Cash-starved India assesses its pain

Two months after India’s Prime Minister Narendra Modi announced the controversial decision to withdraw currency notes of 500 (US$7.4) rupees and 1,000 rupees from circulation, his country is still reeling from the effects.

On Nov. 8, Modi sought 50 days—until Dec. 31—for things to become normal after an estimated 86 percent of currency notes were abruptly withdrawn from circulation. But the calculations of his government have proved as accurate as the Prime Minister’s count.

On Jan. 1, Indians were exactly where they had been for days after the November announcement—in queues outside banks and at automated teller machines to withdraw their own money for use in an economy that is still largely cash-driven in terms of the everyday transactions that make up life. There are limits to the cash they can withdraw—Rs4,500 (US$66) a day from ATMs or Rs24,000 (US$354) in all every week from their accounts—and there seems little hope of respite in the foreseeable future. The distress is so acute in India’s villages, where some two-thirds of the people live, that India’s Central Bank was forced to issue instructions that 40 percent of cash supplies be sent to rural areas.

Characterized by policy flip-flops and shoddy implementation, the decision to withdraw old notes and to replace them initially with new 2,000 notes (for which no one seemed to have change) and later with Rs500 notes in a new series was said to have several objectives. Modi had said these were to snuff out black money, detect fake notes and paralyze underground groups sitting on large piles of extorted money. Later, spin doctors put it out that it was all part of the government’s plan to make India a digital, cashless economy.

By themselves, the objectives were unexceptional, even laudable. But as is always the case with pious intention, there is more to the story. Black money has two faces—the first worn when tax has either not been paid or underpaid on honestly earned income, and the other which is the fruit of crime, extortion or corruption and is spawned by the first. Paying tax is part of a social contract whereby the citizen agrees to give to the government a portion of earnings in order to secure services that include infrastructure, defense and, most important, social security. Sadly in India, this has largely been a contract that neither party, citizen nor state has honored.

The other face of black money—fruit of crime and corruption—is a necessary component of the social fabric. Bribes are sought and paid to navigate the cumbersome processes of an opaque bureaucracy, to secure government contracts, to avail of undeserved tax sops and to overcome the intrusions of the policeman, the taxman and the alderman. It is not without reason that most politicians and many bureaucrats are considered corrupt.

The cash for paying these bribes comes from under-invoicing exports (and sales), over-invoicing imports (and purchases) and evading local taxes through the device of what is called a “kutcha” (handwritten and loose-leaf) invoice.

The fact that most of the “old” cash in circulation has been deposited into bank accounts would suggest that very little of it was “black” and thus debunks Modi’s primary hypothesis. The truth, though, is that almost every one with unexplained cash on hand on Nov. 8 has found a way to bring it into the system.

Money changers, formal and informal, in Delhi’s Chandni Chowk, Kolkata’s Bara Bazar, Singapore’s Lucky Plaza and Bangkok’s Sukhumvit Road were happily accepting old Indian notes at a 70-75 percent discount until the last week of December. The cash changed overseas found its way into India through porous land borders with Nepal and Bhutan and was deposited into bank accounts of friends, relatives but mostly of low-income strangers who offered the service at a charge.

But the irony of Modi’s anticorruption measure is that it gave birth to a new class of the corrupt—bank officers and tellers, petrol pump operators, railway counter clerks, school and municipal body cashiers (until December, old notes were accepted for fuel, train tickets, school fees and local body taxes)—who had the power to change old into new notes.

Ravindra Kumar is editor of The Statesman of India.