The Global War on Cash – India’s Demonetization Debacle

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 writes occasional travel pieces for The National.

December 30 has now come and gone– the last day for people to exchange old INR 500 (worth USD 7.36) and INR 1000 (USD 14.72) notes– that were no longer legal tender after Indian Prime Minister Narendra Modi launched his demonetization policy on November 8.  At a stroke, the policy withdrew 86% of Indian currency from circulation. Holders of old currency notes could exchange them for new currency, but only up to a limit of 4000 INR per person. Sums above that threshold had first to be routed through a bank account– in a country where only about half  the population has a bank account– and then withdrawn later, subject to weekly caps on such withdrawals.

I have written about the policy in three previous posts, India Moves to Severely Restrict Use of Cash, Forcing Much of Economy Into Barter (November 10), India’s Cash Crackdown: Chaos Continues (November 16), and India’s Cash Crisis May Take Months, Not Weeks To Resolve (November 18). I include the links for interested readers but it’s not necessary to read these three previous posts to follow the discussion here.

How has the Indian policy been a debacle? Let me count just some of the ways. It has failed to crack down on “black money”– its announced goal, as discussed further below. Demonetization has been poorly implemented: the Reserve Bank of India– India’s central bank– has failed to supply sufficient currency, in usable denominations, to support ordinary economic activity, and has further confused matters by issuing frequent, ad hoc, contradictory circulars on policy detail. The inability to secure cash has affected just about everyone– whether a national or visitor– who has been in India since demonetization was announced.  Consequences have ranged from mere inconvenience, to failure to be able to conduct ordinary business or economic activity, to in the most extreme cases, suffering and on one estimate, as many as 112 deaths.

The Patient Has Diabetes, So Let’s Treat Him With Chemo And See How That Works Out

The basic problem stems from a failure to distinguish between “black money”– money on which tax due has not been paid– and the legitimate informal sector– the cash-based economy. Estimates of the size of that sector range from about 50% to around 90% (depending on how it’s measured, e.g., as a percentage of GDP, or in terms of the percentage of wages paid in cash and not paid into a bank account). Many people working in the informal sector don’t pay any income tax– not because they’re corrupt or tax evaders, but because their income falls below the threshold upon which tax is due.

No one denies that India has a serious corruption problem. But most experts agree that demonetization– especially as implemented since November 8— is not an effective way of addressing this problem. Far more difficult to achieve but considerably more effective would have been measures directed at illicit real estate transactions, tightened tax enforcement, or political and administrative corruption.

Nonetheless, there was overwhelming, widespread support for the Modi policy when it was first announced– as I witnessed first hand as I was visiting India at the time. This support came from  some unexpected quarters: a group of cosmopolitan Bengalis I dined with the night after Modi launched his policy, as I wrote in this November 16 post:

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…. 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.

Little did we know at that time that that “huge inconvenience” would soon be dwarfed by considerably more inconvenience, due to the spectacularly inept way demonetization was implemented.

The Result: What had been the world’s fastest growing economy is no longer. Third quarter growth has slowed, and this slowdown will certainly continue into fourth quarter as acute cash shortage continues, and likely beyond (India’s financial year runs from 1 April through 31 March for government financial statements and for corporate tax; for the self-employed and those who pay personal income tax, the year runs from 6th April through 5th April. I’m referring to the government financial year here.)

Day 50 after the November 8 launch of the  policy  was a seminal day, being both the deadline for exchanging old currency for new  and the deadline Modi had previously asked for public forbearance for the policy to show its impact.

As the Economic Times reported yesterday,  in 50 days of demonetisation: How Indian economy went off the rails, and what the future looks like :

“There’s a problem at the moment, but it may not remain so for long… people will start consuming once they have more money at their disposal. Demand is only deferred, not denied…,” said Shyam Srinivasan, MD and CEO, Federal Bank.

“Parts of demand will come back quite aggressively. We may see 2/3 quarters of pain, but the pent up demand will blow out eventually,” the banker added.

Though experts prefer to play down the negative effects of demonetisation, the impact of it – which involved the removal of 86% of total currency value – has been widespread. Acute cash crunch has impacted almost all sectors and sections of the population as currency dominates significant proportion of transactions. Consumer spending, trade, industrial and farming activity have been adversely affected. Ratings major Care Ratings has revised its GDP growth estimates for FY17 to 7%, from 7.8% set at the beginning of the year. [Jerri-Lynn here: Other estimates have been far more pessimistic.]

“In overall terms, third quarter GDP growth may be affected badly… things may not look up for fourth quarter too. Growth recovery may start only in the first quarter of next fiscal,” predicted Sabnavis of Care Ratings.

Reality Does Not Resemble a Bollywood Movie

It’s a staple scene in many Bollywood films to see stacks of illicit cash secreted somewhere in the villain’s lair. Demonetization was designed to flush out just such cash. Yet, unfortunately, mundane reality doesn’t conform to these Bollywood cliches. As I first pointed out in this November 16 post: black assets are typically not held in the form of  Indian bank notes– but are either held off-shore, or if kept in India, are invested in real estate, gold, jewellery, art, antiques, or securities.

The latest figures show that much of the outstanding currency has been redeposited into bank accounts. The possibility that there would be a big demonetization windfall–  and an increase in income tax collected– has not materialized.  As reported this week by the Economic Times in 90 per cent of scrapped notes back in system, big dividend unlikely:

Of the Rs 15.4 lakh crore worth of Rs 500 and Rs 1,000 notes that were scrapped as a resulted of PM Narendra Modi’s November 8 declaration, as much as Rs 14 lakh crore has been deposited in banks. [Jerri-Lynn here: Under the Indian numeric system, a lakh is 100,000, a crore is 10,000,000, and a lakh crore is 1,000,000,000,000.]

The value of scrapped currency exceeded the government’s expectation that as much as Rs 3 lakh crore will not be returned as this would be part of black money hoards.

This also means that expectation that RBI will be able to give a substantial dividend to the government will be belied. While the value of deposits indicates that ways were found to deposit unaccounted money, the government expects to gain tax revenues from large deposits above the prescribed Rs 2.5 lakh per individual limit.

I should emphasize that a higher value of cash has been returned to the system, deposited into bank accounts, than the government anticipated, as reported in the Financial Times in Indians rush to exchange cash ahead of deadline. But the lack of sufficient quantities of new currency means that people cannot access that cash– which is subject to strict withdrawal limits (24,000 INR per week– but many banks lack sufficient currency to allow customers to withdraw up to the limit to which they are in theory entitled). The Financial Times also reported that “banks had replaced just 38 per cent of the Rs15.3tn in demonetised notes that was sucked out of the system by November’s announcement, according to RBI data”, in Indian banks warn against lifting cash withdrawal limits.

Interested readers might look at this more extensive account arguing that the government’s aim of extinguishing black money has failed in The Wire, While the RBI Is Silent, Its Numbers Tell Us Demonetisation Has Failed.

Inept Implementation: Printing Logistics

The board of the RBI approved  the demonetization decision a mere three hours before Modi’s November 8 speech, as reported by the Economic Times in RBI approved cash ban just hours before Modi’s November 8 speech:

It remains unclear what kind of preparations the RBI made for the currency ban that caused chaos across India: it did not respond to queries on how many new 2,000 and 500 rupee notes were being printed each day in its mints or the number of hours each day the printing presses were working in the month leading up to the Nov. 8 announcement.

Nearly 50 days after the decision, there is still a shortage of cash in circulation, with ATMs regularly running out of money and a 2,500 rupee per day cap on ATM withdrawals [Jerri-Lynn here: Increased to 4500 INR from January 1].

The biggest mistake the RBI made was in not making sufficient quantities of currency available, in usable denominations, to replace the cancelled 500 INR and 1000 INR notes.  A new, 2000 INR note was introduced.  And as I wrote in my November 18 post:

Printing policy was apparently set to produce the highest replacement value of currency, rather than based on any detailed understanding of how currency typically circulates, and in what denominations, in the Indian economy. [According to LiveMint:]

“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.

To place these values 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,” as I wrote in my November 16 post.

And, I should also add, that in this November 18 post, I quoted former Finance Minister for the Union government P. Chidambaram– who is a controversial figure in Indian politics. Yet at this point, it’s clear that the comments I quoted were on the money:

“They have blundered,” says Chidambaram. “They have blundered hopelessly. They are trying to race against time.”

2,100 crore in currency notes must be replaced …

The capacity of existing printing presses is 300 crore notes per month.

If the government wants to replace (and print) 2,100 crore notes, by equivalent denomination notes to those made non-legal tender by demonetization, it would take them seven months simply to print the notes, which is why Rs 2000 notes are instead being printed.

There is no economic justification for the higher value notes. If the government is demonetizing Rs 500 and Rs 1000 notes, why is it introducing Rs 2000 notes? His answer: only to reduce the number of notes that must be printed.

It will still take 5 to 6 months to print the necessary currency notes to replace the value of the notes withdrawn.

To print sufficient Rs 100 notes [Jerri-Lynn here: a far more usable denomination for ordinary Indian cash transactions] would take five times as long.

As the Los Angeles Times has summarized in People are dying because of an audacious cash policy that India says will modernize its economy

Modi’s government has struggled to explain why the policy, crafted in near-total secrecy, has been implemented in such a disorganized way. The central bank — the Reserve Bank of India, whose well-regarded Gov. Raghuram Rajan resigned amid disagreements with Modi’s government in June — has found itself becoming a national punchline as it issues rule upon rule on deposits and withdrawal limits, some conflicting with one another.

Frequent, conflicting RBI circulars, convey the impression of a disjointed, reactive, ad hoc policy,  a well-conceived, carefully-thought-through plan.

Inept Implementation: Inopportune Timing

The Modi government couldn’t have chosen a more inopportune time to impose the demonetisation policy, as I explored further in this November 16 post and merely recap here.

First,  agriculture is the biggest single source of employment in India, and many farmers are especially cash dependent. They lack bank accounts and in fact, many of the villages they live in have no branches of banks. It often requires a journey of several kilometres– either on foot, or by catching a ride– to visit the nearest bank. Demonetization has coincided with the sowing season, when ample supplies of small bank notes are necessary to pay farmers for their crops. They in turn take the cash they earn and invest it in seed necessary to sow the next round of crops.

Further, as per my November 16 post:

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.

The government did provide a one-off exemption for access to cash to finance weddings; the effectiveness of this provision has been hampered by lack of sufficient liquidity to provide sufficient cash to those entitled to claim it. There have been widespread reports of banks simply refusing to honor the announced withdrawal ceilings simply because they lack sufficient currency to meet these obligations.

What I didn’t mention in those earlier posts is that this is also prime tourist season in India. Now I don’t know about you, but when I travel, I generally don’t carry large sums of cash with me, nor do I purchase traveller’s cheques. Instead, I rely on credit and ATM cards.

While in India, I could use my credit cards for things like hotels and some types of restaurants. But it’s still necessary for tourists to have access to cash– taxis require cash, museum and other admissions are cash only, as are many restaurants. Yet all tourists were subject to the same maximum withdrawal restrictions (initially 2000 INR,  increased to 4500 as of January 1). Once I found an ATM that had currency, I had to wait in the same long queues and usually couldn’t withdraw anything other than the useless 2000 INR notes.

Now, to be clear, I’m not asking for special treatment. I’m an Indiaphile and a frequent visitor, and I’ve learned to put up with various types of inconvenience in order to visit this marvellous country. But I think I’m a bit of a unique character in that regard– and I wonder how many other visitors– in for a brief visit for a week or two– felt about sacrificing hours out of their holidays in order to score currency.

At least visitors, however, don’t have to maintain a household in India. Consider the unfortunate position many diplomats found themselves in. Allow me to quote from the following Times of India article, Stretched diplomats join rush for cash on December 11 (and note that this was more than a month since demonetization had been launched, and still, no workaround had been developed so that diplomats could secure access to sufficient amounts of currency to allow them to conduct their ordinary household and economic affairs):

Demonetization has not only squeezed out cash from citizens’ accounts but has also left scores of foreign diplomats and consulate officials stumped. Barred by law from holding bank accounts in India, many of them in Kolkata have been finding it difficult to get rid of old currencies. Strapped of cash, they, too, have been forced to stand in ATM queues and curtail their expenses.

For Stephane Amalir, director of Alliance Francaise, managing his home has been a struggle since November 8. “I have not been able to pay my local staff and drivers. Going to the market is also tough since most shops don’t accept cards. So, I am only going to malls for vegetables and fish,” he said….

Russian consul-general Irina K Bashkirova has no account in any Indian bank. Nor does she have a credit card. “Our rules do not permit me to hold a foreign bank account or any foreign bank card. So, I draw my salary partly in Indian currency from the consulate. The distribution of new currency should have been better. The situation has not changed in a month. Locals can go to ATMs but what about diplomats?” she asked.

She said the consulate can only apply to the bank for withdrawing money. “We have diplomatic accounts with three banks but are treated on a par with the other Indian customers. We are not getting any special treatment as a consulate. Now we can only withdraw Rs 50,000 per week. But that is not enough,” she said. The consulate, Irina added, has not been able to pay its staff.

She felt sorry for those who died in the queues for money. “Demonenetisation took place in Russia also, but none died.” Irina narrated how she was stuck with Rs 2000 notes as none wanted to take them. “This should not have happened,” she said.

German consul general Olaf Iversen said his office had also been finding it difficult to weather demonetization and had received no special treatment. Most ATMs near the consulate office has remained dry, he pointed out. “I have a Visa card but I unable to withdraw any money. The Visa card allows a minimum withdrawal of 50 Euro. But as per the present law, I can withdraw Rs 2500, which is only 35 Euro. So, I can’t use my card. However, Deutsche Bank is helping me,” he said

Change Chicken and Growth Slowdown

I can’t tell you how much time I, a casual visitor to India, spent in the weeks after demonetization was launched and before I left earlier this month, in discussions about how to cope with the policy.  What ATMs had money?  Where was it possible to find usable denominations — anything but the dreaded 2000 INR notes?

Elaborate forms of what I call “change chicken” occurred– making the minimal possible expenditure for which one could get the maximum amount of change.  Now, at this point you may be saying, these issues seem more a matter of inconvenience than life threatening. After all, if I was finding my visit to India unusually trying, no one was forcing me to stay there, and I could easily have left the country and gone someplace else where the ATMs worked and currency plentiful.

But stay with me for a second. As I’ve mentioned, the acute shortage of currency has imposed a significant cost on the growth of the Indian economy– which had prior to demonetization been the fastest growing economy in the world– and shaved the growth rate, with no end in sight. I lack the space to go into this issue in any greater detail here at the moment.

Also, the failure to secure currency has led to documented deaths– either people collapsing in queues for cash, with others denied necessary medical payment due to an inability to secure sufficient cash to pay a medical bill. As The Los Angeles Times reported in People are dying because of an audacious cash policy that India says will modernize its economy:

Usha Boinavad, a farmworker in western India who underwent a heart operation as a teenager, began suffering from chest pains this month. A doctor advised the 26-year-old to seek heart valve surgery in the nearest major city, 200 miles away.

She immediately ran into another problem: cash.

The procedure would cost at least $1,500, far more than what she and her husband had in their bank account. But with India in the grip of a severe currency shortage since the government invalidated 86% of the cash in circulation on Nov. 8, the couple couldn’t scrape together even $100 for transportation to the hospital.

Banks in their farming region have been slow to receive new bills, dispensing at most $30 to a few customers before closing their doors, leaving masses to walk away empty-handed. Like most rural Indians, the couple did not possess a checkbook or debit card.

Boinavad’s father decided to sell his two buffaloes, but the buyer asked him to wait a few days because he couldn’t find cash either.

It didn’t come in time. Boinavad’s pain worsened for several days until she died at her parents’ home Dec. 13 in Nanded, 300 miles east of Mumbai.

“If not for demonetization” — the name for the government’s policy — “she would still be with us,” said Boinavad’s cousin, Sanjeev Halde.

West Bengal chief minister Mamata Banerjee (of the Trinamool Congress party), a political rival of Modi, has consistently criticised the demonetization policy, as I discussed in my November 16 post. As I mentioned, Modi had asked for the public’s patience for 50 days to implement demonetization. In a report in the Business Standard on day 51, Mamata attacks Modi over cash withdrawal limit, demonetisation deaths, she redoubled her criticisms:

“Modi Babu, public are not beggars of your Government. Why are there still restrictions on cash withdrawal ? 50 days are now over. How can you take away the rights of citizens to withdraw their own hard-earned money,” she tweeted.

Modi announced demonetisation of high value currency notes on November 8, and subsequently sought 50 days to put things in order.

“Governments may come into power but they just cannot snatch people’s economic rights,” she said.

The Trinamool Congress supremo slammed Modi for his “arrogance.”

“Modi babu, you are totally arrogant. You are responsible for 112 deaths,” she added.

Inadequate Infrastructure, Lack of Privacy and Other Safeguards

Where does this leave us?  Well, as of this week, Finance Minister Arun Jaitley is still talking up India’s future as one of the deliberate use of less cash (because I may point out, Indians are certainly currently forced to eschew  cash, but that is due to the liquidity crunch that has arisen from the RBI not making sufficient quantities of currency available in usable denominations). According to The Times of India, in Money has lost its ‘anonymity’ after demonetisation: Arun Jaitley:

Finance minister Arun Jaitley on Sunday expressed hope that demonetisation will help increase government revenue and lower fiscal deficit, leading to higher expenditure on defence and rural infrastructure.

With the junking of the old high-value currency, the parallel economy has become part of the formal system, which leads to higher accountability and taxation that boost economic growth and transparency, he said at the launch of Digi Dhan Mela.

He illustrated this point by saying that shifting towards less cash economy will help bridge fiscal deficit and bring about improvement in rural India [links omitted]. This is outright fantasy.

I should mention some of the major problems that are preventing India from moving out of cash anytime soon– or at least, once the RBI manages to get sufficient currency in circulation, in appropriate denominations, to support “normal” levels of economic activity.

The first serious obstacle is a  lack of bank accounts.  Allow me to quote from my November 16 post:

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).

Although both before and especially after demonetization, the Modi government has made a concerted push to get people to open bank accounts, this is not a straightforward process–  whatever incentives the government may  provide. As mentioned above,  many Indians live in villages where there is no bank branch. At present, economic activity in those villages is conducted in cash (or through various barter arrangements now that currency is in such short supply). So, it’s a bit of a tough sell to get people to accept the logic of opening a bank account.

Second, there are basic infrastructural impediments to any cashless system for transactions.  I have experienced many times frequent problems with phone and internet access– especially out in the countryside but also– due to the sheer volume of people using networks– in the metros as well. In the countryside, India suffers from an unstable, irregular electricity supply. Although India has recently become the second largest smartphone market, terms of active unique smartphone users, as I’ve recently written in Apple Chases Indian Smartphone Market By Asking Modi Government for Manufacturing Deal, the current rate of smartphone penetration is only 30%– an impediment to a shift to cashless transactions.

I should mention two other issues, each raised in an article The Wire, There is No Magical On-Off Switch That Will Allow India to Transform Into a Cashless Economy. Privacy issues are currently not a major concern in India, which lacks adequate privacy and data protection laws:

The Attorney General of India has even claimed before the Supreme Court that Indian citizens have no constitutional right to privacy. Given the situation, the spectre of a cashless economy is scary indeed. Most of us do need the comfort of anonymity that cash provides, even while carrying out legitimate and harmless businesses. It will require a fair amount of informed debate before the privacy rights of citizens can be properly worked out, and it will definitely be premature to consider going cashless before that can happen. The government needs to clearly spell out the technical standards and the legal measures required to ensure the protection of privacy of its citizens, even from itself. The possibility of electronic mass surveillance on all monetary transactions does not augur well for civil liberty and democracy.

And a further concern is deficient security standards.  Assume one could wave a magic wand and give all Indians bank accounts, and some form of card, app, or device that would allow for cashless transactions.  Such a hypothetical system would rely on some form of authentication system. Now, most all Indians have great experience in dealing with cash, and know how to safeguard their small holdings– and what the consequences are of losing cash.

Over to The Wire again:

Clearly, the government has to worry about user education and familiarisation in a big way and needs to work out the public policies and legal frameworks that may have to be invoked to give quick comfort and grievance redressal to its citizens who may lose their hard earned money because of ordinary ignorance. This is obviously not a mean task given the complex demography, and the problem is bound to get compounded as we move further towards cashless. Fiercely protecting our cash is a skill that we learn from our early childhood and is one that suits us naturally, and the skill may have to be completely re-learnt if and when we go cashless – which is not comforting. Besides, the government also has to define security standards for the back end infrastructure and make it as transparent to its citizens as possible. It also has to explain to its citizens why it expects their banks and wallets to be safe. So far it has failed to do so and we remain unaware of the data protection standards followed by the retail banks, Paytm or Airtel money.

Bottom Line

Demonetization in India has been a debacle, and there is no end to the problems that it has created currently in sight. The best that can be said about it is that it might deter political leaders in other countries think long and hard before initiating similarly ill-conceived, premature efforts to try and nudge transactions away from cash and toward cashless payment systems.

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47 comments

  1. Altandmain

    Unfortunately, it may not deter other nations.

    I suspect that this debacle will be repeated elsewhere. The only difference is that the elite will be sure to hoard cash for themselves and ensure ample access to credit cards before they try again.

    1. Mark P.

      They can try.

      But, on one hand, Clive’s post on payment systems the other day was informative on the costs and problems that heavily mitigate against instituting cashless economies.

      And on the other, it turns out that bitcoin isn’t just a solution in search of a problem. The situation in Venezuela shows what can happen when a state makes its currency and cash non-viable for its population.People are turning to bitcoin to replace the bolivar, including at least one person (even as the Venezuelan government is monitoring electrical use and putting bitcoin miners in jail for passing “contraband”) who’s using it to buy food via Amazon.

        1. Hayek's Heelbiter

          Just received this notice in an email a few moments ago.

          “And if anyone is heading to Pune, all ATMs there were out of money last week.”

          Wishing all the NC team and contributors a continued year of speaking the truth that the MSM tries to disappear.

    2. psha

      Who says it is debacle, it is mostly in the minds of economists, who have no real sense of what is happening on ground. The situation has returned normal faster than the economists could digest, instead of the 7 to 8 months. Nothing of the doomsday scenario that economist predicted has happened. This shows that economists are mostly bookworms. There is no real drop in consumption, only a small bit in one, month.

  2. Hayek's Heelbiter

    Every year since 1983 (yes, waaaay pre-1992 – two totally different countries), I’ve been going to India three or four times a year on pilgrimage or to visit friends or on teaching assignments.

    I’ve been reading snippets in the MSM re the chaos, but none with such depth as Scofield’s article..

    I was planning to go again in March, but I think I’ll postpone and save the several thousand dollars I normally pump into the local economy each time until I can purchase the 750 ml Royal Challenge with the new Rs. 2,000 bills. :)

    1. Jerri-Lynn Scofield Post author

      You may want to rethink your decision to go in March especially since as a long-standing visitor to India, you no doubt have developed the necessary flexible mindset to deal with the occasional challenges visiting India presents. I found wine shops to be one of the few places one could successfully and consistently play change chicken– admittedly sometimes at the cost of buying more booze than I was planning on doing. So you may need to pony up for two bottles of Royal Challenge at a time rather than one– but most wine shops would be able to make change.

      Also, I’d recommend not planning on relying on ATMs. When I next return to India in 2017, I’ll bring a stack of US dollars so I’m not so dependent on ATMs. And if you do use ATMs, you may need to think about how to get them to give you cash in usable denominations. I understand the daily withdrawal limit is now 4500 INR, but the key will be whether the machines have currency or not. Although I’m not in India at the moment, as of late December when I was, people were gaming ATMs to try to get them to dispense usable currency (e.g., when the withdrawal limit was 2000 INR, asking for 1900– with no 500 bills then widely available, sometimes the machine would spit out a lovely pile of very usable 100 notes. Of course, often it would tell you it was out of cash– in which case, you’d have to settle for redoing the transaction and getting a 2000 INR note, or walking away with nothing).

      And remember, the withdrawal cap applies to individual cards– so if you have multiple bank accounts, and/or credit cards, you can queue up at a machine that has currency, and then make multiple withdrawals when it’s your turn, from these various accounts, each up to the daily withdrawal limit. This technique ended up costing me more money on minimum transaction fees than making a simple withdrawal from one account when the limit was 10,000 INR or 15,000 INR– but I needed cash, so really had no choice.

      1. bob

        Appreciate the ongoing coverage of this. Bank runs, and the mechanics of the power of cash are a long fascination.

        I meant to ask- What are the local customs with regard to gratuities/tips? Are the bills that were targeted used in that way?

        I understand that most, or a good portion of the indian economy is “underground”, but did those bills that were targeted represent the savings of any group more than others? I have no idea how or if people save or use currency for that savings.

        There isn’t much granularity about the India cash economy. Looking for it ends in “BUY GOLD NOW! India….history” or stories about the cash crunch giving little detail.

        Is it a push between so called “legit” employers vs “under the table” employers?

        1. Jerri-Lynn Scofield Post author

          It’s important to realize: the informal sector isn’t the same thing as the underground economy. It’s the cash-based economy. Most of India’s economy is still cash-based. And most of the workers in this informal sector are completely legit. They pay no taxes. But, guess what: they don’t owe any taxes! They don’t pay taxes because their income doesn’t meet the minimum threshold for paying taxes. The huge conceptual mistake that’s occurred here has been to conflate black money with the informal sector. Modi’s effort to target black money has mistakenly strangled the informal sector– which is not the same thing.

          1. bob

            I understand that.

            What happens when someone who was getting paid in cash for the past ten years, shows up at the bank with 10 years worth of savings? Is this common?

            How are people paid? Is it via check, or cash?

            Getting into the people who would be paid in cash….who are they? And what do they get paid? What denominations of cash are they/were they getting paid in?

            I asked about tipping because that’s normally as good a place as any to start. People I have known in the tip based economy used to save in those same denominations.

            It’s my belief that honest to goodness (no sarcasm) money launders tend to use the same denominations, because of this big float.

            Getting rid of “cash” doesn’t hurt the money launders, it helps them, they know how to clean money. No problem.

            The person with any substantial cash savings, in those denominations, would have a problem.

            1. sanchit

              It is highly unusual for a person who has been getting paid in cash for several years to have substantial savings. This is because the workers who are paid in cash usually have very low wages which are only enough for the daily needs of their family and then a bit more. Even if a person shows up with a good amount of savings, it would not be taxed if he can show a legal source of this income. This phenomenon was common but people usually didn’t turn up with huge piles of cash.

              People were getting paid in cash. Denominations depended upon their wages.

  3. blert

    Modi’s errors are so basic — he could not have staffed this scheme out.

    Financial Civil War is what he’s declared.

    But, he’s fighting ghosts — a myth.

    1. og

      Error? Let’s not color the culpability here. At this level of statecraft, there is never any “error”. One does not wage war, bomb carpets, or cut open cadavers “in error”. One does not even change the size of bills “in error”. That was done deliberately too. Did they not know the size change will jinx ATMs for weeks?

      1. Yves Smith

        Sorry, I work with executives.

        The answer is yes. As Clive has explained, ATMs and nerdy operational stuff are treated with about the same respect as the janitorial staff, even though all these guys (they are heavily male) would go nuts it their toilets were not cleaned regularly.

        Greece, which was considering a Grexit, hadn’t even figured out how to print currency, and didn’t even consider the ATM problem.

        Never attribute to malice that which can be explained by incompetence. Modi suffers via this move being such a cock up. He had no incentive to screw it up. They clearly considered secrecy to be a top priority and that appears among other things keeping the planning among a few very senior people who had no idea about critical operational issues.

  4. medicalquack

    Take a look at the war on cash at the prescription counter. For profit patient scoring with medication adherence prediction scores! If the data miners can’t find enough data on you, you default to being non compliant and a pharmacist told me about this a while back, those who pay cash gets listed as non compliant outliers and the pharmacists have to fix you, so we don’t want to lose our cash.

    http://ducknetweb.blogspot.com/2015/07/patients-who-pay-cash-when-filling.html

    Seriously, read this as the pharmacy benefit mangers front run you all the time to the drug stores in charging you more than what the pharmacy can offer you if you pay cash.

    We need a law badly to index and license all the data sellers in the US and maybe everywhere, as who are they, what are they selling, are they legal, and how much bias is created. Express Scripts is oh so proud of themselves with their 300 metrics used, most of which have zero to do with prescriptions.

    http://www.youcaring.com/other/help-preserve-our-privacy-/258776

  5. George Phillies

    If you have a mostly-cash economy and withdraw (counting replacements at this point) around half of all money from circulation, some economic theories (Austrian, e.g.) suggest that the outcome is going to be much worse than a slight reduction in the economic growth rate. Destroying confidence that money will be worth anything tomorrow will possibly have various follow-on effects, mostly bad.

  6. BecauseTradition

    Well, when citizens may not use their nation’s fiat AT ALL, maybe they’ll wake up to their enslavement to a government privileged usury cartel.

  7. EndOfTheWorld

    I’m interested in how this program will affect gold buying in India. It’s always been a big buyer of, and believer in, gold as a store of value, especially for wedding dowries.

  8. Larry

    Thanks for the very detailed article. Truly a damning indictment of Modi’s ill conceived plan. When the nicest thing you can say about the implementation is that this might stop others from moving to demonetize, well, what else is there to say?

  9. ggm

    What is the role of USAID and Project Catalyst in this? I am trying to better understand the motives behind this poorly implemented plan. It does seem to me that forcing tens of millions of people into microfinance is one of the ultimate goals. There is a lot of money to be made in the data collection, interest payments and fees when most transactions are shifted into the trackable digital realm.

  10. Synoia

    From the department of “What Else Could They Possibly Say:”

    There’s a problem at the moment, but it may not remain so for long… Shyam Srinivasan, Federal Bank.

    Parts of demand will come back quite aggressively…Shyam Srinivasan, Federal Bank.

    Third quarter GDP growth may be affected badly…
    Things may not look up for fourth quarter too…
    Growth recovery may start only in the first quarter of next fiscal…Sabnavis of Care Ratings.

    Oooh! I want one of their Chrystal Balls, which predict the future with such assurance!!!

    Or not.

  11. Disturbed Voter

    Unfortunate for India. But the arrogance of authoritarians is never concerned with the suffering of the poor.

  12. nothing but the truth

    the situation is almost back to normal and the parallel economy has been brought into the official one.

    the reason why the public has moslty supported modi is that this black money is the cause and effect of massive corruption, and the people are sick of it.

    except professional politicians who survive on corrupt cash, practically no one has complained and has taken this as a necessary cleansing sacrifice.

    what happens hereafter is the key – if modi seizes the initiative on corruption and uses the information gained on the huge deposits to act on corrupt sources, he will be a hero. Otherwise he is toast.

    1. oh

      I think it’s time to stick a fork in him. He’s done. BTW, the politicians (I include Modi) hoard a lot of corrupt money as well as hold it in Swiss Banks.

    2. Jerri-Lynn Scofield Post author

      You can repeat Modi talking points until you’re blue in the face, but as you’ll see in the post, demonetization hasn’t stranded nearly as much “black money” as was expected– and the cost both to the economy, and in terms of outright suffering and inconvenience, has been considerable.

      No one denies that Indians are sick of corruption and systemic failures that privilege the few at the expense of the many (as are Americans– see election of Trump; and Brits– see Brexit vote; and Italians– see Rienzi and constitutional referendum: need I go on?). I’ve made just this point in this and previous points: Quite the achievement to get Bengali creatives and intellectuals to cheer on any Modi policy– as certainly happened in the immediate aftermath of announcement of the new initiative. But demonetization is the wrong cure for the corruption disease.

      And I don’t know how you support that claim “no one has complained”. Park yourself in any ATM queue, or talk to any Indian whose economic activity– e.g. just about anyone– has been affected by this debacle, and you’ll hear plenty of choice words, as I certainly did when I was visiting India last month.

  13. Dave

    Every Indian who owes tax should refuse to file until this mess is cleared up.
    The ideal way would be for the government to apologize, admit they were wrong and return to the status quo ante.

    “Every Indian…”? I don’t think it would take more than 25% of those who owe taxes to not file to bring down the government.

  14. Sound of the Suburbs

    George Soros is a ****.

    Insert four letter word of your choice.

    Anyone who was an adult in the UK in 1992 remembers George Soros’s attack on sterling.

    At work I was listening to the radio as the UK was raising interest rates by the hour to try and defend itself and everyone was thinking about their mortgage payments as the UK has variable rates.

    In the end it worked out OK but no thanks to George Soros.

    George Soros was the man who started the Asian crisis that led to whole families committing suicide together in South Korea (Naomi Klein “Shock Doctrine”)

    He talks about it light heartedly in this video.

    https://www.youtube.com/watch?v=p8Ux5b6YM9A

    You can’t see it, I did before he covered his tracks.

    George Soros is a self-serving **** (as above)

    1. Mel

      I was trying to remember a similar story from around the 90s when forex traders made a run at Iceland. All the usual sources will tell me about the recent attack of Banker Madness, but nothing else. ISTR the effects were dire at the time. Any clues?

      1. EndOfTheWorld

        At least his attack on sterling was based on the profit motive. He saw a legal way to make money and he capitalized on it during his currency trading days. The stuff he’s doing now is more insane because he’s spending, not profiting.

        1. EndOfTheWorld

          Nixon started Soros’ merry spree by officially taking the US off the gold standard. The currencies then started to float. Soros saw his opportunity and made big bucks. Don’t blame him for making money legally.

  15. Jay

    “SBI[State Bank Of India] cuts lending rate by 0.90 per cent; automobile, home loans set to get cheaper”
    http://indiatoday.intoday.in/story/sbi-cuts-lending-rate-by-90-bps-others-likely-to-follow-suit/1/847197.html

    India’s cyber appellate tribunal is not even staffed with a chairperson! –
    “What recourse does the average Indian citizen have if they have been affected by cyber fraud? The ministry of communication and information technology’s Cyber Appellate Tribunal (CyAT) was established in 2006 as “a specialised forum to redress cyber fraud”.

    From 2011, however, the tribunal has barely been functioning. It still pays out salaries to its employees but no judicial order hs been passed nor has any case been heard for the last five years. A recent Comptroller and Auditor General audit has noted that after the retirement of the CyAT’s last chairperson in June 2011, there has been no replacement appointed as of June 2016.

    “However, members and other staff continued to render services in the CyAT since then and expenditure of Rs. 27.64 crore were incurred on its establishment for the period from 2011-12 to 2015-16 without carrying out its primary business of hearing and disposal of appeals,” the CAG report notes.”
    https://thewire.in/86414/tragic-comedic-functioning-indias-cyber-appellate-tribunal/

    As far as the finance minister is concerned, I think he is driven by the fiscal deficit ghost. He seems to keep citing that it has been reduced and will reduce because of further demonitisation. It seems the maniacal fiscal deficit targeting number , 3.5%, has arrived in India as well!

    “People aware of the discussions in the meeting, the economists also advised the FM to stop worrying about fiscal deficit targets and focus on increasing capital expenditure and social sector spending.

    They added that despite years of effort to rein in fiscal deficit, the rating agencies the ratings agencies had not upgraded its long-term sovereign ratings. In such a scenario, and at a time when major developed and developing economies were increasing federal spending, India should do the same.

    The focus of the Centre’s spending, said economists, should be on infrastructure, job creation, and the social sector. With private sector balance sheets still weak, the government would not only have to maintain its public spending spree, but maybe even increase it.

    The fiscal deficit target for the financial year 2016-17 is at 3.5%.”

    http://www.business-standard.com/budget/article/economists-tell-govt-to-increase-spending-116122001418_1.html

    Interesting that the Eurozone also has a 3% target so does India. Its interesting that the most powerful country in the Eurozone, Germany, has a stubborn lawyer as its finance minister and so does India.

  16. Stephen Verchinski

    Interesting what the end game of Government spending is here. Arming itself and rural infrastructure investments. Maybe everyone just needs to follow the money.

  17. Jay

    Also J-LN and NC, I would be a bit skeptical about The Wire’s articles on demonitisation. Here is it’s editor citing the fractional reserve system as how banks loan money –

    “Modi’s second assertion – that the excess of cash was fuelling inflation – simply reflects his poor knowledge of basic economics. Indeed, it is astonishing that no one in the PMO or finance ministry had the economic literacy – or the moral courage – to tell the prime minister that the opposite is true, that bank deposits are more inflationary than cash holdings with the public. When the public deposits cash, either voluntarily or, as is currently the case, under duress, banks keep only a portion of this with the RBI as reserve (depending on the ‘cash reserve ratio’) and lend the rest. If the CRR is, say 10%, and an individual deposits 1 lakh with her bank, this leads to an expansion of bank deposits by a factor of 9. This increased money supply is bound to be more inflationary than if the individual had held on to her cash. My monetary economics is rusty so I checked the position with a former board member of the Reserve Bank of India. Pat came the answer: “When M1 enters the banking system and bumps up M3, that will, ceteris paribus, give an upward thrust to inflation.”

    https://thewire.in/90917/modi-just-dug-great-big-hole-demonetisation-speech/

  18. Patrick Donnelly

    Governments, employing most of the world’s economists, do not understand cash nor money….. this is not up for debate, here is the proof! Inflation has destroyed the value of coin so much that coin has been withdrawn in many jurisdictions. Large denomination notes are not large at all! Eventually, the true markets will prevail. But governments can and are delaying it so that some get richer, leaving the rest to pay!

    Time for metal coins of standard weight and size across all nations, to be issued? How much they are worth depends upon their market!!! Democracy in money!

    In fact, this happened in the USA with the thaler from Hungary. Pronounced dollar…..!

    1. Robert

      They understand money just fine, thank-you. 20-25%+ charged to cardholders and 0.01% for savers. Modi is simply a tool for their central bank’s plan (as is the case with all the western central banks as well) to eliminate cash and take a little cut of every single electronic transaction. It was once axiomatic, but very little mentioned today that money is supposed to be a store of value. Fiat money is anything but. If the people of India had small denomination silver coins, they would never have to fear any kind of “demonetization.” But it is up to them to demand it, and they are up against a plethora of sophists and sophisticated BS artists in government and the press. Agree completely with your comments about coinage- they need not even be standardized- word gets around instantly as to their value.

  19. Hemang

    The writer of the piece calls the Indian demonetisation ‘a debacle’ and she is quite further from the truth I am afraid. I live in Western India, the region that pays 80 per cent of the Indian income tax collection . I feel the current demonetization drive has affected the engines of daily life only marginally . Of course there are queues at ATMs and the banks- I have stood three times in a queue during the past month- but show me a single country in the world without the queues of various kinds!- two longest queues in the present world is perhaps made by the office seekers in the Trump Government and the other made by journalists wanting to be in good books of Prez Elect! Middle class western commentators on India are not only always wrong but possess no style either! Witness a great western writer commenting : The borrowed Indian institutions- the press, the parliament and the law courts have worked only as borrowed institutions”. If seen through this prism, the present Indian effort at demonetisation is an incompetent managerial effort. To call it ‘a debacle’, ‘a chaos’ and ‘an assault on the poor’ is the blatant case of misuse of words based on profound misunderstanding of the Indian reality- either economic or civilizational. Common westerners must learn from their elites how to look at India first before commenting on it!

    1. Nathan

      Hemang – I live in India too, and I would have to fundamentally disagree with you. I find the author’s article above to be on the money, and an accurate reflection of the situation in India today. It appears your comment is limited by your own experience (this in fact is a problem that many salaried middle-class people in India suffer from, failing to realize they constitute only a small minority of India). The effects of demonetization have been very profound and deep and has impacted India’s economy very severely. It is not just about standing in ATM queues, as you seem to think. The much greater problem is that liquid cash has dried up, and as a result thousand of businesses across the country had closed down. Very large portions of the informal economic sector have ground to a halt, including in construction, small trade, agriculture, etc. As a result, consumer demand has slumped drastically, and companies are cutting back on production and manufacturing. This is expected to result in a sudden increase in layoffs and unemployment in the coming months (which is when middle-class people like yourself will also be affected). This is the reason, the government has in a panic mode now forced all the banks to drop interest rates and increase lending – by this, they are hoping to stimulate the consumer demand that has slumped. But I suspect it is now too late, and the negative effects of the demonetization are going to be prolonged and deep. I would entirely agree with the author that the demonetization process is nothing but a debacle. So far it has been an assault on the poor, but with the coming economic downturn it will also affect the middle-class, which is when they will wake up and realize what a catastrophe this demonetization process has been. By the way, to accuse the author of misusing words is frankly unjustified; With all due respect, I think it is only your comment above that has used inappropriate words by using words such as ‘common westerners’ and ‘elites’. Just because you have a different point of view to somebody else does not mean the other person becomes either a ‘commoner’ or ‘elite’!

    2. Nathan

      Hemang – Sorry, I don’t mean to be stuck on your post, but as an Indian I cannot help but point out that you have presented an inaccurate statistic in your post. Western Indian does NOT pay 80% of Indian income tax. Yes, Maharashtra contributes to about 40% of Indian income tax collections, and it is the no. 1 state. The next highest after Maharashtra is Delhi which contributes about 13%. This is followed by the three Souther Indian states of Karnataka, Tamil Nadu, and Andhra Pradesh, which contribute to about 20% of Indian income-tax. Gujarat contributes to only 5.2% of India’s income-tax, and has a lower share than all the above three southern Indian states. Hope that helps.

      1. Hemang

        If the poor are assaulted and they do nothing about it in a Gandhian Sermon on the Mount manner then it is their problem: They are a willing game in the extractive enterprise that is mis-termed as ‘ Indian Economy’. Indeed your Indian clerk- hood bristles from each word used by you! Do permit me a short laughter and reiterate that the author has no intellectual equipment to approach the Indian reality. The history of last two hundred years shows that only elite westerners have the facility to view India in correct light without a tone of judgement. All other attempts are involved self-portraits of the commentators revealing their common ness, starting with Karl Marx’s articles in 1850s. You say things like ‘a small minority’ but isn’t a minority small by definition? That prompts another request to you from me: Do permit me a short laugh again!

        1. stam

          Hemang is typically that person who in India nowadays is known as ‘Modi Bhakt’. Nothing can shake their belief in Modi, not even this tragedy. Abuse is their style.

  20. GARVIT RAWAT

    Well researched article and remarkable detail for a foreigner.
    I wouldn’t however call this move a complete debacle.
    For sure it fell short of its primary objective, ‘Black Money’, and that was simply because they should have had restrictions on the number of old cash deposits (like twice only), or simply instead of 50 days, they should have mandated 24 hr banks, thrown in a few holidays and allowed only a week or 10 days to deposit money. They could make detailed exceptional cases for ‘out of country’, or medical issues (like somebody is in a coma.!?…) with proper paperwork.
    The basic truth is whatever the number tells you, Black Money in cash DOES exist. Its more than a fairy tale or Bollywood creation (even though every Indian has definitely heard many crazy stories of the amount of black cash and how the rich hide it). Its also equally true that 90% of Indians that should be paying tax, don’t. The concept of cessation of high denomination is a BRILLIANT idea and it would have achieved its purpose if the government hadn’t given so much time for all the black money folks to figure ways to rid of their notes. The Indian business mind (ethical and not so ethical) is very sharp, and literally there were side businesses springing up in weeks to help launder the old notes. Being on the ground level myself, I can tell you people have been giving money to friends and relatives and servants to get rid of the cash. If Modi had given 10 days instead of 50 a large proportion of this untaxed black money wouldn’t have made it into the system and this move would show up an astounding success.
    The governments estimate of 3 Lakh Crore Rupees in black is probably true, but a lot of it has found its way into the banks. Now there may be later taxation gains, but the victory isn’t as decisive as it could have been.

    Now for the issues facing the ‘common’ man, these are unavoidable. Modi had started printing the 2000 note a couple of months back but even that got leaked. They tried rejigging ATMs for the 2000 note, but even that was leaked. To manage to keep this a secret is nothing short of a MIRACLE in India. They had to print 2000 instead of lower denominations fill the gap quickly. Printing a different 500 rupee note from before is a sure shot way of making it known that old ones are getting scrapped. Why would you print a denomination you already have differently? There should be little doubt that cash supply will take months to refill, and there is no other way. People don’t understand the difficulty in disbursing currency to 100000 ATMS and 100000 branches across India, through its forests, bumpy roads and safety issues. As for the economic hardships and GDP dip – WHO CARES! Seriously Indians don’t care. The country is very resilient, and the fact that there were no riots, violence or major anti civil activities is again nothing short of a miracle. People talk of 50-100 people dying standing in line. C’mon, its possible that it was there time. A person in India dies every 4 min in road accidents, 9 persons die everyday in Mumbai alone crossing rail tracks. God knows how many die everyday due to lack of timely medical attention. The point is, if the government had the resources for proper infrastructure these deaths wouldn’t happen. Financial inclusion is an essential objective of this demonetization policy. Remember about 1% of Indians pay tax. How do you develop social security and infrastructure if nobody pays tax?
    So these so called ‘hardships’ that we talk about would pale in comparison to the purported long term objective.
    Now to speak of some of the successes of demonetization. It HAS almost eliminated internal terrorist activities (the Kashmir stone peltings and Naxals). It has hit the criminal/drug mafias hard. It has hit the counterfeiters. It WILL increase tax revenues and add more liquiditiy to banks. There will some money not returned (not as much as there should have been as I’ve mentioned before) which will be a gain for the central bank. It will act as a catalyst to develop going towards cashless.
    Most importantly, it has worked to re-energize the youth and the country into believing the Government is serious about its battle on corruption and genuine growth. It has increased the average Indian’s economic awareness and savvy to understand that high cash payments are generally accompanied with black money. This has forced small to medium businesses to get card swipers, which were previously cash only. This move has forced all businesses to look to clean up their acts as well.
    In other words, the intangible part of this exercise is creating a positive cleaner socio-economic culture shift as has never been witnessed before.

    1. Ken Ward

      Having carried out a lot of research on terrorism in another Asian country beginning with the letter ‘i’, I would like to know why terrorist activities in India are dependent on black money to such an extent that the demonetisation of Rs500 and Rs1000 notes has had a big impact.

      Does Garvit Rawat believe that, if implemented a couple of months ago, demonetisation in Turkey, for example, might have stopped the attack on the Istanbul nightclub a few days ago? Or is it only in India that demonetisation is a powerful counter-terrorist weapon? How long will the pause in terrorist activities last?

      1. Hemang

        Ken Ward, A fine point made by you! I am an Indian living in western India (surviving on 5 dollars a day and obviouslynot a car owner!) and I would like to assert that Garvit (In Sanskrit, the name means brimming with insolence by the way!) does not mean much by his words . Indians are boastful in general; the poor always boast, as noted by a great writer somewhere. Indians also have a very restrictive idea of their own civilization, a theses confirmed by Mr. Garvit’s post. Alas, the ‘English speaking ‘ type of Indian dances on a platform outside their civilization as he or she stands literally on trap doors of sheer incompetence. And yet they insist on a seat on the high table of the comity of nations! I congratulate Ken Ward for his politeness that Indians in general lack even while discussing such trivial belle- letter topics as World Economy and High Finance. And while we become from cow Worshipers to ‘Card Swipe’ worshipers, I would like to tell one and all that 98 per cent of India’s economic transactions are cash based; Compare that with China’s 90 per cent and of Brazil at 85 per cent. Even U.S. cash transactions are 55 percent!

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