems of the economy overnight, but help to improve the situation gradually by removing corruption, sector by sector, in the economy. The politicians of India need to develop personalized level II relationships that involve trust and openness in Parliament and with the people of India. If the politicians do not know what to do, they need to create a dialogue with economic and political experts and with people who will be effected by their policies.
It was clear that the Modi government failed to achieve the intended results through demonetization. It failed in many operational planning and execution aspects of demonetization. Masses suffered but the tenacity of the Indian poor and middleclass is praiseworthy. Modi's demonetization, though noble in intent, illustrates a lapse in leadership. The leadership, as defined by Heifetz is not passive influencing of the people to achieve the leader's vision, which in India's case happened to be that of the prime minister who is already steeped in controversies and self-promoting achievements (D'Souza, 2016, March 11).
Therefore, according to the general guidelines provided by Heifetz (1998), when technical solutions to problems appear to fail in resolving complex national issues, it behooves the leaders with authority (the prime minister and finance minister of India especially) to face the crisis of black money and corruption more impartially, so that the elite are not left untouched by demonetization. The leaders must identify the adaptive challenges, keeping stress caused by demonetization within a productive range by managing the economic and social environment. The leaders should direct their attention to issues regarding corruption by doing a reality check that more than half of the Indian population do not have and probably will not be able to afford to buy and make monthly payments for smart phones so that they can use apps for their business transactions and for banking. This adaptive work related to advances made in technology needs to be given back to the people in the country so that they can embrace the new emerging technology at their own pace and when they can also afford it. Meanwhile, it is the job of the political leaders to guide the police, military, and the government officials to fight corruption and dangers of terrorism in India.
We also see similarities in Schein's and Heifetz's views on leadership and consulting in today's world of globalization, multicultural, socio-economic, and political environment. In times of crisis, and when faced with messy, complex problems such as corruption related to black money and funding of terrorist activities by counterfeit currency, leaders in authority need to make adaptive changes by facing the harsh realities of the existing Indian economy, rather than behaving in their idealism as if the current challenges do not exist. The leaders need to take small progressive steps in face of changing values in society to work on the problems faced by organizations and, as in this case, nations as a whole.
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Bina Soni, Indiana University of Pennsylvania
Ramesh G. Soni, Indiana University of Pennsylvania
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|Author:||Soni, Bina; Soni, Ramesh G.|
|Date:||Jul 1, 2017|
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