India’s demonetisation: a monumental cock-up

Imagine if Theresa came on live TV at three o’clock this afternoon to say that, from seven o’clock this evening, all five and ten pound notes will be banned and cease to have any value as free currency.

There would be mayhem.

Now imagine if such an action was taken in a country with a population twenty times that of the UK, with an economy that is almost entirely cash-based – with virtually no card or internet transactions.

Well that is what happened in India in 2016. I was there just a few days after the announcement. I wrote a “Postcard from India” for LDV, which said:

…we arrived just a couple days after a major monetary change by the government. To wrong-foot terrorists and criminals, there has been a monumentally huge exercise called “demonetisation”, going on across this, the second most populous nation in the world. All the old 500 and 1000 rupee notes have been withdrawn from circulation at two hours’ notice.

In the Times of India, Santosh Desai wrote: “86% of the currency in circulation becomes illegal virtually overnight”. That relates to an estimated $210 billion worth of money notes. $210 billion! That is a mind-boggling figure.

“Bold” would be a good way to describe the exercise…I’m too jet-lagged to work it out, but I think the redundant bank notes involved would fill the Albert Hall from top to bottom many times over.

It has certainly involved a lot of queuing at ATMs, as people scramble to get hold of the right notes. As a positive, the use of “e-money” and plastic money is thriving, as is foreign currency such as the pound, Euro and dollar.

The reason the Indian government has done all this is to stop the use of forged notes of these denominations, and their circulation on the black market.

A wise man in front of us in the sweaty one hour queue for the ATM said that “we must support the government” and that they “are doing the right thing” but that it “will take a few days to sort out”.

There are 200,000 ATMs in India. At these devices, there have been queues of up to three or four hours long, described as “serpentine” by “oHeraldo” newspaper in Goa. Last week, people were queuing at 1.30am in the morning to withdraw money. But they were limited (at least at first) to 2,000 rupees per account – about £24. They could use up to three cards – so a maximum of about £71.

So the move caused chaos and real hardship. It was a wonder there was no rioting.

As my piece noted, the reason given by the government for the change was to wrong-foot money launderers and terrorists who were allegedly using the 500 and 1000 on the black market.

Well, as they say on “Strictly”, the results are in. The Guardian reports today on a report by the Reserve Bank of India shows that the demonetisation failed to achieve its primary objective, to withdraw significant hordes of unaccounted wealth from the economy. By the way, the whole thing took at least one percentage point off India’s GDP, cost at least 1.5 million jobs and a hundred lives. On the plus side, there has been an uptick in internet banking and an increase in taxpayers.

I find it incredible that a government could make such a stupid and impulsive move. It is unbelievable that its head, Narendra Modi, is still in power.

* Paul Walter is a Liberal Democrat activist. He is one of the Liberal Democrat Voice team. He blogs at Liberal Burblings.

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3 Comments

  • Actually the main reason to do this was to combat tax avoidance.

    India is a very different country to the UK, the comparison is way too crude. Yes it has caused upheaval and I’m alarmed at whether it may increase poverty and lead to deaths in the short term but primarily you should really be asking the question why it’s necessary to be so ‘bold’?

  • Apologies I meant tax evasion.

    So the next question people need to ask is will it increase revenues (seems certain), if so how by how much and what the money will be spent on?

    In the long term if could do a lot to alleviate poverty in India.

  • Peter Martin 31st Aug '18 - 1:47pm

    Another way of looking at this is to say it’s just another tax. A tax by lottery.

    If the UK government decided to ‘demonetise’ all £5 notes they’d be worthless. It would be exactly the same, in macroeconomic terms, as sending out a tax bill to people at random. If you remove $200 billion or so notes from circulation in this way that would otherwise be spent on goods and services then you’ll deflate the economy and that will not result in an increase in the tax take.

    Essentially banknotes are IOUs of government and they shouldn’t just default on them in this way. Or if they do, they should have an ultra good reason which I very much doubt they would have in this case. I’d make the same criticism of the EU in clipping and restricting the bank accounts of those who held euros in Cyprus and Greece.

    I really don’t believe it was done as a counter measure to the Russian Mafia. They’d have been tipped off with plenty of time to move their money! It’s a stupid thing to do. Whatever disagreements there might be between the Greek, Cypriot and German Govts should be resolved through the courts and not by restricting and clipping euro bank accounts.

    Sashi Sivramkrishna gives and Indian take on the question:

    https://thewire.in/business/taxes-really-fund-government-expenditure

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