After 30 December : What Happen in India from Demonetisation Campaign.

On the same day that Donald Trump was elected president of the United States, India also received an unexpected, earth-shattering announcement. However, theirs wasn’t of a disruptive, unconventional presidential candidate coming to power but of a disruptive new policy that would instantly shake up the lives of 1.25 billion people, rich and poor alike. At 10 p.m. on November 8th, India’s Prime Minister Narendra Modi announced that on the stroke of midnight all 500 and 1,000 rupee notes — 86% of the currency in circulation — would cease to become legal tender.

Modi’s demonetization maneuver was a “shock doctrine” tactic to dismantle the cash-centric black market, to cleanse the country of counterfeit notes, to further digitize the economy, and to get more of the population onto the formal, taxable economic grid.

Modi’s plan called for the canceled notes to be replaced by new 500 and 2,000 denomination notes, but these were slow to be circulated, and India — the most cash-dependent country in the world — suddenly found itself without enough cash to run its economy.

As the clock ticked down to midnight on November 8th, a huge portion of Indian society instantaneously found themselves stripped of the ability to interact economically. Up to that point, upwards of 95% of all transactions in India were conducted in cash and 90% of vendors didn’t have the means to accept anything but. On top of this, 85% of workers were paid exclusively in cash and almost half of the population didn’t even have bank accounts. Even Uber accepted cash payments.

Due to this cash crunch, India ground to a halt. Businesses shut down, farmers couldn’t buy seeds, taxi and rickshaw drivers didn’t have any way to receive payments, employers had no way to pay their employees, hospitals were refusing patients who only had old banknotes, fishermen watched their catch wither up and rot, some families had difficulty buying food, and weddings throughout the country were canceled.

The people of India were given 50 days to redeem their canceled banknotes, after which they would become as worthless as the paper they’re printed on, which caused hundreds of millions of people to rush to banks, jewelry shops, foreign-exchange counters, and ATMs. Serpentine lines often stetched outside of such enterprises for blocks, where people would stand for hours just to re-validate their wealth.

This redemption period for the old notes came to an end on Friday December 30th — and, surprisingly, nearly the entire stock of 500 and 1,000 rupee notes were recovered by the central bank. But India’s demonetization transition is far from being over. While the currency supply is still not completely restored and cash is still being rationed (there are strict bank withdrawal limits of 24,000 rupees a week ($350) or 2,500 rupees ($36) per day from ATMs), India is moving through the demonetization transition.

But is it working?

Fighting corruption

Initially, demonetization was sold by Modi as a campaign to fight corruption. It was thought that the country’s black market wouldn’t be able to exchange or deposit their gluts of illicitly obtained wealth, and the central bank could have been in for a payday that was estimated to be as high as $45 billion. But this simply didn’t happen. Even with strict regulations put in place to audit large deposits and limit the amount of banknotes that could be exchanged at one time, India’s shadow economy was able to unload their black money, often laundering it sparkling white in the process.

How the black market was able to do this is still being investigated, but reports have been surfacing that document an array of tactics — which included everything from using phony bank accounts to illicitly exchanging money with corrupt bankers to even threatening bank employees with physical violence if they don’t do extra-curricular exchanges.

A user who went by the name S Kumar Singh left a comment on a previous article that I wrote on Forbes.com that sums up this aspect of India’s demonetization initiative rather well:

This is akin to a Panchatantra-like story we might have heard of.

To get the crocodiles out, a man with good intentions started pumping water out from a pond. Small fishes also living in the water were highly inconvenienced breathing in 85% reduced water but were happy as they were sure that he would get the crocodiles, and with the new rain cycle, they would live happily ever after. The crocodiles, however, are comfortably living on the land and are also waiting for the next rain cycle.

Now who is going to break this news to the fish? Not this honest man who despite his honesty has never ever accepted his prior mistakes and might be next planning to burn the trees to eradicate the bat flu.

Fighting counterfeiting

Another stated goal of Modi’s demonetization campaign was to curb counterfeiting. It was reported that prior to this initiative, 250 out of every million Indian banknotes were fake — the blame mostly being placed on Pakistan, where there are rumored to be government-directed printing presses churning out Indian rupees to fuel terrorism. The new 500 and 2,000 rupee banknotes which are currently being issued have different designs and are of different sizes than the previous notes, so all old fakes were instantly washed from the economy.

Initially, changing banknotes is of course an effective means to combat counterfeiting, but how long will this last? I’ve read reports that state that the newly minted Indian rupees will be anywhere from impossible to rather easy to counterfeit. Only time will tell which is correct.

Expanding the formal economic grid and building the digital economy

As the demonetization campaign progressed, its narrative gradually transitioned from being a measure to fight corruption to one to modernize a large swath of India’s economy. Prior to this campaign, most of the country was firmly entrenched in the cash economy and there was very little incentive to break generations-old habits, get bank accounts, and go financially digital. But temporarily removing the society’s access to cash pushed millions of people onto India’s formal economic grid by all out fiat.

Among the biggest criticisms of the demonetization campaign was that Modi and Co. simply did not take the lifestyle of the country’s massive working class, poor, and subsistence-level agricultural population into account.

As Monishankar Prasad, a New Delhi-based author who is currently traveling India researching the on-the-ground impact of the demonetization phenomenon pointed out:

The unbanked and informal economy is hard hit. The poor do not have the access to structural and cultural resources to adapt to shock doctrine economics. The poor were taken totally off guard and the banking infrastructure in the hinterland is rather limited. The tech class has poor exposure to critical social theory in order to understand the impact on the ground. There is an empathy deficit.

Although painful in the short-term, this aspect of demonetization seems to be proving rather successful, as new bank accounts have been getting opened across India at an exponential rate. The strict limits on cash-to-cash exchanges (only $60 at a time) created a situation where people either had to stand in long lines over and over again or make deposits into a bank account in order to retain their savings — which up until that point was often hidden under mattresses or somewhere else in the home.

Wade Shepard , CONTRIBUTOR
I travel to emerging markets around Asia and report on what I find.

Opinions expressed by Forbes Contributors are their own.
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Expanding the formal economic grid and building the digital economy

As the demonetization campaign progressed, its narrative gradually transitioned from being a measure to fight corruption to one to modernize a large swath of India’s economy. Prior to this campaign, most of the country was firmly entrenched in the cash economy and there was very little incentive to break generations-old habits, get bank accounts, and go financially digital. But temporarily removing the society’s access to cash pushed millions of people onto India’s formal economic grid by all out fiat.

Among the biggest criticisms of the demonetization campaign was that Modi and Co. simply did not take the lifestyle of the country’s massive working class, poor, and subsistence-level agricultural population into account.

As Monishankar Prasad, a New Delhi-based author who is currently traveling India researching the on-the-ground impact of the demonetization phenomenon pointed out:

The unbanked and informal economy is hard hit. The poor do not have the access to structural and cultural resources to adapt to shock doctrine economics. The poor were taken totally off guard and the banking infrastructure in the hinterland is rather limited. The tech class has poor exposure to critical social theory in order to understand the impact on the ground. There is an empathy deficit.

Although painful in the short-term, this aspect of demonetization seems to be proving rather successful, as new bank accounts have been getting opened across India at an exponential rate. The strict limits on cash-to-cash exchanges (only $60 at a time) created a situation where people either had to stand in long lines over and over again or make deposits into a bank account in order to retain their savings — which up until that point was often hidden under mattresses or somewhere else in the home.

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By temporarily grinding the wheels of the cash economy to a halt, India also hoped to get more people using digital payment methods, like debit cards and e-wallets. To these ends, new digital payment points have been popping up across the country. Now even small vendors, like vegetable hawkers, laundry washers, and rickshaw drivers who were until very recently the backbone of the cash economy, are offering ways to pay via electronic means.

As a long-term Indian expat by who went by the name Ian Faus commented on a previous article about demonetization:

However so far my transition into this “brave new future” has been almost seamless with few disruptions due to spotty connectivity and infrastructure issues. I paid my driver, the guy who cleans my car, the maid, the cook apart from all my shopping and everything else digitally this past month and its been far less disruptive than I imagined. Indians ,especially the wage workers and informal sector like maids and cooks etc have been remarkable in their ability to cope and adapt willingly.. .

I am surprised how so many people whose lives are already quite hard have been so adaptable to something so new. In the West we would expect violence and large scale chaos but here despite the abrupt action it has been remarkably well received.

The providers of e-wallet and other digital payment systems have correctly viewed demonetization as a way to promote their services and to obtain new users. Since Modi’s announcement, Paytm, a popular e-wallet, has seen a threefold increase in new sign-ups, while Oxigen Wallet’s daily users spiked by 167%.

“The digital increase is mostly in small ticket transactions that were cash-driven—even small street vendors are beginning to accept digital payments. For example, many Indians are now buying 25 cents of bread using a credit card,” said Shekhar Ganapathy, the general manager for South Asia at ACI Worldwide.

However, there are obviously still many cogs in the works before India can truly depend on its digital financial infrastructure, as Prasad discovered during his travels:

India is lived in the hinterland. Even when the card terminals are available, the telephone lines are not robust enough, as they are prone to weather centric disruption. The pharmacy today, in North Kolkata- Laketown, the card machine was out of order, the e-wallet application was working after four false attempts. The area has four pharmacies as it is around a prominent medical center, and only one had a non-cash option. In short, the transition is far from complete.

Expanding the tax dragnet

The bolstering of the digital economy has another big benefit for India’s government: more monetary transactions happening via traceable methods means more tax revenue.

“Digital payments enable an audit trail, in combination with the computerization efforts of linking transactions by the tax authorities, which automatically will take out a large chunk of the cash-based shadow economy,” Ganapathy said.

India’s finance minister claimed that direct tax collection has increased 14.4% and the federal government’s indirect tax collection rose by 26.6% since demonetization began, and government reports from 47 cities in India have reported a combined 268% year-on-year increase in tax collection for November 2016.

Conclusion

“In the long run, this is nothing short of a revolutionary measure in moving a traditional cash centric economy to a fourth industrial revolution era. It’s audacious, brash, and a future-centered decision, which has changed India, its people, politics, and money game forever,” Prasad declared. “India will be ‘before demonetization’ and ‘after demonetization,’ BD and AD.”

While the fundamentals of Modi’s demonetization campaign appear sound — what government wouldn’t want to curb corruption, clean out counterfeit currency, digitalized more of the economy, get a larger swath of the society into the formal market, and increase tax revenue? — the way that it was carried out appears to have been pointlessly rushed and under-planned, which resulted in a large amount of undue pain and inconvenience heaved upon hundreds of millions of people. However, the people of India for the most part steadfastly went along with their top leader’s ambitious plan without any major protests, disruptions, or violence.

“Given India is traditionally quite volatile and sensitive to certain aspects, this could have huge fiasco and embarrassment for Modi,” said Prakhar Gupta, a resident of Lucknow. “But since no protests were there across India it means that there is a strong undercurrent of support for Modi as a person. But having said that, Modi has used up most of his goodwill and political capital with this move.”

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