The past month has seen historic events in India. On Tuesday 8 November
2016, the Modi government announced without prior warning that all 500
and 1000 Indian rupee notes would be rendered valueless more or less
overnight. In effect, this meant immediate withdrawal of the largest
bank notes in circulation, and issuance of new notes within a few days,
renewing 86 percent of India’s cash economy. Is this another step
towards a cashless economy? What has the cash withdrawal done to the
black economy, and networks based on corruption? And what are the
implications for the use of cash, especially among India’s poor? These
are some reflections based on personal experiences from Delhi.
The morning after Modi’s announcement there was a sense of chaos and
an atmosphere of distress. My neighbor suddenly confessed that he had a
number of 1000 rupee notes stacked in his cupboard as savings. He was
confused and agitated, as he most likely would have to officially
declare the sum. He was expecting suspicious questions from the tax
authorities.
The local vegetable vendor refused to accept any 500 rupee notes. He
explained that his uncle was completely devastated because of his
daughter’s wedding preparations. His uncle had saved up money for his
daughter’s wedding of about 500 000,- rupees in cash, as this was how
the payment would normally be done. Having no bank account where he
could deposit the money, what was he supposed to do?
Major official goals of the demonetization have been to curb the
black economy, tackle counterfeit notes and decrease corruption. The
withdrawal of notes has the side-effect of increasing the use of digital
banking and cashless transfers, moving the country towards a less
cash-reliant economy. Last week, India’s Prime Minister disclosed the
underlying reason, stating: “Our dream is that there should be a
cashless society”. The goal is that Indians should substantially
increase their reliance on debit card transactions and use of digital
wallets.
Demonetization has forced those who to date had no bank account to
immediately open an account, and those who were already banked to
increase the digital part of their financial exchange. Millions have
lined up in front of banks. On 24 November, cash exchange became banned
and people had only one option to get rid of old notes – to deposit them
in banks. Already within ten days of demonetization, the Reserve Bank
of India could announce that more than 5 trillion rupees had been
deposited.
As Digital India unfolds, the government is increasingly invested
with means of tracking individual transactions. Cash transferred to
digital currency means big money in tax revenue for the Indian
government. Today, less than 10 percent of the 1,25 billion citizenry
pay taxes. In a hard hit against the black economy, the government has
also announced that people charged with keeping large amounts in cash,
thus seeking to evade taxation, can be fined up to 200 percent in tax
penalties.
Those living on less have also been caught up in the unfolding of
events, sometimes falling victim to wild rumors. A woman from my
neighborhood who earns her living from clothes laundering was convinced
that Prime Minister Modi would soon transfer 250 000,- rupees into her
newly opened bank account.
Apparently someone had told her they heard
this on the news. Her friend said she had heard of people dumping
millions of rupees in cash in the Yamuna River to get rid of their black
cash, to avoid tax penalties. The neighbor’s driver spent eight hours
in a bank queue before he had to give up without accomplishing his
business. The local vegetable vendor claimed he knew someone who would
sell old 1000 notes for 600 rupees in 100 notes, giving a loss of 400
rupees, but a gain in the sense of having money with transactional
value. His uncle finally resorted to this option, selling old
large-denomination notes. His daughter’s wedding ended up costing the
double of what he had set aside.
Undoubtedly, the government’s move has hit the black economy and tax
evaders hard. It has shaken previous chains of corruption, and given
numerous people living off the shadow economy sleepless nights. The
lesson from previous demonetization in the 1970s is that corruption has
continued as before when the ripples of the demonetization drive settle.
This may no longer be as true in a more digitalized economy.
What demonetization has done is to make both rich and poor Indians
rush to the bank. Demonetization of most of India’s cash will not
instantaneously and magically create accountability and transparency.
But it will push India towards a more digitalized, less cash-reliant,
and more taxable economy.
