Remember, Remember the Eighth of November: India’s War on Cash Assessed One Year Later

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

Ask just about any sentient American what s/he recalls about the eighth of November 2016, and you’ll likely get an earful about the election of Donald Trump as President– which The Hill today points out, neither party has yet to get past.

Ask any resident Indian to recall the same day, and you’ll hear an assessment of notebandi– demonetization. To recap for those new to the story, that evening, Prime Minister Narendra Modi delivered an unscheduled speech announcing the cancellation of Indian Rupees (Rs) 500 (about US$7.73) and Rs 1000 (US$15.47) notes– 86% of all cash then in circulation in what’s largely a cash-based economy– in order to ferret out black money.  Holders of the cancelled notes were required to swap them for new ones by end 2016, using procedures that it soon became apparent were deeply flawed.

Now, coincidentally, I happened to be visiting India when Modi announced the notebandi policy. And so I wrote a series of posts, combining my first-hand observations, with a more comprehensive analysis of the policy (see here, here, here, here, here, and here.)

Immediate Impact, Long-Term Effects

The earlier posts discussed the immediate impact on economic activity, and the other effects– ranging from inconvenience, to acute suffering and extreme distress– on just about anyone in the country at the time the policy was imposed.  I’m not going to repeat any of these details, here but instead refer interested readers to the posts linked to above, that not only discussed the impact of notebandi at length, but the consternation many expressed at the mismatch between the expressed goal of the policy and its likely efficacy in achieving that objective.

Unsurprisingly, when the Reserve Bank of India (RB) issued its latest annual report in August 2017, as I discussed in this post, India’s Demonetization: No Impact on Black Money Despite Huge Costs It Imposed, that body concluded that not only had the policy stymied economic growth, but that nearly all the old demonetized currency notes were swapped for new by the final deadline– 98.96% of the affected notes in circulation. That means that the entire exercise was for naught.

Indian Salvo in the War on Cash: Demonetization Assessed

Yet it had come increasingly apparent long before the RBI issued that report that the result of this tremendous shock to the Indian economy neither had any appreciable affect on black money while instead shrinking the economy, as I concluded the putative rationale for the policy shifted, and the rationale for the policy expanded, to include prodding India to a cashless economy.(I should mention that if the Indian government had consulted and listened to Naked Capitalism’a own clive– who wrote this post, The Global War on Cash — Lessons from History perhaps they never would have pursued such a misguided policy).

The push for a cashless India, along with two other policies– the imposition of the Aadhar universal biometric identification system, and the creation of a comprehensive goods and services tax system– share some characteristics.  Each was imposed with impossibly optimistic deadlines. And as with their counterparts in other countries, such as the US, those in charge seem to combine a touching and naive faith in the technology fairy to create new systems that don’t actually address what they purport to address, combined with a stunning lack of understanding about how things actually  work (see my discussion of how some US policymakers who have more power than sense are looking to biometrics to address cybersecurity shortcomings; this includes a discussion of the Aadhar system Biometric ID Fairy: A Misguided Response to the Equifax Mess that Will Only Enrich Cybersecurity Grifters and Strengthen the Surveillance State)

Cash Comes Full Circle

And in India, each of these three policies– demonetization, Aadhar, and the new GST– have neither been well-designed nor  well-rolled out, and have imposed serious inconveniences on individuals and businesses– without remotely achieving their stated goals, as Jayati Ghosh discussed in this recent post, India’s Demonetization Experiment Fails to Demonetize: Cash Comes Full Circle.

Many in the government appeared to believe that the introduction of the Goods and Services Tax would be one more force pushing people towards digital transactions. The argument was that the trail of transactions required to claim refunds on GST would make it preferable for producers, suppliers, traders and other businessmen to move to electronic transactions that would be easier to monitor and calculate, and would also make the filing of returns easier. But the GST itself is plagued with massive design flaws and very shoddy implementation, which has even acted as an incentive to rely more on cash transactions. The multiplicity of rates, the complexity of the system, the widespread confusion about different categories, the costs and sheer difficulties in even filing online returns, have all meant that small businesses in particular have reverted to cash. Even in big megacities like Delhi, consumers can testify to the fact that the “kaccha bill” of items written on a piece of paper has made a comeback in a big way.

Let me further highlight Ghosh’s main insight:

The failure of this attempt at digitisation [she’s referring to the GST] is the result of what now appears to be a basic flaw in the approach of this central government towards much policy: a cart-before-horse attitude that does not take into account the wider context, underlying factors and supportive and enabling conditions that must be met for any policy measure to succeed.

Don’t Know or Don’t Care

Fairly apparent in the notebandi exercise that those who’d designed the policy, either didn’t know, or didn’t care, about the basics of how cash is used in India. And I mean that on two levels, not understanding the implications for the wider economy of canceling cash in what  was– and remains — a cash-based system.

And also, they failed to grasp how cash is actually used in India.  Whlle Ghosh notes that the actual amount of cash in ATMs approaches the level before notebandi was imposed, liquidity remains limited by what notes are actually available. When it cancelled 500 Rs and 1000 Rs, the government opted to replace these with 2000 Rs notes– even though as I discussed at the time, such large notes were much too large to be used for ordinary transactions.This problem still festers, as I learned when I returned to Calcutta earlier this week to attend a conference. I arrived t the airport after midnight, and immediately withdrew cash from an ATM– 10,000 Rs.

Now, Calcutta’s taxis still operate on a cash-only basis. I don’t use Uber, partly out of principle, partly because I don’t carry a smartphone.

What could I withdraw? Only the dreaded 2000 Rs notes. Yet a cab to the city centre costs about 350 Rs, and the dispatcher at the prepaid taxi desk sighed deeply when I handed over a note, batted my eyelashes, and asked him to make change.  He did, reluctantly, and I was able to pay for my cab.  But I was still left with four 2000 Rs notes, which, in order to use for ordinary cash transactions, I’ll either have to go to a bank, or hope I can otherwise exchange.

I’ve yet to spend much time out and about in Calcutta, but it seems that as was the case when I was last in India, change chicken is a game people are still forced to play– pretending they don’t have smaller denomination notes, in order to get the other party to a transaction to surrender his/her change.

Impact on the Poor

Now, I can imagine the snickers I’m getting from some in the commentariat– particularly the Modi supporters who sometimes comment– that this is a very first world problem.  And I should mention in passing that supporters of government policy suggest that the noetbandi policy has been a political success. On that point, thus far, they’re not actually wrong, as it seems that Indians, many fed up with corruption, continue to believe, mistakenly, that notebandi is an effective response to that scourge.

But consider this LiveMint piece– Demonetisation: A resounding success— written by Jayant Sinha, minister of state for civil aviation and a member of Parliament from Hazaribagh, Jharkhand. Sinha at least doesn’t ignore completely contrary conclusions:

For instance, [former RBI governor] Dr Raghuram Rajan has mentioned that he believed that while there might be long-term benefits, the short-term economic costs of demonetisation would outweigh them and that there were alternatives available to achieve the main goals. He has chosen not to elaborate what he thought the long-term benefits might be nor has he quantified the short-term costs.

Dr Manmohan Singh [Modi’s predecessor as PM] has estimated the cost of demonetisation to be 2% of gross domestic product. These quick assessments appear specious. Zhou Enlai, when asked in 1972 about what he thought the impact of the French Revolution of 1789 was, is said to have commented that it was too early to tell. When revolutionary changes take place, it takes years, decades, or even centuries before the impact of such transformations can be studied and commented upon.

I suggest that when one sidesteps a question by relying on Zhou Enlai’s well-known French Revolution quip as well as hundreds of unwritten doctoral dissertations, which Sinha mentions later in the article– “It will take many years to filter out the economic impact attributable to demonetisation and, indeed, this bold move and its implications will, quite probably, be the subject of hundreds of dissertations”– most people understand that notebandi has failed.

Impact on Rural Indians and Artisans

Let’s bring this down from the level of the abstract and discuss a bit more the consequences of this policy failure on Indians. Permit me to quote from some articles I spotted over my morning coffee, such as this piece in yesterday’s Economic Times, The Cashless Mirage in Bihar, discussing the situation in Bind Toli, Basta of Maer, and Patsa, which were among the first villages that went cashless after demonetization went into effect last November. (These three villages are located in the Bihar, a state that’s found at or near the bottom of the country’s economic performance table):

Rohit Mahato was ecstatic to be part of history. Demonetisation, on November 8 last year, was unprecedented; the abrupt move to shift to a cashless economy was audacious; and, in spite of being caught unawares, the 60-year-old farmer in the tiny hamlet of Bind Toli of Kurji in Patna district was eagerly looking ahead to the profound changes in his life that the move entailed: shunning cash, and transiting to a debit card and mobile banking.

“ Darr lag raha tha , lekin Modiji ke saath tha (I was apprehensive, but was with Modi),” recalls Mahato, who had deposited Rs 10,000 in his bank account post November 8. “ Notebandi se zindagi badlegi (Demonetisation would change my life),” is what he hoped. Bind Toli of Kurji, some 15 km from Bihar’s capital city, was among the first few villages in India to go cashless. Bank of Baroda… reportedly took the initiative to open bank accounts for the villagers, facilitate enrolment of Aadhaar cards and handhold some 2,000 inhabitants of the village to move towards a cashless life.

A year later, Mahato sounds dejected. “ Landless the hi, ab cashless hogaye (Were landless, now we have become cashless),” he rues, whining about how falling returns in agriculture have forced him to lead a life with little cash. The optimism of a year ago has given way to cynicism. “Nothing will ever change for the poor,” laments Mahato, as he pays Rs 5 for a cup of tea and samosa at a ramshackle snack shop at the entrance of the village on Friday morning.

Bind Toli of Kurji is made up of displaced villagers who were relocated to this dusty village along the banks of the Ganga last January. The roads are bumpy and muddy, some of the semi-plastered houses have crowned themselves with Dish TV and Videocon D2H dish antennae, and the rest rely on their mobile phones for entertainment; there is electricity but electric poles don’t have lights; the village doesn’t have drainage, toilets and potable drinking water; three grocery stores transact with cash as PoS (point of sale) machines to accept credit, and debit cards remain an alien concept; and there is no bank branch or ATM, just the branding — Bank of Baroda is as conspicuous as Jio.

“They (Bank of Baroda) came here twice last year after demonetisation but disappeared after that,” alleges Mahato. Most of the villagers opened zero-balance bank accounts, deposited some money, but have made no transaction over the last couple of months on their own, he adds. “Nobody knows how to withdraw money from a branch or ATM,” he says.

Now, the plural of anecdote is certainly not data, but this account is consistent with what I’ve observed, in some occasional travels in Rajasthan, Gujarat, and West Bengal in the past year. And, since the majority of India’s population still live in rural areas– about 70% IIRC– the problem of access to basic banking services remains a widespread one.

Another point I wish to touch on briefly is the continued impact of demonetization on many small-scale Indian businesses in the informal sector. Here I quote from another report in yesterday’s Economic Times, Agra’s shoemakers, handicraft traders and silver dealers yet to recover from “DeMonic” shock:

Shabir, his father and forefathers have all been shoemakers. “We were called master craftsmen,” says the 44-year-old. Not anymore, he shrugs. Prod him for the reason and “DeMon” is in the detail. “Gradually, (post November 8) orders dried up. Then one day traders said they had no money to pay us; that demand had plummeted.” Shabir is a fruit vendor today. “I make about Rs 300 a day — just enough to feed my family.”

A year after 8/11/2016, Agra, which employs 3.5 lakh shoemakers, has yet to recover from the “DeMonic” shock. Most of the shoemakers are skilled labourers in the unorganised shoe industry. “The city supplies handmade shoes to 60% of the country. But even a year after the note ban, business has yet to show signs of recovery; problems have been aggravated by the GST pain,” says Gagan Das Ramani, president, Agra Shoe Factories Federation and mahamantri of Agra Vyapar Mandal. “Being the president of the federation, I know hundreds of shoemakers who have switched to pulling rickshaws or working as daily wagers.”

It is not just the shoe industry that has not recovered from notebandi. Enter the lanes of Gokulpura, a hub of marble traders, and one witnesses empty shops “Business is almost finished. It was a dull Diwali. We hardly had orders for corporate gifts this year. Handicraft thrives on excess cash. And people are in no mood to splurge…Whatever little recovery we saw was soon wiped out by GST,” laments Sunil Kumar Verma, president of Agra Handicrafts Association.

The article discusses similar problems that notebandi has caused for Agra’s cloth and silver merchants.

Bottom Line

One year in, therefore, it’s not surprising that most Indians remember, remember, the eighth of November. And not all too fondly either– given the tremendous costs demonetization has imposed, and apparently, to no avail.

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  1. Wukchumni

    It’s not uncommon for some countries to retire currency, for instance all Swiss banknotes from about 30 years and prior are worth precisely nothing, the difference being the amount of time allotted to turn them in for newly issued currency, usually 5-10 years from the date of being demonetized.

    But of course, Switzerland is a rich country and more than likely as in most of the west, credit cards are responsible for the lion’s share of transactions, unlike India.

    The idea that you were there to witness the event was lucky timing, despite the travails you went through. My sister and her husband happened to be in India as well before & during when the deal went down, and my sister told me that she ended up ‘selling’ the 3,000 rupees they had left over in 500 rupee notes for a 20% discount to face value as they were departing, as they didn’t want to hassle with it.

  2. Wukchumni


    India is quite auric oriented, did you notice in the midst of the currency kerfuffle whether there was even more of a push towards the precious?

  3. flora

    Thanks for this article, which, in conjunction with the article on the Charter of the Forest, has set my thoughts spinning (off into outer space, perhaps.).

    Earlier post Charter of Forest article discussed the commons, the access to natural resources for the common people necessary to their lives and livelihoods in the feudal economic system, and to present public policies on natural resource use.

    I wonder if the transition from feudalism to capitalism (small ‘c’) creates an economic extension of what can be considered the “commons”, where markets and the ability to transact in markets is now a requirement for most people’s livelihoods. And so, therefore, neoliberal attempts at increasing rentier wealth by such things as monopoly power and demonitization can be seen as a modern enclosure movement.

    Following this line speculation (or flight of fancy), replacing the common resource of govt issued cash – usable by all in all transactions for free (no transaction charges) – could be seen as another attempt at enclosure of the commons for private gain. The poor and middle classes were hurt by restricting a resource they need. The small farmer or shop keeper is hurt most, and has had his livelihood threatened by “privatizing” the resource of money and monetary transactions., The big tech companies and card issuers would have been the winners.

    In this instance, as you say, the Indian govt didn’t know how cash worked in the real economy and believed in “the technology fairy.” (great phrase.)

  4. dk

    Coming from a tech sensibility, it would be easy for me to laugh at the absurdity of these lofty expectations of “easy” technology… but it’s completely unfunny and heart-breaking.

    Thank you Jeri-Lynn for jumping on that chance opportunity of first-hand observations of this giant’s fall and staying with it over the last year. The anecdotal often anticipates the hard data, but also shows us the fine mechanisms of catastrophic degradations.

    “Disruptive tech is disruptive,” and those closest to poverty and disenfranchisement often experience it first and throughout. But in the US/EU, we let “markets” impose these changes more gradually than governmental fiat. It’s taken years for the rosy glare around Uber, AirBNB, and especially, Amazon, to even begin fade to a dimmer jaundiced pallor; their natural coloration.

    More affluent, hence more immediately resilient in the aggregate, market-y economies fork under pressure, but few acknowledge or even deign/dare see it. Our well-subsidized economy support a para-economy of marginal living (lost the house, still have a car to sleep in) that many of its own inhabitants can’t acknowledge for fear of losing the rest of their partialized access/participation in the main streams.

    BTW… less intensely perhaps, but “change chicken” plays out regionally in local convenience stores and 7-11s even here in the US. Nice to have an alliterative name for it, anyway.

  5. Chauncey Gardiner

    Thank you for this article. I am surprised Modi hasn’t paid a political price for this debacle, as it appears to have most severely affected his key constituencies. Perhaps it’s also a case of his political opponents failing to aggressively capitalize on this policy failure.

    1. Brian M

      I think also he is able to rely upon Hindu nationalism to retain his support. As with Trump, religion and tribalism can lessen the desire to question The Leader.

    1. flora


      This important J-L S post referencea an earlier Clive post. The Clive post states:
      “…in the context of the payments systems we use what, exactly, is physical cash? Leaving aside the obvious stores-of-value and means-of-exchange descriptions — and looking at cash as a payments system — it has some unique and rather special characteristics. Firstly, as a service, it is free at the point of use. …” (my emphasis)

      “…free at the point of use.”

      To push a this point (possibly too far), the “free markets” crowd want to set up a toll road (special expensive equipment and a cut of the transaction) on the so-call “free markets. ” imo. How, exactly, are toll roads “free market.” (rhetorical question)

  6. Mark Keller

    My wife and I were there. We have a small garment production company in Jaipur. Making payroll was a nightmare. Our employees are paid electronically, but they still need small cash to survive daily, and they don’t have two or three hours a day to spend lining up at a bank or at an ATM. We operate as a Fair Trade Company, so obviously we felt obligated to help them. Our manager was heroic; he spent I don’t know how much time on his scooter, running from bank to bank, hitting up every officer he knew for any amount of small cash.

    Now we face GST, and it is liable to be even worse in the long run.

  7. Byron the Light Bulb

    Traveling in India, it was obvious the impact of demonetization, and level of inconvenience, was not evenly distributed. However, I found Indians, after qualifying their optimism with a dose of skepticism, were proud that the systemic corruption was finally being addressed by the courts. It was all part of the Indian nation becoming a modern first-rate world power, to rival China. It was the hope that the democratic government would pull India’s economy ahead for a more just society. Indians, being law-abiding, conscientious, and tolerant in nearly every other arena of life [excluding motor traffic stunts], had wounded pride over the transactional nature of authority in some states. The front pages of papers everywhere seemed to scandalize the latest black marketeer in custody.

    However, since the Modi government represents the political ascendancy of Hindu nationalism, minorities were concerned that demonetization would be primarily used against Modi’s political opponents and/or the more political contribution-stingy racketeers. Nobody I talked to saw the measures as a sinister neoliberal stratagem against the impoverished, which as a group, boggle the mind for shear numbers, while acknowledging I socialized with a very narrow strata.

  8. Doug Wuerth

    Is one year long enough to gauge the full impact (good or otherwise) on such a drastic policy?

    Perhaps in a few years it might look like a wise decision.

    1. Clive

      Yes, anyone who suffered (and the poor, as always, suffer proportionately the greatest) financially — and in communities which lack access to much, if anything, by way of a safety net, financial suffering tends to not stay confined to just monetary losses — will look back on their suffering and declare it a price worth paying.

      Sarcasm aside, our ability as a race of humans to stand coolly back and see suffering inflicted on others becauase they’ll thank us for it later is, I think, one of our more distasteful characteristics.

      And a year is plenty long enough to gauge success or failure of an initiative especially, as the above article was at pains to point out, the long term benefits have not been quantified by any objective measures — let alone tracked in a comprehensive and systemic post-implementation study. There was no published cost/benefit analysis performed on the demonetisation programme, it was all just faith-based and ideological assumptions underpinning it. Or did you miss that bit of the post? I’ll quote it here again for reference:

      For instance, [former RBI governor] Dr Raghuram Rajan has mentioned that he believed that while there might be long-term benefits, the short-term economic costs of demonetisation would outweigh them and that there were alternatives available to achieve the main goals. He has chosen not to elaborate what he thought the long-term benefits might be nor has he quantified the short-term costs.

      … if even the RBI can’t spell out exactly how demonetisation will pay off, this suggests the case for doing it is hardly overwhelming. It was your typical evidence-free political project, then, in other words.

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