India’s cash chaos sparks growing backlash

Posted on November 13, 2016

Indians’ desperate quest for cash intensified at the weekend, as public resentment grew at New Delhi’s chaotic effort to replace more than $220bn in cash with new currency notes in a matter of weeks.

Crowds queueing at India’s banks grew larger and more restive, and many automatic teller machines remained inoperable — while those that had been filled with cash were rapidly emptied. 

It has emerged that India’s new Rs2,000 ($30) note, with which the government intends to replace some of the 22bn currency notes summarily demonetised on Tuesday, are slightly smaller than existing notes and incompatible with the nation’s approximately 200,000 ATMs. 

Arun Jaitley, finance minister, said the recalibration of the machines would take two to three weeks. But he was adamant that the disruption to India’s cash-driven economy — in which millions of consumers and tiny vendors rely almost entirely on cash for their transactions — would pay off for India in the future.

“It’s a big regret that people are being inconvenienced,” Mr Jaitley said at the weekend. “Our energy is concentrated on making sure that the replacement takes place smoothly and quickly.”

“The first few days are going to be periods of inconvenience,” he added, “but the long-term advantages of this are in the overall state of the economy.”

The Reserve Bank of India on Sunday appealed to Indians not to hoard the valid currency that they do have.

Prime minister Narendra Modi has roiled India with his shock invalidation of all the country’s Rs500 and Rs1,000 notes, which account for about 86 per cent of the value of currency in circulation.

The government is exchanging the cancelled notes for new currency, a process it says will put pressure on those hoarding “black money”, earned through illicit activities or never declared to tax authorities. It is expected to force many Indians and Indian businesses to move away from entirely cash transactions, thus reducing tax evasion.

“Why should India’s wholesale business be transacted only in black money,” Mr Jaitley said. “Once the money is available in the system and the banking system, the advantages of that to the economy and the businesses will be far more.”

But Kaushik Basu, former World Bank chief economist, believes the potential economic damage of such shock therapy has been underestimated, as India could see significant quantities of both black and white money taken out of circulation.

It’s “a very risky correction of money supply”, said Mr Basu, who was chief economic adviser to India’s previous Congress government. “Ordinary salaried people, retirees and small farmers who store their legitimate incomes in cash for future durable and rainy-day purchases, will not be able to change all their money for fear of harassment and not being able to explain how they got it,” he said.

“This can be very disruptive, increasing the costs of small business and trade and causing a drop in aggregate demand in the economy, thereby slowing growth.”

In an emotional speech while inaugurating a new airport on Sunday, Mr Modi sought to rally public support for the scrapping of the currency, claiming he had taken on great personal risk with his strike against black money. “I know the forces up against me,” he said. “They may not let me live. They may ruin me because their loot of 70 years is in trouble. I am prepared.”

Initially, many Indians had expressed support for the draconian move to flush black money out of the economy, buoyed by the image of powerful hoarders losing their hidden wealth.

But as the extent of the disruption grows, patience is wearing thin, especially among working-class Indians struggling for cash to meet their basic needs as well as cope with emergencies such as visits to doctors or private hospitals. The move also came at the start of India’s wedding season, a time of high spending by both the rich and the working classes.

Tensions outside banks have risen, with Delhi police reporting rising incidents of violence. Even those who have acquired the new Rs2,000 notes are unhappy, as the acute shortage of smaller notes for change makes them illiquid, unable to be used for small purchases. The roll-out of the new Rs500 notes only began over the weekend.

In a full-page, front-page newspaper advertisement on Sunday morning, Kotak Mahindra Bank urged middle-class Indians with debit or credit cards to “lend a helping hand to those without bank accounts”, who have been hit hard.

“Step in and swipe your card for them at a store. Or make a digital cash transfer for someone,” the ad urged. “Together, let’s progress towards cashless India.”

Over the weekend Mr Jaitley rejected calls to allow old currency to be used in private hospitals or by senior citizens, saying any relaxation would help launder black money. “Every exemption is a gateway for black money to emerge again,” he said.

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