The great Indian demonetization tamasha

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RAHUL MAIRA

RAHUL MAIRA

India, the biggest democracy in the world, deemed their legal tender of 500 and 1,000 currency bills invalid on the evening of Nov. 8, 2016 in a surprise announcement. This move came with the Indian Prime Minister Narendra Modi cracking down on the circulation of black money that nourished the shadow economy of India. The government aimed at acting as Robin Hood by seizing the illicit gains of the wealthy and distributing them among the poor. Is this how the story unveils itself or is there a flipside to the Robin Hood story?

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About 70 percent of the Indian economy thrives on cash transactions and the 1000/500 currency bills made up 86 percent of the money in circulation. The government planned to exchange the invalid currency bills with new 500 and 2000 currency bills. Largely, the amount of cash that was being used on a daily basis by the farmers and daily wage earners was underestimated. ATM machines do not have enough cash to dispense and have not properly been calibrated with the new legal tender. The poverty-stricken daily wage earner is affected the most. They now have no cash to buy basic necessities, put food on the table, or pay to transport their crop to the market places. Ninety percent of all salaries in India are paid in cash, hence, all labor intensive businesses now don’t have enough cash to pay their daily wages. They are laying people off in lieu of time for a more stable environment where cash is once again freely available.

Overall spending has declined, which led to a reduced level of consumption in the economy. Goldman Sachs predicted a decline in the Indian GDP from a strong 7.6 percent to 6.5 percent post demonetization.
India also offered an amnesty program for black market players, where the government would accept illicit cash at 50 percent tax, and how much of the recovered notes were part of this program is currently unknown.

The effects are widespread beyond the Indian borders. Bangladesh, Nepal and Bhutan are some countries where Indian legal tenders are used frequently due to the historic trade relations. These are being affected, too, because there is not enough cash to purchase items for small and medium-sized businesses. With people across the world working with India and Indian businesses, as well as expats carrying Indian currency with them, it has become inconvenient to remit the Indian currency back or exchange it for US dollar anywhere outside of India. The Russian embassy, along with some others in Delhi, also highlighted the mismanagement with the rollout of such sudden changes as they are stifled by the shortage of cash to pay for their employees as well.

There have been many disclosures as the government introduced an amnesty plan for all with money unaccounted for to come forward and deposit the cash voluntarily, taxed 50 percent. Cracking down on black money is not always as straightforward. Most of the illicit gains are not held in cash for a very long time.

They are usually invested in stocks, jewelry, and property and hence, the actual gains from the demonetization are yet to be seen. One thing is clear: the government has now positioned this move as a step forward into a cashless society that in the future will be a safe and secure manner to transact. As of today, only 10 to 14 percent of the population has ever used non-cash payment methods. The youth of the nation are being seen as the digital baby boomers that will take this agenda forward and educate their grandparents on the use of such payment instruments.

Only time will tell the real effects of demonetization in the long run and whether this is a strategy that other economies dependent on cash could implement.

Rahul Maira is the vice president of Sales and Operations at MoneyMax.ph, a financial comparison website aiming to help Filipinos save money through diligent comparisons of financial products.

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