New York Times editorial on India’s demonetization
New York, January 9: Two months after the Indian government abruptly decided to swap the most widely used currency notes for new bills, the economy is suffering. The manufacturing sector is contracting; real estate and car sales are down; and farm workers, shopkeepers and other Indians report that a shortage of cash has made life increasingly difficult.
Prime Minister Narendra Modi announced on Nov. 8 that the 500 and 1,000 rupee notes (roughly $7.50 and $15) that made up about 86 percent of all currency in circulation could no longer be used in most transactions and would be replaced by new 500 and 2,000 rupee notes.
People could deposit old notes in banks until Dec. 30 and withdraw a limited number of new notes every week. This was meant to help identify people who were hoarding cash — or “black money,” as it is known in India — to avoid paying taxes or to engage in corruption. Mr. Modi’s government later said that it was also eager for Indians to move to electronic transactions.
But the swap was atrociously planned and executed. Indians had to line up for hours outside banks to deposit and withdraw cash. New notes have been in short supply because the government did not print enough of them in advance. The cash crunch has been worst in small towns and rural areas. The amount of cash in circulation fell by nearly half, from 17.7 trillion rupees ($260 billion) on November.4 to 9.2 trillion ($135 billion) on December 23 according to the Reserve Bank of India.
No economy can lose that much currency in a few weeks without creating major hardship — certainly not one like that of India, where cash is used for about 98% of consumer transactions by volume. And while a growing number of people have debit cards and cellphones that can be used to transfer money, most merchants are not set up to accept such electronic payments.
Meanwhile, there is little evidence that the currency swap has succeeded in combating corruption or that it will forestall future bad behavior once more cash becomes available. The government had said that people bringing more than 250,000 rupees ($3,660) of the old notes to banks would have to show that they had paid taxes owed on the money. Because of those rules, officials had expected that a lot of black money would never make it back to banks. Yet local news outlets are reporting that Indians have successfully deposited the vast majority of old notes. That suggests that either there wasn’t as much black money out there as the government claimed or that tax cheats found a way to deposit their hoards of cash without attracting the government’s attention, perhaps with the help of money launderers.
Many Indians have said that they are willing to tolerate some pain in the fight against corruption. But their patience won’t last if the cash crunch continues and the swap does little to reduce corruption and tax evasion, as many economists predict.
(The featured picture at the top is that of Dr.Urjit Patel, Governor of the Reserve Bank of India, the country’s Central Bank)
