When 86 percent of a country’s cash in circulation becomes worthless, problems are inevitable.
In India, Prime Minister Narendra Modi abruptly announced on Nov. 8, 2016, that the country’s old 500 and 1000 rupee bills, worth roughly seven and 15 dollars, respectively, were invalid. People could bring these old bills to banks to exchange them for new 500 and 2000 rupee bills. The bills were canceled in an effort to combat the shadow economy in India, illegal transactions which go under the radar and untaxed.
Supporters of the sudden demonetization claim that much high-level corruption occurs through the exchange of high value rupee notes. When large amounts of old bills are exchanged at banks, Modi’s plan would make it difficult for shadow money to be accounted for, punishing shadow money holders with a harsh tax penalty. Unfortunately, currency withdrawal does not solve the non-currency wealth of corrupt officials.
Modi’s plan was only known among top government bureaucrats, leaving the public completely unaware. The abruptness of the currency withdrawal was considered imperative—if there was advance notice of demonetization, money launderers could easily exchange their currency for items such as gold, foreign currencies or property, which would defeat the whole purpose of the plan.
Expedience comes at a cost. 8.5 trillion rupees have already been deposited into banks out of an expected 14 trillion rupees canceled by demonetization. The Reserve Bank of India is responsible for printing new currency, but by the end of Feb, the bank is forecasted to print less than 90 percent of the total currency that is necessary.
India’s cash crunch has become a burden on daily life. Long lines of people waiting to return their old bills form around ATMs. The livelihoods of hundreds of millions of farmers, street merchants and day laborers who are typically paid with cash are at stake. Small scale industries heavily dependent on cash transactions suffer the most. According to Societe Generale, a French financial company, these industries have suffered a 35 percent job loss and a 50 percent decrease in revenue since the start of demonetization. The crisis is so severe that India is set to experience low growth in the economy not seen since 2011, when high inflation caused to India fall into a recession.
“I am against this policy; Modi’s plan disrupts cash circulation. Indians cannot be paid after a day’s work,” Sophomore Ramzi Djebroun said.
According to Bloomberg, 98 percent of consumer transactions in India are cash-based. A continued reliance on cash means easier corruption and less accountability due to the anonymity of cash. By taking out a large share of cash in the economy, Modi’s plan could turn Indians toward electronic means, such as debit cards and banks, increasing accountability and encouraging savings.
“Modi’s plan to cancel the currency was good on paper, eliminating counterfeit rupee bills. However, there could have been a better approach to counter corruption because his plan has caused much stress on the economy,” said Sophomore Nikhil Devaraj said.
During the first few days of demonetization, the program received widespread support; people perceived Modi working for the common people. Unfortunately, as people lose their jobs and become starved of cash, the Prime Minister will be hard-pressed to show how his currency cancellation has done good for the country.