The End of Cash in India?

Late in the evening on Nov. 8, Indian President Narendra Modi made an unscheduled appearance live on TV. Effective immediately, he said, all banknotes of 500 rupees ($7.50) and higher were invalid and must be turned over to banks, in order to fight corruption, terrorism and forgery. Abruptly the entire Indian economy was forced to subsist on nothing but the equivalent of $1 bills, at least until new currency could be rolled out. In the following excerpts, Outlook India surveys the chaos that followed, and interviews an economist who believes the “demonetization” scheme may be intended to push India toward a cashless economy.

Sudhir Panwar, a member of the Uttar Pradesh [UP] Planning Commission and professor at the University of Lucknow, was caught up in a strange, chaotic situation on Wednesday afternoon. A group of sugarcane farmers from western UP had travelled to the state capital that morning. They had arrived to meet state officials, to implore them to issue a sugarcane ‘reservation order’. This order has been long overdue this year. Without it, the sugar mills are not allowed to purchase the sugarcane crop, which is ready to be harvested.

But when the farmers reached Lucknow, and as they began their meetings, they realised that their currency notes were not being accepted by shopkeepers and restaurants. The night before, the government had invalidated Rs 500 and Rs 1,000 currency notes, but those were the only denominations they had. Lucknow—like most other places in the country—was witnessing a lot of panic as the government tried to assure people that cash in the form of Rs 2000 currency notes would be available in coming days. Thus, with all the banks and ATMs closed to public dealings on Wednesday, these hungry and confused farmers finally approached Panwar. “They were wandering around with nowhere to go or eat so I arranged some Rs 4,000 in cash for them, needless to say, with great difficulty,” says Panwar.

Right now, north India’s paddy farmers are flush with cash from fresh crop sales and need to purchase seeds for the sowing season. Most of their cash—and cash is the norm in rural India—is in the form of Rs 500 and Rs 1,000 notes, the most common denominations. “I expect rural banks, which are very inefficient, to turn away these people as they try to exchange their cash for the new currency,” Panwar adds. “The current feeling is that their money has been rendered worthless overnight.”

Early morning on the same day, another scenario played out at one of north India’s prominent vegetable markets in Gurgaon, which cater to the hinterland as well as regions beyond. This mandi typically opens for business at 4 AM, starting with purchases that are on credit. Subsequently, cash purchases begin, from 6.30 AM to late into the afternoon.

On Wednesday, buyers came to the mandi with cash in the now-invalid denominations, so trading could not take off. The farmers failed to sell their produce, and the crowd was getting agitated. The mandi president then decided to accept the old denominations, just for a day.

By the end of the day’s trading, transactions were 30 per cent lower than usual. “Making the Rs 500 and Rs 1,000 notes invalid did cause hardship but we can take this much trouble for the better of the country,” says Inderjeet Thakran, president, Gurgaon Sabzi Association. He is only voicing a belief that many have, that the sudden ban on these denominations will curb illegal currency and black money, plus make the country safer. “Yes the impact of the government’s decision will continue for the next two or three months,” he says. “But tough decisions like this were likely. Hadn’t the Prime Minister said that black money hoarders should own up by September 30 and then not complain if the government takes tough steps.”
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These are only the early days of the mammoth cash purge—and a lot of people feel that it’s worth going through the hardship of initial days to serve a larger cause, while, on the other hand, just as many are outraged at this forced disruption of order. How far this will work will depend, obviously, on how soon and how well the government brings it all under control.
– Pragya Singh with Minu Ittyipe

“TRANSITION TO CASHLESS ECONOMY?”

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Hindu temple coin. Photo CC: Jerry Woody

Outlook’s Lola Nayar interviewed economist Abhijit Sen: His assessment? Modi is planning a transition to a cashless, or much less cash-friendly economy. The reward for India’s federal government would be a much more efficient tax collection system.

How do you see the demonetization affecting the economy?
I don’t know how the whole thing was thought of, but given the fact that 500 rupees is not exactly a very large amount nowadays compared to either the wages—it is two days wages roughly for daily-wagers—or the fact that it is a very large part of the currency in circulation, it must have some pretty strong effect. At least in the short run, the cash economy, which is 50 or possibly 60

At least in the short run, the cash economy, which is 50 or possibly 60 per cent (we don’t know exactly what the number is) [of India’s economy]will be drastically effected. We can certainly expect it to slow down for the first one week, then people will find jugaad [workarounds]to get around the whole thing, but some of the effects are bound to last longer. So essentially in the short run–though I can’t say how short the short run is—there will be the same effect as a sudden drop in demand. Daily wagers will find fewer people willing to employ them because of liquidity crunch. This will be particularly strong in the construction sector. People selling things may also find buyers turning them away saying “Paise

This will be particularly strong in the construction sector. People selling things may also find buyers turning them away saying “Paise nahi hai, baad mein aao” (I have no money, come later) or be forced to take huge discounts, particularly if you want the payment in hundred rupee notes. There will be all sorts of effects…There is a large part of the economy that works on a daily basis—either daily wagers or those who take a loan to buy things to sell. The trend of people relying on money supply on a day-to-day basis is stronger in urban areas than in rural areas. And all that money comes from people who are entirely rooted in cash economy. These are merchants, money lenders, kabadiwallahs[scrap dealers], wholesalers and many others. These are people with black money, as a large part of the black money is actually the liquidity for a very large economy. If these people get scared and shut off to fix their own problems, then it will have an effect—which may be for a week or a month…I don’t know how long it will be.

There is a large part of the economy that works on a daily basis—either daily wagers or those who take a loan to buy things to sell. The trend of people relying on money supply on a day-to-day basis is stronger in urban areas than in rural areas. And all that money comes from people who are entirely rooted in cash economy. These are merchants, money lenders, kabadiwallahs[scrap dealers], wholesalers and many others. These are people with black money, as a large part of the black money is actually the liquidity for a very large economy. If these people get scared and shut off to fix their own problems, then it will have an effect—which may be for a week or a month…I don’t know how long it will be.

These are merchants, money lenders, kabadiwallahs[scrap dealers], wholesalers and many others. These are people with black money, as a large part of the black money is actually the liquidity for a very large economy. If these people get scared and shut off to fix their own problems, then it will have an effect—which may be for a week or a month…I don’t know how long it will be.
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The government has talked about cleaning the economy of black money. Have past demonetisations helped do that?
No, it has not worked in the past. What it does is—if there is a stock of black money, some of it would simply vanish as it will not be changed into the new currency due to the fear of being caught out. All you are doing is reducing the stock of money without doing anything about the processes which generate it.
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Would you say the move was entirely to unearth black money or was there a political dimension to it?
This suggestion, of a transition to a cashless economy and reduced cash transactions to help improve tax collections, has been floating around for some time now. This idea seems to have been bought into [by Modi’s people]. In the course of things, there might be some notion that there are stacks of cash lying around that can be tapped into through such a move together with the disclosure scheme. Perhaps, soon after this move, there may be an amnesty scheme, which will help the government have a lot more cash. So, more than previous governments, Modi is thinking of improving the tax intake, as he obviously wants to spend more on development in the last two years of his office. The decision seems to have been worked out in terms of not the effect on the economy today, but the effect on the ability of taxes to unearth unaccounted money in some sense. Any move of this sort is bound to have

So, more than previous governments, Modi is thinking of improving the tax intake, as he obviously wants to spend more on development in the last two years of his office. The decision seems to have been worked out in terms of not the effect on the economy today, but the effect on the ability of taxes to unearth unaccounted money in some sense. Any move of this sort is bound to have political dimension. As media reports state, it is almost like a ‘surgical strike’, signalling the message of a tough man who has ability to take decisions that ought to have been taken much earlier.
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Lola Nayar