A month into India’s demonetization initiative, long lines of people looking to exchange notes still spew out of banks, some sectors of the economy continue struggling with the lack of readily available cash, the grassroots economy continues introducing electronic payment capabilities, and people are still transitioning to new ways of paying for basic goods and services. However, this is all a part of a monumental movement that could put India on a more financially modernized trajectory from here on out.
On November 8th, 86% of India’s currency was nullified in a great demonetization effort that aimed to clean out the black market's cash supply and purge counterfeit notes from the economy which completely disrupted the social, political, and economic spheres of the world’s second largest emerging market. All 500 and 1,000 rupee notes were instantaneously voided, and a 50 day period ensued where the population could (ideally) redeem their canceled cash for newly designed 500 and 2,000 rupee notes or deposit them into bank accounts.
India has done this before. In 1946, all 1,000 and 10,000 rupee notes were recalled. In 1978, 1,000, 5,000, and 10,000 rupee notes were demonetized.
Indians queue up outside a bank to withdraw cash in Ahmadabad, India, Thursday, Dec. 1, 2016. Indian Prime Minister Narendra Modi, in his Nov. 8 televised address, announced demonetization of India's 500 and 1,000-rupee notes, which made up 86 percent of the country's currency. The government's sudden decision to withdraw large-denomination currency from circulation, has caused enormous hardship to millions of people in the country's predominantly cash-based economy. (AP Photo/Ajit Solanki)
This recent bout of demonetization was planned in secret by a small, tight-knit group led by Prime Minister Modi, and it overtook the country like a flash flood. This surprise was by design, as it was feared that if the black market caught wind of what the government was planning they would find ways to rapidly unload their illicit cash, and the initiative would flop on one of its initially-stated goals.
Of course, this meant that the rest of Indian society was also caught in the demonetization crossfire. Not even the banks — who would be required to do the heavy lifting on the ground — were in the loop. In the days following Modi’s announcement, the banks didn’t have enough of the newly designed banknotes on-hand to distribute in exchange for the canceled notes, and there simply wasn’t an adequate supply of smaller denominations in circulation to run the cash economy. Far from being a 50 day transition, it is estimated that even if India’s printing presses were to run 24/7 it would take upwards of four months to a year before the currency supply was adequately restored.
“I personally think it's a chicken or egg situation because the more prepared you are, the more people who are aware, the more opportunity you're giving to people to find loopholes in the system,” said Arpan Nangia, the head of the India desk for HSBC’s commercial banking division. “Whereas the downside of making it a surprise was [that] the government and the central bank were severely unprepared to manage the whole situation.”
Modi’s demonetization initiative caused a sudden breakdown in India’s commercial ecosystem. Trade across all facets of India’s economy was disrupted, and cash-centric sectors like agriculture, fishing, and the voluminous informal economy were virtually shutdown, with many businesses and livelihoods going under completely -- not to mention the economic impact of millions of people standing in line for hours to exchange or deposit canceled banknotes rather than working or doing business.
"The unbanked and informal economy is hard hit," explained Monishankar Prasad, the New Delhi-based author and editor for Alochonaa, an Australian current events publication. "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."
However, although India’s demonetization initiative was seemingly severely mismanaged, this doesn’t mean that the entire endeavor was a complete failure. 35 days in, there are some positive indicators.
Like most other above-ground industries, India’s shadow economy had its financial legs taken out from under it with Modi’s currency purge. Similar to the other financial sectors mentioned above, the cash-centric black market for the most part ceased to function with the nullification of the bulk of its currency.
“I think, in the immediate term all sorts of illegal activities, like terrorist financing, etc... have been completely hit,” Nangia said.
While, like in other sectors, this virtual shutdown of the black market is more than likely only temporary, there may be some longer-lasting impacts. Cashless transaction systems have been encouraged across the board, which will not rid India of its massive black market but may make it a little tougher to conduct business. Also, this initiative indicates that such wide-ranging, deep-striking governmental actions to combat what it sees as corruption could happen again.
The demonetization process has also repaired India's counterfeiting problem for the near to medium-term. It was previously estimated that 250 out of every million Indian bank notes were fakes. This recent culling of the bulk of the country's currency instantly rendered counterfeits as valuable as the paper they’re printed on. It has also been reported that the new 500 and 2,000 rupee notes are less vulnerable to counterfeiting, having advanced security features — with one report claiming that it will be “impossible” for Pakistan (India’s counterfeiting bogeyman) to fake them.
It is also thought that Modi’s demonetization drive will wipe out a measure of corruption and tax evasion in India’s real estate market.
“In certain parts of the country there used to be always an official amount and an unofficial amount for property,” Nangia explained. “Now with this so-called black money going out of the window people are expecting that the price of real estate is going to fall, which is going to make it more affordable for honest, tax paying people.”
