India’s Cash Crackdown: Chaos Continues

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.

India is currently in a state of economic chaos, as poor implementation of the government’s ill-conceived demonetization plan to crack down on black money has created massive queues for newly issued currency, and an acute shortage of cash for day-to-day transactions. Just over a week ago, on November 8, Prime Minister Narendra Modi announced a plan to render all Rupees (Rs) 500 and 1000 notes– accounting for more than 85% of cash outstanding– non-legal tender as of midnight that night. I outlined the details of that plan in this post from last week.

[Jerri-Lynn here: To make this post more easily understood by those who don’t know offhand the rupee’s current value and don’t want to look it up, Rs 500 is today roughly equivalent to $7.37, while Rs 1000 is about $14.75.]

To no one’s surprise, the impact of the policy has fallen hardest on India’s poor. About 75% of India’s economy is in the informal sector– meaning it is cash-based– including nearly all the economic activity that the poor participate in. In fact, a handy rule of thumb might be, the poorer the Indian, the more dependent that person is on cash.

While in theory, up to Rs 4500 in old 500 and 1000 notes may now be exchanged directly into new currency at either an Indian Post Office or a bank, this is only possible if sufficient supplies of new currency and other old small denomination notes are available to meet demand– which has been far from the case. Any sums above that threshold must first be deposited into a bank account, and can later by withdrawn, subject to limitations.

Yet as of 2014, only about 53% (up from 35% in 2011) of Indians have bank accounts. Even those with bank accounts usually receive wages in cash, while only 4% of those aged 15 or older have their wages paid into a bank account.  Moreover, poorer Indians also don’t have credit cards, which the more well-off have been able to use to mitigate the policy’s impact.  In fact, only 22% of Indians even have debit cards (all figures are from the World Bank, as of 2014 unless otherwise noted). Even for those with access to plastic, basic ordinary transactions are conducted largely in cash (e.g., taking public transit or taxis; purchasing vegetables or other foodstuffs; buying medicines,or medical care; and paying school fees (often paid weekly).

The Wire has recognized:

For the last few days the world is watching the bizarre spectacle of millions of Indians waiting in long, unending queues to recover their own money from banks, post offices and ATMs even as the government at the Centre remains firmly in denial about the untold hardship to the poor who cannot afford to stay away from their daily wage work even for a day. Some senior citizens have died of exhaustion standing in queues for hours on end. Families have suffered as private hospitals refuse to take currency notes of 1000 and 500 denomination, legal tender just till the other day.

To rub salt in their wounds Prime Minister Narendra Modi, on a visit to Japan, makes a statement that he had anticipated short term pain to the ordinary people and goes on to warn that even harsher measures could come to tackle black money in the near future. Meanwhile, the finance minister Arun Jaitley goes about his daily briefings spouting platitudes about how the people are willing to suffer some pain to promote the larger cause of fixing the black economy. He has however admitted that it will take a few weeks for the adequate supply of new currency notes to materialise and that the bank ATMs will take time to be able to adjust to the size of the new notes. All this comes as no relief to the people of this country who are left wondering whether the government could not have prepared better to face what is undeniably the most extraordinary situation India’s economy has faced since independence.

First-Hand Report

As luck would have it, I landed at Kolkata’s Netaji Subhas Chandra Bose airport for a short visit just a couple of hours after Modi made his November 8th speech.  At that time, it was still possible to use the old currency, and I forked over a Rs 500 note to pay the Rs 350 prepaid taxi fare to get to the centre of town– having no idea that would be the last time I’d be able to use one of those notes.  Once I arrived at my destination, I had all of Rs 650 left– including a no-longer-legal-tender Rs 500 note– to pay immediate incidental expenses.  This was not something I was particularly worried about, as I expected to be able to withdraw money from an ATM the next morning.  Little did I know that the ATMs would remain shut for two days, that when they reopened, they would be besieged by queues, and withdrawals– which before the policy change could be made in increments up to Rs 15,000, with multiple transactions permitted– would be strictly limited to Rs 2000 (subsequently increased to Rs 2500).

The next evening, Wednesday, November 9th, while the rest of the world was fixated on the US election results, Indians had more immediate pecuniary concerns to consider. The spectre of Donald Trump was relegated to a crawling news feed across the bottom of television screens, while six talking  heads– the typical format for current affairs coverage in India– shouted over each other about the demonetization policy. I found myself attending a dinner party held to celebrate my visit to the city and that included among the guests several Kolkata friends, most of whom I’ve known for several years.  This city is certainly no Modi stronghold by any means, having been governed for more than three decades by the Communist Party of India (Marxist) and various left coalitions until the All India Trinamool Congress Party’s Mamata Banerjee came to power in 2011.

So, among this rather cosmopolitan crowd, I thought perhaps only one person might have been a supporter of Modi and his politics. To place this in a US context, I would have been more likely to find a public supporter of Donald Trump at a New Republic cocktail party than to find a public Modi supporter among the Bengalis gathered that evening. After food was served, we sat around the host’s dining room table, engaging in an adda– a Bengali word that loosely translates as a freewheeling intellectual or political debate, or perhaps in this particular context, a bit more exactly, as a general bitchfest.  Given the huge inconvenience the new policy had caused– some guests I was looking forward to seeing didn’t show because they couldn’t cobble together enough cash to pay for cross-town transport– I was surprised that to a person, everyone present at that party mounted robust defenses of the objectives of demonetization.

Where I did hear dissent was first, on whether the policy made any sense, since most black money is either held offshore– and therefore cancelling Rs 500 and Rs 1000 bank notes would achieve nothing in combating this problem. Or, alternatively, onshore illicit holdings are parked in real estate, art, bullion, jewellery, or securities.  And of course, everyone was dreading having to go through the announced procedures for swapping old currency for new.

Immediate Impact

Since that night, the impact on ordinary people, and on economic activity, has been serious and unremitting. The first and most serious consequence has been a number of reported deaths arising from the policy, for which it’s been difficult to get an accurate count.

The Times of India reported in an article today headlined, 6 more deaths; man tries to set himself on fire at bank:

Three people died while standing in queues, three more killed themselves and one tried to set himself ablaze in Ghaziabad over the last 48 hours as frustration mounted in people unable to access their own money.

The six deaths occurred over Monday and Tuesday, three in Uttar Pradesh and one each in Bihar, Telangana and Gujarat.

In Ghaziabad, Ram Mehar Singh Yadav, a farmer who could not visit a doctor because he had no cash, tried to set himself on fire at a branch of Sahkari bank in Muradnagar on Tuesday. He was stopped by other customers who saw him dousing himself with kerosene. Bank officials exchanged his Rs 2,000 in cash and sent him home.

In Gujarat’s Surat district, Indira Modi (22) died in a private hospital on Tuesday after consuming pesticide at her residence in Varachha, in Gujarat’s Surat district, on Monday. She also administered it to her one-year-old son, but he survived and his condition is said to be improving.

Police said the woman ended her life after an argument with her husband because he could not give her more than Rs 300 for household expenses.

Deshraj Singh (55), a farmer, ended his life in Muradpur village (Bulandshahr) on Monday as he could not withdraw the money he had banked after taking a loan against his land to get his daughter married on December 5.

The same paper reported over the weekend on the arrest of a man charged with murdering his wife for failing to return with cash after queuing at an ATM.

The second impact has been on the supply of food and consumables. I’ve seen multiple reports on the distortions  the policy is having on sales of fish and vegetables– staples of the Bengali diet, still largely purchased daily, for cash, at markets.

Supply imbalances are expected to increase further, as trucks are stalled at state borders, due to lack of cash to pay tolls. As reported in Drop in transactions has hit truckers, says Bengal association, an article in yesterday’s The Hindu:

The supply of daily consumables is “disastrously hit” and the prices are expected to surge in neighbourhood markets over next few days following demonetisation, warned the Federation of West Bengal Truck Operators’ Association (TOA).

Secretary of the association Subhash Chandra Basu said that at least 80 per cent of nearly four lakh trucks [Jerri-Lynn here: In the Indian numeric system, a lakh equals 100,000] affiliated to the TOA were off the road. The drop in transaction had severely affected business, Mr. Basu told The Hindu.

“At least 3,000 trucks are waiting on various inter-State borders of Bengal. Truck drivers or cleaners do not have sufficient change, neither have new currency notes and thus they are stuck on the border from November 9,” he said….
“Moreover, transport organisations affiliated to our association are losing money every day as the factories have stopped producing since they cannot pay new cash to workers or loaders. About 80 per cent of 3.70 lakh vehicles of TOA are off the road, severely damaging the State’s economy,” Mr. Basu said.

Realising that the situation would affect the neighbourhood market of daily consumables like vegetables or fish, Chief Minister Mamata Banerjee said the State would not impose “agricultural tax” on the produce….

At this point, about 3,000 trucks are waiting on the Bengal border, mostly with perishables, and the number is increasing by the hour.

The problem is not limited to food alone, either, “Moreover, essential medical items — like platelets carried in airtight air-conditioned containers — move from one State to another at a time when dengue is at its peak. The stoppage of trucks on borders may severely affect supply of platelets affecting health care and business,” Mr. Nag said in The Hindu article quoted immediately above.  Most Indian pharmaceuticals are available at nominal cost in neighborhood medicine shops and most of these do not accept credit cards. There are widespread reports that people have not been able to purchase essential medicines, due to lack of cash.

A third impact is on the agricultural sector, still the single largest source of Indian employment. As reported by The Telegraph, in an article titled Cash crunch strains food chain, the demonetization policy has ruptured the normal functioning of the rural economy, which is heavily dependent on cash:

Uday Hazra is an affluent farmer. His fields are flush with harvest-ready paddy but he cannot hire day labourers.

Shiva Sambhu Das is a day labourer who works on farms to earn Rs 100 and 2kg rice a day. He needs money to feed his family and pay for his children’s education.

Sarashi Jasan Samanta’s shop is brimming with fertilisers he had stocked ahead of the potato-sowing season. But he is not getting customers.

Samir Sahana runs a poultry unit, but the demand for his chickens has dipped.

Nov. 14: The fates of Hazra, Samanta, Sahana and Das are bound together by cash, the absence of which is disrupting the rural food chain.

Unless cash flows from Hazra to Das, the labourer cannot harvest the farmer’s ripe crop. If the crop is not harvested, the farmer will not be able to buy and sow potato seeds, which means Samanta’s fertilisers will not find a taker.

Unless the farmer, farmhand and the fertiliser supplier complete the economic jigsaw, Sahana’s meat will remain unsold.

Cash, indeed, is the binding force that holds life together in rural Bengal – and in most of India’s hinterland.

Hazra, Das, Samanta and Sahana are residents of Burdwan’s Kendur village, around 140km from Calcutta.

The plight of the four residents is a textbook case of the impact of the demonetisation – and the resultant currency crunch – announced by the Prime Minister on November 8.

The agricultural transactions that the government’s policy has thwarted cannot be replaced, and  some farmers are missing the chance to sow crops at the optimal time.

And a fourth impact to note is that it’s currently wedding season in India. These extravagant celebrations are often financed with cash– some  saved outside the banking system for years,  in anticipation of the event. The economic activity generated by weddings isn’t limited to bride, groom, dancing and dining alone, but extends to expenditures by guests, many of whom purchase new clothes or gifts for the event. Many of these transactions have stopped, as people just can’t get access to cash at the moment.

And after this litany of the human misery caused by the policy, I will close with a story from The Times of India that reminds us that it’s probably always a good idea to make alimony payments on time:

A septuagenarian was sent to judicial custody by a family court at Kolkata on Tuesday after the man failed to pay the alimony amount to his wife in legal tender.The judge has ordered that the man would be set free only after he pays the entire amount to his wife.

The man, a retired engineer and resident of College Street was fighting a case of separation with his wife for the past several years. He was ordered to pay an alimony amount of Rs 8,000 per month by the family court. But the man has not paid the amount in last four years and the amount due accumulated to Rs 2.25 lakh by November. Miffed with his repeated failure, the family court judge Shyamal Biswas ordered to put him behind bars on November 8.

“His brother managed to get loans and collected Rs 2 lakh towards the payment of alimony amount. But by the time his brother arranged the amount, Rs 500 and Rs 1,000 currency notes ceased to be legal tenders. The family did not have a way out to change the currency ,” claimed Pratap Dey , the man’s advocate. His brother appeared before the court on Tuesday with the entire amount–mostly in the denomination of Rs 500 and Rs 1,000 notes.

Seeing the entire amount in 500 and 1,000 rupee notes, his wife refused to accept it. Since the currencies have ceased to be legal tender the judge did not object. “We argued that although 500 and 1,000 rupee notes have ceased to be a legal tender, they are being accepted by the banks as deposits. Since the notes were accounted for, there was no way they could be refused by banks. But she refused to agree to that,” Dey said.

The family members then offered to pay the entire amount in cheque or demand draft. “She refused to accept that too. We were surprised as her refusal was forcing the old man to stay behind bars,” Dey said.

Implementation Blunders

As intended by the Indian government, most of the exchange of old notes for new must pass through the banking system. This should make it possible to detect illicit sources of funds. Yet deficiencies in that system have rapidly become apparent and have failed to cope with the magnitude of the task with which it has been charged.

Part of the problem is that the Reserve Bank of India (RBI) — India’s central bank– has failed to make new bank notes available in sufficient quantities to meet demand.  There continues to be an acute shortage of the new currency notes, but this problem is expected to be alleviated within the next eight to ten days, according to Tushar Roy, chief manager of a nationalized bank, Central Bank of India. “We will have to manage until then,” he concedes.

Part of the problem has arisen from the sizes of notes made available. Initially, with old Rs 500s and Rs 1000s notes withdrawn, people could use only notes of Rs 100, 50, 20, or 10 to conduct cash transactions, leading many to opt instead for informal credit transactions. By Friday, new notes appeared, but only in Rs 2000 denomination. To put that in context, a week’s worth of vegetables for one person costs no more than Rs 150, a takeaway order of a full tandoori chicken costs Rs 280 (with a further Rs 80 for two orders of naan bread), most taxi rides around central Kolkata don’t even top Rs 100, and ten tablets of aspirin cost Rs 3. I know from first-hand experience that it proved very difficult to get change for the new Rs 2000 notes.

Might this logistical state of affairs perhaps have been different if the former well-regarded governor of the RBI, Raghuram Rajan were still at the helm of that institution? (Instead, he’d been rather unceremoniously dumped by Modi earlier this year.) “If Rajan were still in office, he would not have been in a position to influence the primary decision to undertake demonetization – which was a political one,” said Kolkata art dealer and entrepreneur Anirudh Chari. “Yet implementation of the policy would almost certainly have been better planned and managed.”

Technical Issues

It appears also that the government seriously underestimated the technical challenges that accompany making a currency changeover of this magnitude. I asked our very own Clive to weigh in on some of these problems, and he’s given me permission to quote from several emails we’ve recently exchanged.

Over to Clive, who observes at the outset that bulk cash management requires considerable subject matter expertise to get right. As a baseline:

The Bank of England manages the introductions of new notes and coins very well. It is uneventful, which is how it should be but also indicates that any switch-overs for different note designs are well planned. And those plans are well-executed. On the physical adjustments side, early release of the new note specification is vital — done at least two years before introduction in draft and 18 months once the spec is finalised….

[Based on his experience], it takes approximately one year to get ATM cash hoppers designed, built, tested and distributed to the retail network, six to nine months for changes to note and coin counters and three months to do a teller training programme. …

In the Indian case, it was necessary of course for the government to keep the proposed changeover secret, so that privileged insiders did not take advantage of information and move stock of black money into other assets. While the need for secrecy did indeed pose a legitimate obstacle, unfortunately, the Indian government just seems to have got round to setting up a task force to address relevant logistical issues. As the Hindu published yesterday in an article entitled Task Force led by Mundra formed to recalibrate ATMs:

With automated teller machines (ATM) still unable to cope with the huge demand for cash and consequently running dry, a Special Task Force has been formed under the chairmanship of S.S. Mundra, Deputy Governor, Reserve Bank of India (RBI), to speed up the process of recalibration of these machines to dispense the new denomination notes. . . .

The move comes after Prime Minister Narendra Modi took stock of the situation on Sunday evening with top central bank and government officials.

“It has become necessary to recalibrate all ATMs/cash handling machines to dispense the new design notes following introduction of Mahatma Gandhi (new) series bank notes including a new high denomination (Rs.2000) in new designs,” according to an RBI statement. “Expeditious reactivation of all ATMs in a planned manner,” said the terms of the reference of the Task Force.

As Clive observes:

Agh ! This is horrid. They are attempting a quick fix, from what I can infer from the article. Normally when you get a new note, you get a new ATM note hopper designed for it, or at least heavily re-engineered to customise it for the different properties of the new note. That’s the best solution, obviously, because it is optimised for handling the redesigned voucher.

But what’s proposed here is tweaking of the existing hopper. Tricky to explain without having the actual hopper to show, but inside the ATM hopper there are two note-handling surfaces which have to perform a delicate balancing act….

Clive’s original email to me explained some of the technical considerations that go into making ATM hoppers work just right. I lack space to quote from that thorough explanation here, and I lack expertise to paraphrase the details he shared with me accurately. So, for interested readers, I encourage them to raise issues in comments, and perhaps Clive can weigh in further there.

Over to Clive again:

To the uninitiated, one banknote is pretty much the same as another apart from the artwork. But the paper grades are subtly different and each note design has a different level of friction surface (when placed against another note), different torsional stiffness and varies in performance over the note’s lifecycle (from “super-fit” — just issued by the central bank — through to “fit” — been in light circulation but not abused too badly — down to “used” and “soiled” — needing to be withdrawn). ATM hopper settings allow for optimisation for “super-fit” — this is preferred because super-fit notes cause the least ATM issue-gate jams and the highest possible ATM uptime but you can sometimes have to slightly “tweak” the ATM hopper settings because the notes are “stickier” in the hopper. If you don’t target the maximum ATM uptime, you can use “fit” notes, but the less “fit” they become, the more liable they are to crumpling in the issue-gate and jamming. Finally, if you’re desperate, you can put “used” notes in the ATM but without constant cleaning of the ATM hopper, it’ll jam every five minutes (slight exaggeration but it’ll be very unreliable).

ATM service engineers gain experience on how to adjust ATM hopper settings to keep the machine working. They’ll get service bulletins from the ATM vendor advising what settings to apply to what type of note is being used. But this takes time to acquire. When we introduce a new note design in ATMs, ATM downtime increases, we are finding this, as expected, with the new £5 note here in the U.K. It’s manageable because, prior to introduction, banks and ATM engineers gained experience with the new note in testing. Simple things like “oh, if you get a brick of those new £5 notes, in super-fit from the BoE, make sure you run them through the note counter first, just to ‘loosen them up’ and shed any microbeads that might have got shedded in the manufacturing process.” An ATM operator will (eventually) learn quite a few of these hints and tips to keep the machine running by avoiding commonly experience problems.

But with the Indian switchover, it looks like they are just doing a quick fix (using existing ATM hoppers and crudely adjusting the hopper tensioners) and they’ll have zero real-world experience of how the note will behave in each particular ATM model variant. This is just going to whack ATM availability. That’s the last thing they need.

Political Consequences

So far, the Opposition has allowed Modi lots of leeway to pursue demonetization. Criticism has focussed on faulty implementation, rather than challenging the government’s anti-corruption objective. As I noted in my post last week, quoting from an article in The Hindu, in which former Finance Minister Palaniappan Chidambaram criticized the Modi government’s method for achieving its objective:

“We support the objective of the government to stamp out black money. But the method they have adopted raises questions… The move has come as a bolt from the blue for the common man.”

The real test for the government would begin [Thursday], Mr Chidambaram said. “How efficiently and how quickly the money is exchanged…. If there is harassment or inconvenience and all kinds of questions are asked, then I think that will be completely counterproductive.”

A similar move had been contemplated by the previous Congress-led UPA government, he recalled. But the idea was dropped as “the economic gains were not too great.”

For his part, Modi has doubled down on the anti-corruption agenda, calling for public funding of elections, and simultaneous Lok Sabha and assembly elections. As the Times of India reports:

[Modi’s] move to bring up state funding at a time when the decision to scrap old currency is being bitterly debated is seen as a step to push the transparency agenda, as elections and political parties are closely associated with black money.

Though not a new idea, Modi’s pitch that state funding, along with simultaneous Lok Sabha and assembly elections, will curb poll expenditure and make the process cleaner seems a bid to link demonetisation with wider political reforms.
Collection of unaccounted money by leaders and parties has often been cited as the root of political corruption as it leads to post-election favours being granted to poll financiers. State funding has been touted as a possible antidote.

While support appears to continue for the goal of tackling corruption, the longer cash remains in short supply, the more political opposition will increase. Already, noted anti-corruption crusader and Delhi chief minister Arwind Kejriwal has denounced Modi in a Tuesday speech in the Delhi Assembly, saying, “He has been claiming that the decision is an attack on black money, but it is an attack on common people. He is protecting his friends. These businessmen pay Prime Minister Modi and in response the Prime Minister ensures that the income tax department does not conduct raids on these businessmen’s house.”

West Bengal chief minister Magmata Banerjee has taken firmer steps to oppose demonetization, criticising its impact on the common man. On Wednesday, as reported by The Indian Express, Banerjee:

led a protest march to the Rashtrapathi Bhavan, seeking President Pranab Mukherjee’s intervention over the Modi government’s move to scrap old tender. Banerjee lead a small group of opposition leaders… and briefed the President over the inconvenience being faced by the public. “We asked for the intervention of the President. Even he has served as finance minister in the past and knows the situation very well,” she said.

Saying that the country was under financial emergency, Banerjee compared the move to discontinue old Rs 500, Rs 1000 to the one taken by the 14th century Delhi ruler Mohammed bin Tughlaq. [Jerri-Lynn here: This was an earlier example of demonetization, in which Tughlaq replaced gold and silver coins with brass and copper ones.] Banerjee said the protest march was organised to save the common man from the looming disaster owing to demonetisation. She also questioned the government over how much black money has been recovered so far. Our party will move an adjournment motion inside the House, Banerjee added. “TMC MPs will disrupt House till adjournment motion is accepted,” she told [television station] NDTV.

Meanwhile, cash remains in short supply, no one can say when liquidity will return to pre-demonetization levels, and as is usually the case, the poorest Indians suffer the most.

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    1. Jerri-Lynn Scofield Post author

      Yes, that was an unfortunate typo by me– fat fingers! I fixed that mistake after another reader drew it to my attention in comments. Thanks for reading my work so carefully and taking the time to point out the error.

  1. Steve H.

    Thanks for this. It looks like no cash is as useless as wheelbarrows full of cash (under- & over-supply having no-food effects downstream). So it would seem like local currencies could spring up to cover shortfalls, or personal-relationship debt logs.

    Which makes me wonder: do the poorest Indians have to pay taxes? i.e. mmt, can they operate sans rupee? Or is this irrelevant?

  2. tinheart

    I’m going to reveal my naivete, but could one of the problems be that the Indian government simply underestimated the raw scale of the “underground economy” in the country?

    1. Clive

      I think if anything they underestimated the readiness and maturity of the money transmission infrastructure in India to be able to migrate away from cash. Actually, I’m being too kind — data on access to a bank account, number of ATMs and the proportion of transactions being cash-based is widely available, as Jerri-Lynn pointed out. If the Indian government didn’t know how the Indian economy functioned “on the ground” then they are incompetent.

      If I had to stick my neck out, this all sounds to me like the sort of thing that happens when politicians have an idea, get external consultants in to “advise” them on how to implement it, the said consultants are a fatal combination of under-informed and over-confident in their own abilities and you get a Frankenstein’s monster created out of wonky body parts sewn together that ends up having a life of its own. No-one can stop it, even though anyone who comes into contact with it, while it is in the planning stages, can see how crudely it is all put together.

      Add in “support” from senior political figures and the monster becomes unstoppable, because no-one wants to tell the people who have the power to call a halt to it all and that it’s a dreadful idea. The ACA, anyone? Brexit, anyone? Withdrawal from NAFTA, anyone? LibyIraqAfghanSyristan, anyone?

      1. flora


        but, ,but, the govt/corp/etc read a new paper about the latest “cutting edge theory” from an esteemed think tank; the external consultants have their laptop computers and their spreadsheets and their desire to please. Combine the slightly dim politician with the blue-sky theory and add in the technician. What could go wrong? /s

          1. Jerri-Lynn Scofield Post author

            And now we see this article, which suggests that no one had a clue how cash actually circulates in the Indian economy when this denometization scheme was floated (or if someone did, the info wasn’t passed up to or assimilated by the relevant decision-makers).


            “We planned to first bring the 2,000 rupee notes as the focus was to create high-value notes to ensure the smooth replacement of the old 500 and 1,000 rupee notes. We would have to print four 500 rupee notes for every one 2,000 rupee note. If we would have focused on printing the 500 rupee notes, the entire printing exercise would have taken much longer,” said an official who didn’t want to be named.

            This means they’ve focussed on printing Rs2000 notes since printing an equivalent value of Rs 500 notes would take longer, when, as I point out above, Rs 2000 is a massive sum compared to the value of most ordinary day to day transactions. With an inadequate supply of smaller denomination notes, no one wants to take the larger bills. (Even before the changeover, it was tough to use Rs1000 notes for many things– taxis, etc.)

            1. H. Alexander Ivey

              The people in charge of this F/U are politicos; so don’t blame bureaucrats or engineers.

              “We would have to print four 500 rupee notes for every one 2,000 rupee note.”

              Classic ‘I refuse to look into the details of how the world works’-ism. As Ms. Scofield points out, nobody, as in nobody, will take a Rs 2,000 note. You don’t understand why not? Read Marx. Here is a clear example of use-value vs. exchange-value, with real live money to boot. Yes, the exchange-value of a Rs2,000 note is 4 times the exchange-value of a Rs500 note. Soooo, lets print Rs2,000 notes, right? But nobody will use the Rs2,000 notes so they are useless! All your effort to print Rs2,000 notes will be wasted—which they have and will continue to do so.

            2. Erika

              I’m getting flashbacks to when I traveled in Senegal, and no one wanted to break a 10000 franc note, even brick and mortar stores. If you did manage to get your hands on a rare 500 franc note, it would be unspeakably filthy and would barely be holding together as a recognizable piece of currency. Really made me appreciate the Federal Reserve System.

  3. Synoia

    Trampling the peasants underfoot, while not addressing the offshore nature of “black” money. Another case of punishing the innocent with the wrong solution.

    What’s not mentioned is that increasing the use of small denomination notes greatly increases the cost of producing and circulating the money.

  4. Bo

    Very interesting article. Like India, Chinese prefer cash transactions. Credit cards are not widely used and personnel checks are almost never used. But unlike India, in China the mobile payment system so advanced and widely loved by the society. When I was travelling in China this past summer, I was amazed to find even street vendors accept mobile payment via Webchat. Everyone with a mobile phone, an ID card and a bank account can conduct daily transactions without any paper cash.

  5. Vatch

    It’s a shame that hundreds of millions of Indians are suffering from this ill-conceived and poorly executed cash conversion. The only good thing about this is that it provides a strong argument against eliminating cash in other countries, so some people will indirectly benefit from this catastrophe. Imagine what it would be like if the U.S. government eliminated not just $100 and $50 bills, but also twenties and tens. Since the $500 rupee notes are equivalent to about $7.50, I guess to really approximate what happened in India, the U.S. government would also have to move half of the five dollar bills out of circulation.

    Ken Rogoff’s credibility has taken another hit, and he didn’t even have to make any spreadsheet errors this time.

  6. kr

    Here is where you make a mistake if you rely on the English language media (newspapers and TV), which are notoriously anti-Modi. I know of many incorrect and downright untruths that I have seen in the MSM and have been debunked in the social media. You really need to read the Indian language media, and watch the TV in Indian languages.

    Sorry, anyone quoting P. Chidambaram on corruption immediately loses credibility. Also, unless you are plugged in to Indian politics, you will not know that “The Hindu” has its own mess; one of the politicians accused in the multi-billion dollar 2G auction scam is a son-in-law of one of the publishers of “The Hindu”, so they have their own axe to grind.

    Similarly, you cite Mamata Banerji and Arvind Kejriwal. But they are loudest because they appear to have been hit hardest. Ms. Banerji’s state is the top area for Fake Indian Currency Network, and her partymen and backers are alleged to have lost a lot on this. In an embarrassing turn of events (since India is constantly accusing Pakistan of fostering Islamic terror networks), the government of Bangladesh (which shares a border with the state ruled by Ms. Banerji) has accused the West Bengal government (headed by Ms. Banerji) of shielding Islamic terrorists.

    As regards Kejriwal, I was initially (perhaps naively) a supporter of him, but I now believe he is more fraudulent than the normal fraud politicians. The leader of the mass movement against corruption, Anna Hazare (upon whose back Kejriwal climbed to become the political leader), has come out strongly in favor of demonetization. Millions of unaccounted money have been recovered from the houses of legislators belonging to Kejriwal’s own party.

    Implementation – this is a big issue. This is where the Finance Minister has shown that he is not upto the mettle. For example, some of the problems in queues are because it appears that the mafia have hired daily laborers with a 10 percent cut to change the old notes to new notes; these guys then clog up the queues, which is why starting today there is a move to use indelible ink, so as to prevent the same guys from repeatedly going to multiple banks and clogging the queue, even while genuine customers are forced to wait. This is the sort of thing that should have been anticipated, and action taken even at the start.

    1. paul

      Having been caught up in the ayodha madness, been around for the godhra riots and last years beef bans, its hard imagine anyone being anti modi enough.
      Hindutva+neoliberalism is a deeply unpleasant combination.

      Kerjiwal seems a colourful but all too common character in indian politics

      1. paul

        Wikipedia, but perfectly reasonable starting points
        ayodhya the milieu that nurtured modi was behind this LK Advani was the most prominent.
        I’m sure you can find out more if you are interested

  7. BecauseTradition

    Where I did hear dissent was first, on whether the policy made any sense, since most black money is either held offshore– and therefore cancelling Rs 500 and Rs 1000 bank notes would achieve nothing in combating this problem.

    Isn’t all of India’s fiat except for physical fiat (currency) held at its central bank? Then what’s offshore about that except for Indian currency held outside India?

    And if so, taxing “offshore” Indian accounts is as simple as applying negative interest to foreign accounts at India’s central bank? Along with exchanging the currency?

    1. Ravi Rikhye

      Because Tradition, excellent point. Holding INR bank notes overseas is without purpose. 1st you have to smuggle them out, then you have to smuggle them back when you need to spend them.

      1. Jerri-Lynn Scofield Post author

        I should have made clear that money held offshore in foreign accounts is not denominated in rupees.

  8. timotheus

    I arrived in Ghana shortly after a similar debacle created by the government with similar goals. The stories sound exactly alike: people dying in the bank lines, farmers being scammed by hustlers offering to help them avoid the wait (sometimes of days) and getting cleaned out of their entire net worth, breakdown of commerce, and general chaos. The result was a coup d’état and the first of several Jerry Rawlings regimes. After a few weeks in power he lined up a half dozen of the deposed leaders and had them shot. People cheered in the streets.

  9. Ultrapope

    Absolutely fascinating article, thanks Jerri-Lynn.

    I am totally ignorant of India politics and government but I feel like I’m missing something here. So the big push to eradicate this ‘black money’ seems to be related to transparency reforms “as elections and political parties are closely associated with black money.” They’re replacing Rs500 and Rs1000 notes to combat this even though the real ‘black money’ is held up in offshore accounts/onshore illicit holdings. I could understand a government doing this to give the appearance of fighting corruption without impacting its own coffers. But they’ve brought the country’s economy to its knees which completely dwarfs any boost in the government’s PR. It seems like they are risking political suicide for some real small potatoes. Normally I would chalk this up to elite incompetence but… this incompetent?

    1. cocomaan

      I’d love for Jerri-Lynn and Clive to comment, but from what I understand, India also liberalized bank accounting, so there’s lower thresholds for people to get bank accounts.

      Combine this with the fact that they are experiencing problems with taxation and you kind of see where this is going.

      The push is not just to get the denominational bills out of circulation, but also to get people onto the books in order to have grounds/evidence/ability to tax them.

      1. Clive

        There’s several barriers to increasing “financial inclusion” (oh, how I dislike that term; it makes it sound like you’re missing out on something if you’re not “included” whereas all you’re missing out on is being a potential target for looting by Big Finance, but I’m digressing…), anyhow, some of the key problems are:

        1) “Basic” bank accounts are unprofitable. They will typically have low credit balances, low monthly or weekly incoming funds but high turnover and transactions volumes per account. So it is difficult for the financial services provider to make money on the account but very easy for it to spend money servicing it. Also, their customer profile won’t be one to be driven to low cost servicing channels (internet, phone, ATM) — they’ll probably “clog up” the counter service (sorry for the disparaging language, it’s how this customer segment is seen by your average caring, sharing TBTF) which is the highest cost-per-transaction channel.

        2) To reach your target customer base, because of reason 1) above, you’ll need a branch presence in every geographical area. Your basic bank account customers won’t be particularly mobile, they likely won’t have a private car and won’t want to pay for public transport if they can help it. So you have to come to where they are, they won’t or can’t come to where you are or where you want to be. This pushes up your cost-base.

        3) Your back-end systems may not be able to scale to the degree required. Most businesses with a big IT operation don’t waste their money keeping tonnes and tonnes of spare CPU, Storage, Network I/O, backups etc. sitting idly by in Live. Keeping capacity in Live that isn’t used is a massive (unnecessary) cost if it is not being used to run your IT-dependent processing. So if you have, say, 25 million active accounts and you are being tasked with doubling that to 50 million to support more basic (currently unbanked) account customers, you’ll have to as a minimum double-up on your core systems. Worse, sometimes you can’t just throw CPU at a problem. Let’s say you have a batch job that takes 5 hours to complete with the CPU slices you’ve allocated to it in the job scheduler. Doubling the runtime to 10 hours due to twice the number of accounts being supported is not acceptable because you need the job to complete before the start of online day and there’s upstream and downstream jobs that have to finish or start before that job can run and need to be run after it finished. Doubling CPU allocation will not half the runtime. Network latency, disk I/O operations and other factors like those will turn from fringe, manageable effects to critical impacts. You may well need to split the batch job up and re-profile to run as multiple, smaller, jobs. That’s just one example.

        4) Banks previously hoped that, what started out to be potentially loss-making “universal” accounts might become more profitable as customer’s financial situations improved. But that only happens if they take out credit products and high-margin bolt-ons. Unfortunately, our dreadful elites other policies seem intent on keeping poor people poor, so in practice, that simply hasn’t happened to any significant degree for financial services providers who have experience of providing a basic bank account.

        So, reducing acceptance criteria for an account is, in effect, just a bit of can-kicking before you start to hit other problems.

        1. cocomaan

          Sounds like the same reasons banks don’t have a ton of reach into ultra-rural areas or deep ghettos here in the USA.

          It sounds like they are really trying to smash the square peg into the round hole in an effort to collect more taxes.

        2. BecauseTradition

          1) “Basic” bank accounts are unprofitable. Clive

          It would seem an inherent duty of a monetary sovereign to provide basic accounts and transactions in its fiat for all its citizens, their businesses, etc. Then why are such accounts and transactions in fiat limited to depository institutions in the private sector?

          So it’s irrelevant that “basic” bank accounts are unprofitable since the monetary sovereign should be providing them anyway – as an essential public service.

          How to implement those? Philosophically*, the central bank should just be expanded to handle hundreds of millions of new accounts . That way, preferential treatment for depository institutions would stick out like a sore thumb.

          *a Postal Checking Service that made no loans but simply provided accounts and transactions in fiat is another possibility, though conceptually less clean and thus more prone to straying from its intended purpose.

    2. H. Alexander Ivey

      …this incompetent?

      Amen brother, amen! Another sign of the End of Days…first, the Clubs, then, the Trump, now this!

      1. Bugs Bunny

        Once spent so much time in India, it becomes a reflex and you forget the Western figure. At least for me. I know that a decent house on 100 cents of land costs 1 crore in South India. Basically my measure.

        1. Jerri-Lynn Scofield Post author

          One of the first things one learns when one visits India is how to think in lakhs and crores. Unless one understands those figures, one’s at sea in any discussion involving large numbers.

  10. RUKidding

    Interesting and thanks for updating us on this situation. I have many Indian friends, some of whom I’ll see soon. I’m curious to hear how this panning our for them and their families, who are still in India.

    This sounds like an absolute disaster. Maybe a good idea in theory (albeit I question that), but definitely poorly executed. I hope more people aren’t hurt by this.

    Please keep us updated on this situation.

  11. Rajesh

    Dad works for a large payment co in India, part of the mgt team actually and they’ve had meetings with the RBI gov on this…but I didn’t ask him for the details.

  12. susan the other

    This sounds so stupid it’s gotta be a ruse to achieve other goals. like achieving disinflation faster than some long term method. demonetization is such a strange word. to de-money. de-liquify. deflate. and as usual it is done on the backs of the poor all the while pretending to be cleaning the black marketeers and graft. if this action has little chance of taxing the black market, then it is intentionally going for the default result which is probably to deflate the economy on the backs of the poor. India’s economy has been inflating at a pace that has remained very high and only handwringing so far. Modi can’t be this stupid. He knew exactly what would happen. What would happen if they just devalued the currency, who would be hurt the worst?

  13. paul

    Using a bank branch office in india is normally a gruelling process, this kind of situation will be a nightmare. I can imagine this being exacerbated by ‘black cash’ operators hiring hundreds of locals to queue up to exchange the maximum permitted, resulting in a nice, government sponsored laundering scheme.
    I can also see things getting pretty fractious, pretty quickly.

    1. Kate

      Yes this is exactly what’s happening. To reduce this the government has asked the bank branches to mark people’s fingers with indelible ink like they do during voting. Those people cannot return to the bank for ten days.

      1. paul

        Not much use considering the size of the suddenly available workforce for such activity. Inky hand? Just find another of the poor and starving from the queue.
        From the ayodha situation I saw how swiftly innovative India’s informal entrepreneurs can be.

  14. Rajesh

    Ok I got the timelines. Cash recycling machines will take a month to get up and running whereas regular ATMs will be functional in 7-10 days. This is wrt to the ₹2000 notes

    1. Clive

      Getting them functioning is the easy part. Keeping them running if the modifications to accommodate the new notes are too rushed and not done properly is a big risk.

  15. Disturbed Voter

    Wish the best of luck to the Indian people, and leprosy for the Indian government. Don’t they know they shouldn’t kill the golden cow?

  16. Rosario

    If you want to go after the real “black market” go after the wealthy hiding their money through the “formal” channels. The whole idea of a formal economy is bullshit anyway. Anyone who has been in business deals and negotiations knows that the formality is merely the legal outward face of the deal (term sheets, MOU, etc.) everything else is absolutely informal. The poor are effectively punished for not having the capital to afford a consultant, lawyer, and an accountant to “formalize” their economic activity. Marx had it right about the elite. They set the terms of “standard practice” and it comes as no surprise that it hinges on their mountains of capital.

  17. Indian

    Lop sided arguments. Most of the sources quotes are misleading, propaganda and outright lies.

    You could find more such notes on that website.

    How about arguments for this move from commoners?

    So please don’t contextualize all other countries only through Western prism.

    1. Clive

      Haven’t we all, collectively, wherever we are in this world, had more than our fair share of “the ends justify the means” and “so what if there’s a little suffering, it’s all for (insert beneficiaries here)’s greater good” type of thinking?

      Suffering — and from Jerri-Lynn’s account there most definitely is suffering — is not a toy, for someone to play with inflicting on others for their own ends.

      That’s not a Western prism. That’s basic human decency.

      1. Indian

        Don’t get worked up with the last sentence alone. Read the links with this article. So called poor man do support at some places…

        Actually with counterfeited currency people are unable to realize the loss of their purchasing power. In this way, it is quite possible to improve economy.

        Lack of assured returns is not enough to continue status quo especially when nefarious activities are being throttled.

        So you are still not getting out of the imprint that it is bad move only. Too early to tell that this move is assuredly wrong one… But you are entitled to your opinion as to mine.

    1. Jerri-Lynn Scofield Post author

      Perhaps a bit too soon to be predicting permanent consequences, but: “In the first polls since the Narendra Modi-led NDA government decided to demonetise the Rs 500 and Rs 1000 currency notes last week, the BJP took a major hit in an election for a crucial local agricultural body in Maharashtra.”

      What’s especially interesting is the party breakdown: The BJP lost all 17 seats but that didn’t translate into Congress wins:

      “According to a Times of India report, the BJP lost all 17 seats in the Agricultural Produce Market Committee (APMC) elections to members from Peasants and Workers Party of India (PWP), Shiv Sena, Congress and the NCP alliance.”

      “The PWP swept 15 seats while its allies, Shiv Sena and Congress took one seat each.”

      (All quotes were taken from The Wire article.)

  18. Raj

    Jerri, how has your experience of India been so far as a foreigner? What are your general thoughts on the politics and future of this society? Just curious to know an outsider’s informed and experienced perspective

  19. Maurice

    1: Politicians – Even though no political party is ready to admit it openly, it is no secret that most of them are stunned by the latest move by the PM. In all major elections, political parties bring in sacks full of black money to distribute in exchange for votes. The parties with strong financial clout can easily turn the results in their favour by such illegal means. The significant chunk of money spent on elections are usually in cash, and it comes from real estate, infrastructure, smuggling and other illegal businesses. Most politicians and their funders keep the money readily available in cash and take it out during the elections.

    2: Hawala Dealers – Hawala works by transferring money without actually moving it. In a hawala transaction , no physical movement of cash is there. Hawala system works with a network of operators called Hawaldars or Hawala Dealers. A person willing to transfer money, contacts a Hawala operator at the source location. The hawala operator at that end collects the money from that person who wishes to make a transfer. He then calls upon his counterpart or the other Hawala operator at the destination place/country was the transfer has to be made. Now the hawala operator at the tranferee’s end, hands over the cash to the intended recipient after deducting a certain amount of commission.

    3: Real Estate Mafia – In cities and villages throughout India, mafias consisting of municipal and other government officials, elected politicians, judicial and law enforcement officials, acquire, develop and sell land in illegal ways for profit. Computerisation of records relating to the classification of tracts and land ownership is a key tool in countering the illegal activities of land mafias, since it creates transparency on all information relating to a given parcel of land. But black money is what funds these operations and the decision to demonetize 500 and 1000 rupee notes will hit them the most.

    4: Fake Currency Dealers – Counterfeit money is imitation currency produced without the legal sanction of the state or government. Producing or using counterfeit money is a form of fraud or forgery. A recent study commissioned by the NIA showed that 250 in every 10 lakh notes in circulation in India are fake, with FICN bearing a face value of Rs 400 crore in circulation at any given point in time.

    5: Terrorist Organizations – The security features of Rs. 500 and Rs. 1,000 notes had been compromised by Pakistan and was flooding the Indian market with fake currency which was also used for financing terrorism. While removing black money, the demonetization process will also definitely address the problem areas of terror financing and fake currency. There is illegal money behind terrorist funding. The channel through which the adversary sends in militants and arms is also used to send fake currency.

    6: Sports Betting – Gambling in India is heavily restricted except for selective categories including lotteries and horse racing. According to the Doha-based International Centre for Sports Security, India’s illegal sports betting market is worth some $150bn a year. And much of that gambling money is directed towards cricket.

    7: Educational Institutions – Many institutions that are meant to provide education have been promoting corruption, and education has been a major contributor to domestic black money in India. Indian education system generates at least Rs. 48,400 crores of black money every year from KG to PG admissions. This black money fuels corruption and inflation. It may also find its way into overseas tax heavens, election, terrorism and religious conversion.

    8: Fake Trust and Charity – Money laundering in India was rampant through NGOs and charitable trusts. The majority of industrialists and even some top politicians are using NGOs to launder their black money back into the country.

    9: Rich Agricultural Land Owners – Agricultural income, being tax exempt, has become a channel for money laundering. The country is losing billions in revenues. Among the vast majority of poor farmers, there are quite a few millionaires and billionaires – rich landowners, masquerading as the poor old Indian farmer, the only commonality between them being subsidies- fertilizer subsidy, power subsidy, minimum support price, loan waivers, and tax relief.

    10: Film Industry – A recent report of the Income Tax department on Mumbai’s film industry finds significant funding from hawala and hot-money routes, portending a grave threat to tax mobilisation, and even to general law and order. In 2011, a leaked cable released by Wikileaks had spoken of the film industry’s underworld connections, and that “it welcomed funds from gangsters and politicians looking for ways to launder their ill-gotten gains, known in India as ‘black money’”. In 2012, a sting operation by news website Cobrapost had caught leading producers and directors allegedly admitting on camera how the industry is being used to convert “black” money into “white”.

  20. Raj

    @Jerri-Lynn – If you can get someone to translate this from hindi to english, this is an excellent segment by journalist Ravish Kumar from NDTV Hindi discussing the recent demonitisation. The panelists make sure they distinguish between various types of ‘black money’ and how much of an impact will the current demonitisation make.

    And here another, albeit sad example, of how its really the poor who are getting hurt –

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