In November of 2016 the Indian prime minister, Narendra Modi, announced that all 500 rupee and 1000-rupee bank notes would be cancelled immediately. The government said that this was to tackle ‘black money’, illegal, untaxed funds that were held largely by the corrupt and the criminal. However, two years on it is becoming clearer that the botched policy has done more harm than good, and that there are many Indians still struggling with the social costs of the government’s negligence.
The ensuing weeks after the higher denomination notes were banned were chaotic and costly to the Indian economy, as well as resulting in a significant number of job losses as an unprecedented liquidity crisis squeezed all areas of society. The government predicted that, of the 15.4 trillion rupees in circulation in the banned denominations, about 5 trillion rupees would not be returned as it was being hidden by tax evaders. Unfortunately, after the catastrophe had unfolded and the money that had been returned to the RBI was counted, it became apparent that 99.3% of the notes had in fact been returned. The government had been wrong in almost every way.
For India’s lower income households this must have shone a painful light onto an already difficult chapter. Standing in queues for hours to withdraw cash, low-income workers missed out on working opportunities during the implementation of the ban. Whole communities went without access to cash making everyday tasks impossible. People even struggled to pay for medical fees in hospitals due to the lack of notes in circulation and a million and a half workers lost their jobs as a result of the economic disruption. There are even around 100 deaths attributed directly to the disruption caused by the ban.
“Small and medium businesses that are the cornerstone of India’s economy are yet to recover from the demonetization shock,” Modi’s predecessor, Manmohan Singh, said in a statement at the end of 2018. “This has had a direct impact on employment as the economy continues to struggle to create enough new jobs for our youth.”
As the inaccuracy of the government’s predictions became clearer the official line changed and continued to do so on a number of occasions. It went from being a move to thwart ‘black money’ to one of transforming India into a cashless society, then a more cash-free society, then a more regulated economy.
Unsurprisingly, fintech companies made massive revenue and sign up gains in the months following the ban, but the move itself had a crippling effect on the informal labour force in India. This happened to describe 81% of the population in 2016. Areas of India dominated by the informal labour force saw a 7.3% drop in GDP, according to a World Bank study. When you understand how dependent this section of the people is on cash you understand how foolish and unfair the decision was in the first place.
Adding to the people’s suffering, the government mishandled the implementation of almost every aspect of the process, changing and amending policy relating to currency exchange so often during the episode that people started referring to RIB as the ‘Reverse Bank”. Returning currency to the economy was also a lengthy process which left people delayed and hurting for weeks, and cost hundreds of millions of dollars in minting costs alone.
In contrast to the hit on India’s poorest households and smaller businesses, those at the other end of the economic ladder have only benefitted from the situation. The burgeoning entrepreneurial sector saw huge gains. India’s Paytm payment system and digital wallet is one of the many big winners from the fintech market buoyed in the aftermath of Modi’s reforms.
Like the hidden money, the government’s move toward a cashless economy has also proven quite elusive. The amount of cash in circulation has actually risen by 9.9% since the ban. Additionally, due to the traumatic period of demonetisation, there is arguably even less trust in financial institutions among lower-income Indians than there was before the ban, and this is evidenced by an apparent increase in the amounts that households are saving their assets in cash sums at home.
If the ban really was intended to catch out people holding untaxed black money, then by the government’s own means of assessment, that was a complete failure. On top of this, if the second reason for the move is true, that the move was also designed to move India towards a more cash free society, then to rush into it overnight, quite literally, was utterly absurd. The amount of harm caused, in particular to the poorer rural communities of India, is startling, and the gains have been modest by the most charitable estimates.
“Good governance with good intentions is the hallmark of our government. Implementation with integrity is our core passion.” It seems that the words of Narendra Modi from 2013 come back to mock him. The implementation and the changeability of Modi’s message and policy have done little but to harm the most vulnerable groups in the country. It is further to their own discredit that the government still refuses to acknowledge the move was a blunder.