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 Any sums above that threshold must first be deposited into a bank account, and can later by withdrawn, subject to limitations.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.
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.
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.
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.”
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.
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.