About two and a half months ago, Indian Prime Minister Narendra Modi embarked on a radical experiment, pulling 86 percent of India’s cash out of circulation overnight in a bid to take on corruption. The sudden move threw the country’s mostly cash-based economy into total chaos, and tens of thousands of people took to the streets across India to protest.
The prime minister argued that while people might face temporary hardship, in the longer run the benefits to the economy would far outweigh the costs. Now, nearly three months into the experiment, it seems the challenges might just end up being significantly less temporary — and causing a great deal more hardship — than Modi originally anticipated.
One study, from the All India Manufacturers' Organization, found that micro and small-scale industries showed a whopping 35 percent job loss and a 50 percent decline in revenue in just the first 34 days since the policy went into effect, and that those numbers are likely to continue to increase in coming months. Earlier this month, the International Monetary Fund said that Modi’s policy had caused India to lose its title as the world’s fastest-growing economy, after shaving a percentage point off its projection for India’s growth in 2016. Many of India’s small businesses that handle all their transactions in cash have facing crippling blows to their business.
Modi’s “demonetization” scheme was designed to tackle a number of issues associated with “black money” — unaccounted-for cash holdings that haven’t been taxed but, under the law, should be. On November 8, Modi gave the country four hours’ notice that most of the country’s cash would be legally worthless and informed them that they had until the end of the year to swap banned notes with new ones.
The idea behind the measure was that the government would get the opportunity to tax cash that people were hoarding and flush money out of the system used for illicit purposes. Along the way, it would help capture counterfeit cash floating through the country and give businesses a strong incentive to move toward digital forms of payment instead of using paper currency.
The biggest issue with the rollout of the plan has been that the government hasn’t printed nearly enough of the new banknotes to replace the old ones. That has created a serious cash crunch, which has been a headache for people who are materially comfortable — but has created a genuine crisis for the millions in India who are less fortunate.
A New York Times report published Wednesday has a collection of statistics and stories based on interviews with ordinary Indians which collectively suggest that demonetization has come at a steep cost for financially precarious households. The cash crunch has made it harder for ordinary Indians to put food on the table and finance cash-heavy activities like weddings.
Based on interviews at protests and spaces where day laborers gather, the Times found harrowing stories of suffering among working-class Indians due to lack of cash:
Many of them, even children, are forced to go without fruit, vegetables and milk — now unaffordable luxuries. Most had not paid apartment rents and their children’s school fees in the months since the cash ban. Many had sent their families back to their villages, and were ready to give up and follow if things did not turn around soon. Sending cash to the elderly parents they had long supported is now out of the question.
During a New Year’s address, Modi defended his measure, assured that widespread dissatisfaction with corruption in India made his policy worthwhile. "In this fight against corruption and black money, it is clear that you would like to walk shoulder to shoulder with us [the government]," he said.
Aditya Dasgupta, a postdoctoral fellow in contemporary Asia at Stanford University, says the government’s official growth rates shouldn’t be trusted because they are “very likely to be politicized.” He suggests looking instead at how much things cost.
“The best indicator of slowing growth is prices — inflation is at record lows, indicating reduced demand for goods and services in a largely cash-based economy,” he explains. “Anecdotally, ordinary people living in India can attest that prices for everything — from auto-rickshaw rides to vegetables to real estate — have fallen since demonetization.”
The sharp fall in prices means there’s been a huge drop in demand for those items, since people don’t have the money in hand that they need to buy them.
On top of all this, early estimates indicate that the Indian banks ended up receiving 97 percent of the banned bank notes by the December 30 deadline last year — far more than the government estimated would be returned, based on the assumption that illicitly held money would’ve simply been left undeclared. In other words, it appears that one key goal of Modi’s — to deal a financial blow to people using the cash for illegal purposes — simply didn’t bear fruit.
Modi has staked his personal political fortune on a huge gamble. In a cabinet meeting shortly before the move was announced, Modi told cabinet members, "I have done all the research and, if it fails, then I am to blame."
But Dasgupta cautions against assuming that the botched rollout of Modi’s program, and the costs it has had on the country’s poorest citizens, will exact a political price. The idea of cracking down on black money is highly appealing to many Indians fed up with systemic corruption.
“There is even a sense of civic engagement in waiting in long ATM queues as part of the effort to stick it to a corrupt and wealthy elite,” Dasgupta says. “It is telling that elections in India's largest state, Uttar Pradesh, are coming up, yet demonetization is not a central campaign issue.”
Guess we’ll just have to keep watching.