India’s Attempt at Becoming Cashless

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Do you remember when Canada got rid of the penny? There was months of advertising, plenty of time for planning, and thus it was relatively easy to exchange pennies for other forms of money. But many people didn’t bother exchanging, as Canada’s economy is not exactly dependent on the penny, and most people in Canada don’t use cash for transactions regularly anyway [1].

Now imagine if 78% of transactions in the country were done in cash. And then one day, without warning, the government got rid of the most used bank note in the country – say the $20 bill. Imagine the chaos that would ensue. That is what happened in India.

On November 8, 2016, Prime Minister Narendra Modi announced he would be getting rid of the old 500 and 1000 rupee bank notes, and issuing new 500 and 2000 rupee bank notes. The deadline for the exchange was December 30, 2016. In addition, people could only exchange a certain amount of money per week. Finally, large exchanges – over $3600 – were subject to a tax.

The reason for PM Modi’s decision was to tackle crime and corruption in the country. It is easy to see why cash transaction would be so helpful for different kinds of criminals. It is extremely hard to track. This leads to huge amounts of tax evasion and an easier time for underground criminals.

In a month and a half, roughly USD 183 billion dollars were exchanged. The process, was unsurprisingly rough. Since the decision was such a surprise to everyone, people had to line up for hours. As well as that, there was an initial shortage of new banknotes, and people living in small villages had a hard time even getting to banks. Many Indians didn’t even have a bank account. This was an unmitigated logistical mess – especially early in the transition.

Because Modi decided to get rid of about 86% of all currency in circulation, there was a tremendous shortage of cash – in a country that runs on cash!. This is causing a slowdown in the Indian economy. Investment, real estate, and the automobile industry are all down. And perhaps most devastatingly, farming is down, too [2].

The slowdown hurts the poorest Indians the most. Those living on the edge of poverty, now have to reduce consumption. This might be okay in a developed country, like Canada, where incurring a slowdown may help to solve such a problem. But for those on the poverty line, a reduction in consumption means eating less food [3].

The question remains, what about the corruption that was going to be combated? Well, the evidence on that question has yet to come in. There is, of course, the fundamental question, what is stopping criminals from switching over to the new cash system – especially when more cash becomes available? It is true that more tax than usual was paid over the last two months, but beyond that, this policy won’t shift India into using plastics overnight. Overall, expert opinion seems to say that crime will not be too affected by this new policy.

The dream of Modi, to turn India into a cashless society and to combat crime and corruption, is worth striving for – considering the level of tax evasion. But an aggressive policy like this targeted toward an India that is simply not ready to become cashless is a misguided move that will continue to have harsh economic consequences.

[1] http://www.bankofcanada.ca/wp-content/uploads/2015/05/boc-review-spring15-fung.pdf
[2] http://www.npr.org/2017/01/03/507983996/indian-farmers-hit-hard-by-governments-currency-restrictions
[3] https://www.nytimes.com/2017/01/02/world/asia/modi-cash-ban-india.html
[4] http://blogs.wsj.com/briefly/2016/12/30/50-days-of-indias-war-on-cash-the-numbers/
[5] https://www.bloombergquint.com/business/2016/12/30/50-days-after-demonetisation-real-estate-deals-remain-few-and-far-between
[6] http://www.livemint.com/Industry/SIK34NIedgYQjLwFHmy6BI/Demonetisation-takes-a-toll-on-automobile-sales-in-December.html
[7] http://www.livemint.com/Politics/5vmA6lF40HFY3P381uzkTJ/Demonetisation-takes-toll-on-investment-manufacturing.html

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