Back in November 2016, I traveled to India for a two weeks bus tour through the North Indian Federal State of Rajasthan which is famous for its Forts and cities founded and constructed under the ruler ship of the Maharajahs, its culture, and landscape.
On November 8, when I was just flying out from Frankfurt to Delhi the Indian Prime Minister Narendra Modi during an unscheduled TV address gave only four hours‘ notice that virtually all the cash in the world’s seventh-largest economy would be worthless, effective by midnight.
By that time the 500 ($7.30; £6; €7) and 1,000 rupee notes would no longer be legal tender. People were told they could deposit or change their old notes in banks until 30 December and new 500 and 2,000 rupee notes would be issued.
This action by the government (which has been given the official name „Demonetization“) came as a surprise to everyone. Apparently, it was secretly planned by the Prime Minister and a small number of intimates. It also appears that the demonetization was not coordinated with the central bank, the commercial banking community or any other part of the Indian economy.
The inscription on every Indian banknote signed by the Governor of The Reserve Bank of India (RBI), the country’s central banking institution which controls the monetary policy of the Indian rupee, says:
I PROMISE TO PAY THE BEARER THE SUM OF XXX RUPEES.
Clearly, this promise with regards to the 500 and 1,000 rupee notes was broken. The banned bills made up more than 80% of the currency in circulation.
So, why did the government do this?
The decision was taken to crack down on corruption, illegal cash holdings known as „black money“ and to wipe out widely spread counterfeits. In an attempt to curb tax evasion, the government expected to bring billions of dollars of unaccounted cash into the economy because some 90% of all economic transactions in India are in cash.
Upon my arrival at the Delhi airport all ATMs, currency exchange offices and banks had closed down for the next couple of days. During my two weeks travel around Rajasthan it was next to impossible to get any cash.
The situation caused some inconvenience for my travel, but I personally could easily deal with this situation (relatively speaking) due to my credit card and a certain amount of EUR denominated cash I had brought in which was well accepted at shops.
However, for millions of Indian people and small businesses, it was much worse. The realization that the 500 and 1,000 rupee notes in every man and woman’s pocket were suddenly redundant let people flocking to banks and ATMs to withdraw cash or exchange the old notes.
The queues were long and people were short of cash – even buying daily essentials like milk and bread had become difficult. I took these pictures of people queuing up at banks in Jaipur ten days after the announcement.
During a hearing at a Parliamentary Committee in January 2017, the number of people who have died as a result of the note ban (heart attacks or body exhaustion while queuing up for hours at banks) was estimated to be over 100.
Unpaid cash salaries for workers. Unemployed day-laborers. Farmers without cash to buy seeds and fertilizers for the sowing season. Disruption of supply chains. Stranded trucks (as drivers were short of cash to pay for fuel). Et cetera. At the time of my travel I was surprised, how patient and disciplined the Indian people overall dealt with the situation.
With respect to a fair judgment of such a drastic action taken by the Government, there are two sides to the coin: There is an enormous amount of tax evasion money hoarded by billionaires and big companies that could be used to provide funds for urgently needed public infrastructure and education investments.
On the flip side there were serious short to medium term disruptions to the economy and millions of casualties – so to speak – among the poorest of the poor…
While according to RBI around 60% of banned currency had been replaced by Mid-January, the maximum amount of daily cash withdrawals per person over a certain period continued to be limited in early 2017.
Based on a report by the BBC in January 2017 it appears, that the short term impact of demonetization on certain sectors of the Indian economy such as farming, textiles (in particular the small weaving enterprises India is famous for) or the millions of day-laborers initially was quite devastating.
However, from what I have read in the press since then life has returned to normal.
It looks like some of the goals that the government wanted to achieve have been missed.
Corruption and a „black economy“ continue to be a problem in India as it turned out that they do not solely rely on cash payments.
Also, for the newly introduced 2,000 rupee notes counterfeits began emerging almost as soon as the legitimate ones were minted.
However, the Government was able to coerce Indian people into opening up bank accounts and using digital forms of payments like bank transfers, debit cards, and e-wallets.
Therefore, clearly, the winners are companies (like banks) who provide non-cash payment services and produce the necessary products and equipment.
Now, interestingly enough, at the time I saw many one or two pages sized advertisements for e-wallets or debit cards published by these companies in India’s daily newspapers just in the morning after the Prime Minister’s surprise TV announcement of the evening before.
Oh boy, that was quick.
Well, it’s all about timing. And information, of course.
(Hamburg, August 2017)