Demonitization of the Diamond Industry

The greatest hope of India was when Mr. Modi was elected as the Prime Minister. With fanfare, the people voted him in, and it was described as being ‘emblematic’ to the future of India. People truly believed in him and had the highest hopes.

 

I am afraid that if the Prime Minister of India, Mr. Narendra Modi, would run again today, his chances of winning the election would be dramatically lower than last time. In fact, some would go as far as saying that these days he is not under fire, but on fire. One of his megalomaniac project ideas is to build a monument in the sea of Bombay, on reclaimed land. The memorial, which includes a proposed 630-foot-tall statue of Shivaji, a 16th- century ruler from western India, will be built off the coast of Mumbai on land reclaimed from the Arabian Sea.

 

The project is expected to be completed by 2019.

 

The estimated cost to the government of the Maharashtra state, of which Mumbai is the capital, is said to be 36 billion rupees ($530 million). In my opinion, it will never finish below a billion US. The insane step to eliminate 86% of bank notes in one bold administrative decree could cost 50% of India’s projected growth this year.

 

The sudden contraction will hurt economic growth. According to Patrick W. Watson from Forbes Magazine, economists at Ambit Capital cut their 2017 GDP growth estimate almost in half, from 6.8% to 3.5%. They think the effects will last into 2018.

 

Every government dreams of eliminating corruption, but it is regretfully one of the driving forces of the Indian economy. The government policies to eliminate the 500 and 1000 rupee notes will have little effect on corruption as the big bribes are not taken in cash rupees but in United States Dollars. Furthermore, the exchange doesn’t even happen in the streets of Bombay. Rather, it takes place between banks located far far away.

 

The dramatic demonetization plan of India, in a way, is similar to Mao Zedong – The Great Leap Forward. From 1958 through to 1961, the Communist Party of China (CPC) ran an economic and social campaign, which adopted that name. Mao’s great dream cost 45 million people their life, and all within five years. Mao wanted to rapidly transform the country, in a five-year plan, from an agrarian economy into a socialist society. The idea was to do this through rapid industrialization and collectivization. However, it is widely considered to have caused the Great Chinese Famine.

 

You will most probably ask me why I feel it’s relevant to bring all these stories as Leibish isn’t a political commentator. We are a jewelry brand. One of our great sages, Moses Maimonides who was otherwise known as the Rambam, stated that the world is going on its own ways. He did not mean that changes are not possible. What he meant was that changes have to be made gradually in modest portions.

 

The diamond business in India is heavily relying on cash transactions. I figure that about 30% of the manufacturers in Surat don’t even have a bank account. They likely settle their transactions in cash, completely outside of the banking system.

 

Due to this dramatic effect of demonetization, large numbers of Indian manufacturers drastically cut their hours and many others lost their jobs completely. The industrial production is down, dramatically.

 

India is a rural society. The dream of a cashless society is a nice fantasy, but it is impossible to ignore the constraints that they have. Four out of five villages don’t even a have a bank. Mr. Gyan Rohra writes in one of his articles that if 86% of cash is taken out, leaving only a small amount available, all market transactions will have been killed. The people who would be affected would be the common working folk, those that keep the market moving. A parable explaining the situation is the Government makes these new harsh policies to kill ten crocodiles. Only, the changes pumped out all water from the pond, which in turn killed all the ten thousand fish that were inside. All crocodiles simply walked off on the dry land.

 

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