On Tuesday, Nov. 8th at 20 hours, the Prime Minister Narendra Modi made a surprise announcement in a televised address to the nation, an unprecedented maneuver in the national economic system.
At midnight of the same day, the 500 and 1,000 rupee banknotes (equal to €6.8 and €13.6 respectively) in use across the country, were to be considered to be out of circulation, ‘scrap paper’, worthless pieces of watermark redeemable until Dec.30th 2016 at banks and postal offices.
In order to give an idea of the impact, it is as if overnight all banknotes higher than €10 were not worth anything.
TAX EVADERS AND CORRUPT The initiative was presented as a sudden coup of grace against the corrupt and the big tax evaders who, in the collective imagination, have been committed for decades to amass current undeclared currency to pay bribes or illegal transactions, the so-called “black money.”
In addition to the exclusion from circulation of the “old bills”, which represent 86 per cent of all cash in circulation in the Indian monetary system, it was announced the introduction of a new banknote of 2,000 rupees, and “soon”, the new 500 and 1,000 rupee bills.
The banks, ATMs and postal offices were closed for two days to allow for the replacement of cash bills. On Nov. 11th, with a zeroed cash purchasing power, hundreds of millions of Indians queued to exchange their worthless banknotes following governmental directions: exchange immediately up to 4,000 rupees with the presentation of an ID, unlimited deposits in checking bank accounts and without provenance of funds controls up to 250 thousand rupees, and teller withdrawals of up to 10 thousand rupees per day and 20 thousand a week.
LOGISTICAL LIMITS The system, with only 48 hours to prepare for the exchange without running the risk of tipping off the corrupt, showed all the logistical and human limitations of such an ambitious and disturbing initiative. Banks and post offices run out of cash to be distributed within a couple of hours; until last Sunday, the ATMs had not been calibrated for the distribution of the new 2,000 rupee banknotes and distributed only 100 rupee bills and were sucked dry in a few minutes.
Millions of people, both in the cities and in rural areas, still do not have access to the banknotes and are forced into hunger or to change their money with loan sharks offering indecent exchange rates: a worthless 500 rupee note for three 100 rupee bills.
The cash economy of the country has suffered an almost total paralysis, markets were deserted over the weekend and street vendors are forced to throw away their perishable goods or sell on credit: no one had access to small denomination currency for daily shopping, in the order a few hundred rupees.
CLASS WAR The narrative promoted by the government revolves around a kind of “class war” against the tax evaders and corruption. Prime Minister Modi and Finance Minister Arun Jaitley have repeatedly appealed to the spirit of sacrifice of the Indian population, urging the ”common man” to resist the “inconvenience” for a few days. A temporary but necessary evil to flush out the tax evaders, now sitting on mountains of worthless banknotes who, in order not to lose everything, are forced to declare their own money to the tax authorities by depositing it in the bank.
The opposition and the progressive circles of the national press have raised official protests, pointing out the ineffectiveness of the maneuver in the long term. According to estimates by the Indian tax authorities, out of all undeclared goods seized by the authorities between April and October 2016, only 6 per cent were in banknotes: the tax evaders prefer to deposit money in offshore accounts or to invest it in the real estate market, land, gold or jewels.
CASHLESS ECONOMY The chief minister of West Bengal Mamata Banerjee and the chief minister of New Delhi Arvind Kejriwal complaint that the only effect of this “anti-corruption campaign” is to make life impossible for millions of lower middle class Indians who are cut off from the so-called “cashless economy,” made of electronic transactions, payments by credit or debit card, smartphone apps linked to checking accounts through which the user can buy everything from vegetables to movie tickets, pay bills and reload the mobile phone. A luxury only a small percentage of urban Indians have access to.
Despite the fact that it is allowed to use the old banknotes at gas stations, milk kiosks, pharmacies and government hospitals, motorway tolls and at the ticket offices of long-distance trains and buses (until Nov. 24th), the lack of information and the panic push everyone, even those who could accept the 500 or 1000 rupee banknotes, to reject them, resulting in untold anguish that cascades down on other sectors of the economy.
FOOD AND CONSUMER GOODS According to some rumors filtered in the national press, the forced suspension of cash payments, for example, could lock in a few days the food distribution system and primary consumer goods, 90 percent of which is transported on truck in India.
According to Wion News, truck drivers have been locked for two days on the highways since tolls and gas stations are not accepting the old notes. The same goes for the wholesale fruit and vegetable sales, which up to five days ago, were always conducted using paper money.
Finance Minister Arun Jaitley said on Sunday, perhaps revealing the real goal of the campaign: “Once the money will be back in circulation and, especially, in the banks, the benefits for the economy and businesses will grow.
The ability of banks to lend capital and support businesses will be greatly increased with all this liquidity.”
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