India: Demonetization and its Discontents

This is Naked Capitalism’s special fundraiser, to fight a McCarthtyite attack against this site and 200 others by funding legal expenses and other site support. For more background on how the Washington Post smeared Naked Capitalism along with other established, well-regarded independent news sites, and why this is such a dangerous development, see this article by Ben Norton and Greenwald and this piece by Matt Taibbi. Our post gives more detail on how we plan to fight back. 346 donors have already supported this campaign. Please join us and participate via our Tip Jar, which shows how to give via check, credit card, debit card, or PayPal.

By Arjun Jayadev, Associate Professor, University of Massachusetts, Boston. Originally published at the Institute for New Economic Thinking website

The Modi government’s demonetization decree, which at the stroke of a pen eliminated the two most widely used and largest currency notes in circulation (Rs. 500 and Rs. 1000) was initially hailed by the prime minister’s chest-thumping media allies as a “surgical strike’’ against “black money”. But a surgical strike, at least in theory, is precise and targeted — in this case presumably aimed at the “black” part of “black money”, holdings of wealth that are obtained illegally or which have been undeclared to the tax authorities. What has transpired, instead, is more akin to a carpet bombing — a widespread and indiscriminate operation without concern for collateral damage.

The widespread pain caused to those who are not its intended targets is a good reason to oppose such indiscriminate policy actions. But in the case of demonetization, those unjustly injured have by and large accepted a narrative that this is for the greater good and will somehow rid the system of the depredations of lawlessness.

The logic of the measure was never clear. As many have pointed out, cash hoarding is a very small part of asset holdings gained from illegal activities, and at least some fraction of the cash hoards are generated by activities that are perfectly legal (indeed most activities that generate illegal income simultaneously generate legitimate income). Moreover, even these “black money” hoards can be laundered under the new dispensation through multiple routes. Indeed, within a few days of the announcement, many agencies suggested ways in which Indians could launder ill-gotten cash. These include providing temple donations with a kickback, backdating invoices, using factotums to deposit money and so on. There is already evidence that these methods are being used, and there is no reason to believe that those with cash hoards are going to be caught.

Even if there was some way to track these incomes, it beggars belief to imagine that a tax authority as inept as India’s is at catching and prosecuting income-tax evaders will suddenly have the wherewithal to do so. An equally implausible justification of the policy is that it was important to get rid of high-denomination notes to prevent cash hoarding — as if somehow the extra burden of holding four extra 100 Rupee notes rather than one 500 rupee note would magically prevent illegal transactions. “No one will ever hold black in 100 notes”, an observer told me without irony, displaying a desperate need to believe in the cause. Of course, this justification collapsed when it became clear that there would be Rs. 2000 notes that were legal tender. Finally, Indians were told that the currency withdrawal would prevent counterfeiting (the always convenient Pakistan threat!!) — with no evidence offered to make the case that this was a major problem, or that the new currency was more immune to counterfeiting.

Evidence of these problems is mounting. In the best case scenario — highly unlikely to be achieved — some people will be dispossessed of illegal cash holdings. But the methods by which illegal income is generated have gone untouched.

That’s why, in the days following the announcement, advocates of the change have slowly moved goalposts. New justifications include promoting a cashless economy, although there’s no sign of any program to back that up. Talking heads and government spokespeople speak easily of the idea that every family has a bank account and that there are over a billion Aadhar cards (India’s identity card system) conveniently forgetting that for the vast majority, those are not accounts from which everyday transactions take place (indeed, this is not true of the majority of the middle classes as well).

How then to explain the fact that people have been tolerant and willing to undertake the hardship associated with the currency change? The answer may lie in the feeble hope that the move will reverse widespread venality and lawlessness by “fat cats” who hoard “black money”. The government has bet on a fantasy without doing all the hard work associated with addressing the underlying malaise.

But the demonetization also has a malign edge that has, as yet, not been adequately acknowledged. If there is a longstanding collective understanding that has prevailed in India, it is in the belief of the integrity of the monetary system—that legal tender will be widely accepted, that our ‘pay community’ is strong and cohesive. Relatively unusually among developing economies, India has avoided monetary drama —inflation has never gotten to hyperinflationary levels; deflation has never been on the cards; widespread defaults have been few and largely contained; money has been accepted as means of final settlement everywhere and at all times. But demonetization has shaken that faith. Indeed, the only way for the policy to have long-term effects in preventing cash hoarding is to have the threat of further demonetizations.

There is a reason why demonetization has never previously happened in peacetime or in the absence of hyperinflation. Those are events that acknowledge the widespread breakdown of social life and attempt to reset it. Money itself is an essential metaphor, a social contrivance to signify a means of final settlement of debts without which binding commitments or promises would be impossible. The anonymity of money is exactly what allows people who don’t have any strong social ties to cooperate in all sorts of ways. And cash, in particular, allows for cooperation and coordination among the poor, the rural population; people who don’t have access to electronic payments systems or coordination through corporate structures, professional networks and so on. Demonetization undermines those structures and in that, the sense of a collective social understanding. Doing so, while unlikely to be fatal, will corrode this most basic trust.

* A different version of this piece first appeared at Macroscan.org

Print Friendly
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn0Share on Google+0Buffer this pageEmail this to someone

30 comments

  1. b

    The reason fro the demonatization is that Modi plans in a second step a tax system that ONLY taxes monetary transfers – all of them.

    These plans are known, though not widely, since 2013.

    For the problems of this see my piece yesterday:

    Modi’s Bank Transaction Tax May Lead To Larger Conflicts
    http://www.moonofalabama.org/2016/11/modi.html

    1. CRISC

      India needs to implement ISO 27001 and ITIL at government bodies.. As risk management gets neglected or may be no one understands risks or no one really understands DAR (Decision Analysis and Resolution) or (Causal Analysis), even if we have so many project managers in this country, we cannot really solve the problem easily and reasons for this: competency training and minimum education criteria be imposed for key positions in government else ensure the aspiring candidate educates self seriously and all right intentions will lead to right results too. Prior to moving to cash less society it makes sense to conduct threat-vulnerability-risk assessments of all assets in country and establish controls. How can the present problem be resolved? Needless to say – bring in currency replacements soon. Why do many individuals support demonetization- because it is a good cause to reduce cash transactions. why common man suffers – because they didnt take active interest in Information Technology… they had fear or insecurity or blind trust.. this is known as vulnerability, the threat is exploitation and the risk is breakdown. Cudos to demonetization, people have began curbing expenses and maybe one day they may not use cash or cash-less systems and just rely on barter system and golden era will come soon or may move to spiritual path and get philosophical with ways of life.

  2. weinerdog43

    I hope some other folks caught Bloomberg this morning. They had Ken Rogoff (eye roll) explaining how Modi was so ‘brave’ for implementing this idiotic plan. Tom Keene introduced Rogoff by noting that Rogoff’s new book “The Curse of Cash” is the most hated book on Amazon. Go check the reviews for a laugh this morning.

    Anyway, they also had Bill Nye on at the same time and it was delightful to watch Rogoff squirm.

    I wonder how this cash confiscation will affect the Indian elections in 2017?

    1. Disturbed Voter

      Hopefully Modi and anyone associated with him will be defenestrated from public office.

      The purpose of controlling every purchase of chewing gum .. is micromanagement, and of something as vast and complicated as a national economy. Basically recreating the economic equivalent of the Soviet Union in India (and elsewhere). Human nature and limitations will never make this megalomania practical. And the persons pushing it are either insane or malignant.

    2. templar555510

      How right you are. Rogoff …….lol. He’s so naive. He talks about corruption in India . It’s small beer compared to corruption in the US and the UK. But cash is not the issue. It’s government policy that is. His example of a friend’s father selling a house and the amount of the sale shown on the deed being half the actual price. Did he never hear of Liar’s Loans ? He lives in his own little make-believe world, the same world that now believes Naked Capitalism amongst two hundred others to be a Putin tool .

  3. skk

    these actions by the govt. may look sudden and arbitrary, but to promote a cashless economy the govt implemented a no-fee bank accounts scheme, with 220m accounts now, in late-2014. https://www.bankbazaar.com/saving-schemes/zero-balance-account-through-pm-jan-dhan-yojana.html

    For the goal of fighting black money, a tax-amnesty plan – where you paid the tax, a surcharge and penalty but avoided prosecution – ended just a month before the demonetisation. Of course they didn’t say “pay or else….” – but they could hardly do that.

    From this perspective this looks like a step by step approach towards the problem of “black money”. What next ? Money parked abroad is clearly something to go after. And the approach ? how about incentivising the return of capital assets with a lower tax rate on returned capital ?

  4. k5

    i am a sort of sales guy. i travel to certain districts in western india to ensure our vendors are stocked up and displaying our wares (mostly small ticket items like shampoo sachets and toothbrushes). over the last few weeks, its clear that the most inconvenienced are people in salaried positions in big cos and cities. the very rich dont touch cash so much and the very poor rarely see so much cash. the ones who definitely are panicking are jewellers, white goods (refrigerator and tv etc) merchants and low and mid level local and state level bureaucracy. this section of society has the most to lose because of rampant use of large cash transactions. i wouldnt know enough abt real estate, but i am sure they are affected too.

    a lot of anger in the media seems misdirected. more people, included the salaried and small traders support the move than oppose it inspite being unfairly inconvenienced and modis largest constituency. they finally see drastic action against corruption from the very highest levels that was not initiated because of courts or some journalistic investigation. talking to my vendors and clients i get the feel that the government has some sympathy for now and it might be a coupke of months before things start simmering. in the interim, informal credit has stepped up. medical and small shops used to settle tabs once in 15 days. now i see them extend that to 45 days for regular local customers. the use of debit cards and payment apps hasnt picked up to the extent it has been hyped.

    i came across the site from some post us election links i randomly followed and found it to be quite eye opening. thanks for your reporting.

  5. Ulysses

    “The anonymity of money is exactly what allows people who don’t have any strong social ties to cooperate in all sorts of ways. And cash, in particular, allows for cooperation and coordination among the poor, the rural population; people who don’t have access to electronic payments systems or coordination through corporate structures, professional networks and so on.”

    This is a very important point. While the social construct of money does, generally, reinforce the hierarchical, power relationships that allow elites to dominate society, its anonymity can also allow for some effective means of resistance.

    I recall seeing a wealthy executive from a Providence bank, after checking carefully to see that he wasn’t being observed by any other “suits”, distribute quite generous cash gifts to a dozen striking IBEW members picketing the downtown Verizon headquarters in 2011. He almost certainly would have refrained from this subversive act in a “cashless society,” where his generosity would have been noted and held against him.

  6. rn

    It appears that the primary reason for demonitization is due to circulation of fake currencies printed by Pakistan. The company supplying the bank note paper to India was caught supplying the same quality paper to Pakistan and Pakistan was planning to double the Indian notes in circulation.

    The economic reasons being discussed in the blogs are NOT the the primary motives for demonitization.

    1. RUKidding

      I heard that from some Indian friends of mine, and I had heard prior to this demonitization by Modi that there was a huge amount of counterfeit currency in India. And yes, I also heard the counterfeits were coming from Pakistan.

      If that’s the case, then Modi should have been clearer about that, plus also found a different means of handling this situation.

      Some speculate that this is move to get rid of cash entirely, which other countries are doing. In a nation such as India (I’ve been there several times), it’s hard to imagine how the poor are supposed to function with bank accounts and credit/debit cards. Not impossible, but certainly a huge imposition on a part of the population who are the most vulnerable.

      1. Anonymous

        A Kashmiri friend tells me that not only are the counterfeit notes coming from Pakistan, but they’re being used to fund the insurgency in Kashmir.

        1. RUKidding

          Yes, and I’ve heard that as well. And fund insurgencies & terrorist activities elsewhere in India. Could be true; hard to say.

          But if that’s the prime motivation for this, why isn’t it spelled out more clearly. Mr. Modi seems more focused on discussing black currency & tax issues.

          I had the pleasure of living in Kashmir back in the ’80s for 6 months. Wonderful place but a myriad of problems there.

  7. Mel

    Reading David Graeber, I’m not so sure about that last paragraph. Money allows for cooperation and coordination between the rural population and the cities — between the people who have food and the people who need it. In a small enough social unit, strong social ties are not impossible to use, and primitive communism becomes possible. If that were to take over, life would be very tough in town. Heaven knows what form town’s recourse might have to take.

    1. Ulysses

      I had a thought earlier this morning about the significance of the anonymity of cash. I won’t repost it yet, in case the Skynet gods relent and let it go through. In any case, a “cashless society” (with the possible exception of a reversion to an agrarian, primitive communism) would undoubtedly prove even more dystopic than the nightmarish world we currently endure.

  8. flora

    Thanks very much for this post.

    “But the demonetization also has a malign edge that has, as yet, not been adequately acknowledged. If there is a longstanding collective understanding that has prevailed in India, it is in the belief of the integrity of the monetary system—that legal tender will be widely accepted, that our ‘pay community’ is strong and cohesive. “

  9. susan the other

    There must be a better explanation for Modi’s abrupt action to create a cashless society without preparing for all the discontents. Is Modi a twit?

  10. Sally

    I believe this is really about gold. Modi is a western puppet & when he first came in Modi tried to bring in a scheme that would get Indians to exchange their gold for paper bonds. If you signed up for this you could not exchange your bonds back to gold for five years. Indians didn’t fall for it. Next up was a 10% import tax on imported gold to try to stop Indians from buying gold. All that did was encourage massive gold smuggling. How do smugglers pay for gold? Cash!! Also Modi has brought in a new policy where if you buy gold jewellery with a value over $3000 you have to hand over a card with your security/insurance number so the govt can track who is buying gold. If it’s less than $3000 you can pay by cash and not give over your number. Another reason to get rid of cash.

    The west is running out of gold to meet the demand from the east. The price is being manipulated on the paper markets. The west needs more gold , and I think Modi was trying to stop or slow down the gold market in India, and also to try and steal gold to hand over to the west through his fake bond plan. Gold is a huge part of Indians wealth, and where many put their savings. It has been for thousands of years. I also believe that the ban on cash is being trailed in India. So far it has been chaos, and has actually had the opposite effect as many Indians are using their cash to buy more gold.

    1. Ralph

      “I also believe that the ban on cash is being trailed in India.”
      You think?!
      Banks are transnational and it defies reason that Modi’s decision to demonetize was not initiated via global banking interests. Mandating deposits is good for banks. I don’t know enough about the health of the banking sector in India but I suspect they were over leveraged.

  11. oh

    The Modi government made a big mistake by poorly implementing this policy. It was probably at the urging of the IMF and the World Bank, the usual suspects that bat for the banks. And indeed the US banking sector is probably itching for “de-regulation” of banking and the stock market in India so they can offer credit cards etc. A cashless society would help these vultures.

  12. aletheia33

    >Relatively unusually among developing economies, India has avoided monetary drama —inflation has never gotten to hyperinflationary levels; deflation has never been on the cards; widespread defaults have been few and largely contained; money has been accepted as means of final settlement everywhere and at all times. But demonetization has shaken that faith.Money itself is an essential metaphor, a social contrivance to signify a means of final settlement of debts without which binding commitments or promises would be impossible. <

    will destroying that "means of final settlement of debts" enable those who wish to extricate themselves from such "final settlements" to do just that when it is convenient for them?

    since when are neoliberals interested in being bound by commitments or promises not in their favor? neoliberalism = antisocial, take-no-prisoners, ideologically justified war against anyone who does not serve that ideology's adherents' heroic quests for money and power, while brushing off such noncooperators as unfortunate deplorables and losers.

  13. Marblex

    I should think that before moving to a cashless economy the government might want to ensure that everyone has electricity…?

    1. Jerri-Lynn Scofield

      And reliable connectivity remains a big issue. Although India has high rates of mobile penetration, coverage– especially in the countryside– can be spotty. I was in rural West Bengal last weekend– specifically, Bishnapur, where I visited the exquisite terra cotta temples there as well as weavers who make the celebrated Baluchari saris. Mobile coverage was erratic, and I couldn’t connect to the net at all. Which, I must confess, provided a pleasant break. But I was lucky to have enough cash with me to conduct transactions. That would not have been such a pleasant experience if lack of connectivity meant I couldn’t pay for things– especially if these were basics essential to my everyday survival, e.g. food, transport.

      I should point out that this problem isn’t limited to the countryside either, but also sometimes extends to cities– making it at times difficult to get a call through (with a clear line, without being dropped) or to get on-line.

  14. Ivan

    The only practical result Modi could have hoped to achieve by this piece of rubbish, is to beggar the Opposition. No Indian election election can be contested without some form of emolument. For example, my in-laws have mixers, fans and grinders from past elections. Indians do not generally change their political affiliations by moral suation. The rest of what all the apologists say is equally nonsensical. Here you have a country where electricity supply is erratic, wireless services dodgy and they hope to go cashless?

Comments are closed.