THE DISCOURSES: What Happened After India Eliminated Cash

 

Deepa Krishnan

IN 2016, the Indian government abruptly wiped out most of the nation’s currency in hopes of ending black money and curbing corruption. Has the experiment worked?

On the night of Nov. 8, 2016, there was a surprise announcement on Indian television. In a live telecast to the nation, Prime Minister Narendra Modi declared that the country’s two highest-denomination currency notes (Rs 1,000 and Rs 500) would be withdrawn immediately from the market. The plan, termed demonetisation by the press, was planned in secrecy and announced dramatically, as Modi’s masterstroke against black money.

As economic experiments go, it was a big, bold move. There was no precedent, anywhere in the world, for a sudden economic shock of this scale. The withdrawn notes, amounting to US$320 billion at the time, represented 86 percent of the total currency value in circulation in India.

By making the notes worthless almost overnight, the government hoped to destroy large piles of black money hidden away by tax evaders. In addition, the government claimed the plan would strike a major blow against corruption and counterfeiting and would kick-start India’s transition into a digital, cashless world. In a country with a huge informal economy, dependent on cash transactions, demonetisation was a big political gamble, too.

The immediate fallout was chaos, as the country scrambled to cope. There was a rush at banks and ATMs to exchange old notes and withdraw new currency. Queues at banks grew; many people suffered, especially the poor, who had no access to credit cards or mobile wallets; and dozens of deaths resulting from the crisis were reported.

Two years later, the dust has settled, and it has become obvious that demonetisation was not the resounding success the government expected it to be. India’s black money problem has not gone away. The economy has taken a beating, huge financial losses have been incurred, and the marginalised poor, least able to withstand adversity, have been negatively affected. There have been some gains in tax collections, and the country has progressed toward digital payments, but these advances could have been achieved through other, less drastic means.

For countries tackling black money or promoting a cashless economy, India’s experience with demonetisation provides rich lessons. Although the long-term social, economic, and political consequences of demonetisation are still playing out in India, answers to many complex questions are now apparent.

What Happened to the Black Money?

Economists who supported demonetisation predicted that black money hoarders would destroy their stashes rather than declare them, thus delivering a bottom-line bonanza to the country. But in August 2018, the Reserve Bank of India (RBI), the country’s central bank, confirmed that 99.3 percent of the demonetised notes had been returned to the banks. Almost nothing was extinguished.

The Centre for Monitoring Indian Economy (CMIE), a private forecaster, estimated that 1.5 million jobs were lost between January and April 2017. The labour force further shrank from 439.7 million in the fiscal year 2016–17 to 426.1 million in 2017–18. And the labour force participation rate (which expresses the labor force as a percentage of the working-age population) fell from 46.1 percent to 43.5 percent. According to CMIE, those ages 15 to 24 were the most affected, probably because they were relatively new to the workforce and typically held low-skilled, informal jobs paid by cash.

Culled from Strategy+Business, a pwc publication.