The Indian war on cash is not going well. From Don Quijones at wolfstreet.com:
“Economic Shock & Awe” turns into “Nightmare Without End”
On Tuesday November 8, Narenda Modi, the prime minister of India, the world’s second most populous nation and Asia’s third largest economy, announced in a public address to the nation that India’s two biggest denomination notes, the 1,000 rupee and 500 rupee bills, were now worthless and would have to be replaced with newly designed bills.
That was six days ago. Since then all hell has broken loose.
Official Motives
There are plenty of reasons for the government’s action. Partly it was intended to flush out the cash hoardings of black market operators and stop the rampant corruption permeating all levels of business and government in India. It is also part of the government’s plan to thwart counterfeiters and bring more stashed currency into the banking system.
One of the biggest beneficiaries will be the nation’s nascent digital economy. Paytm, India’s largest digital wallet startup, hailed the move. “This is the golden age to be a tech entrepreneur in India. Especially a fintech one,” tweeted Vijay Shekhar Sharma, the company’s founder, whose investors include Alibaba Group Holding Ltd. “Keep the money digital.”
The coffers of both the nation’s government and banks are also expected to benefit handsomely. According to some reports, banks’ non-performing loan ratios have already shrunk in recent days as small and mid-sized businesses that had been defaulting on repayments suddenly started rushing to banks to repay the money they owed. As for the government, it hopes to boost its tax revenues from the current anemic level of 17% of GDP to somewhere closer to the OECD average of 34%.
The problem is that India is not an OECD nation and it does not have the financial logistics or architecture to accommodate such a bold move. In fact, even the world’s most advanced economies would struggle to cope with such a radical financial shake-up.
“Economic Shock and Awe”
Taken together, the 1,000 rupee bill (worth just over $14.50), and the 500 rupee bill ($7.30) account for 86% of the cash economy, in a country where over 90% of retail transactions are performed with cash. In other words, Modi’s move is the economic equivalent of “shock and awe” — the BBC’s choice of words.
The result so far has been pure chaos. Millions have converged on banks to change their now defunct bills for newly designed or lower denomination notes, only to find the banks out of cash and the ATMs empty or out of order. As the FT reports, India’s new Rs2,000 ($30) note, with which the government intends to replace some of the 22 billion currency notes scrapped on Tuesday (despite the fact the new note is double the value of the highest value nixed note), is slightly smaller than existing notes and hence incompatible with the nation’s approximately 200,000 ATMs.
Even those lucky enough to have acquired the new Rs2,000 notes are displeased, as the chronic shortage of smaller notes for change makes them illiquid, unable to be used for small purchases. Naturally, those who can, have used debit or credit cards to make purchases but even they have proven far from infallible as severs have crashed under the sheer weight of transactions.
To continue reading: India Launches War on Corruption, Hits Cash, Chaos Ensues
