It was on Nov. 8, 2016, in a shock announcement, that Indian Prime Minister Narendra Modi announced around dinnertime that banknotes of Rs.500 and Rs.1000 would no longer be legal tender starting midnight.
It has been exactly a month since he made that announcement. His key objectives in scraping 86 percent of the circulating currency in a country of over 1 bln people, was to remove “black money” out of the system, fight counterfeiters and stop the financing of terrorist organizations. While it can be argued that the measure may have had limited success in all of these fields, the demonetization policy has broadly failed.
Black money is well and alive
The government in carrying out the demonetization had hoped that a large percentage of the circulating cash would simply not make it back into the banking system. It was hoped that the holders of black money would prefer to have it invalidated rather than bring their sacks of ill-gotten wealth to banks and face penalties of up to 200 percent tax, which had been previously announced by the authorities.
However, according to the Economic Times, the government is in for a shock:
“The RBI had said that Rs 8.45 lakh crore was deposited and exchanged during 10-27 November, after the implementation of the note ban from 9 November. Between 28 and 30 November, the State Bank of India saw deposits increasing by Rs 22,000 crore. In a recent submission to the Supreme Court, the Attorney General had said that the government expected Rs 10 lakh crore back as deposits. This raises questions whether the exercise was worth carrying out at all.”
For readers unfamiliar with the Indian system of counting; 1 crore = 10 mln and 1 Lakh = one hundred thousand.
The nitty-gritty is that not only have people managed to convert their untaxed income at the banks through so-called Jan Dhan accounts, they have also been able to buy assets like gold. Jan Dhan accounts were opened by the government with relaxed KYC and AMC norms for the purpose of financial inclusiveness.
Another route that many people with untaxed income have taken is to fly the cash out to India’s remote northeast region, where many tribes are exempt from Indian income tax. Some people have also taken to transferring the money to farmers who are also tax exempt.
Bloomberg ran a story quoting an Indian lawyer on how this exchange is being carried out: “Individuals are transporting millions of rupees on trains or vehicles, and the big money-laundering networks have been chartering flights to transport crateloads of cash to India’s northeast from small airfields.”
Counterfeiters shift home
Perhaps the most shocking effect of the demonetization has been the shift of currency counterfeiting from offshore locations to the homeland. In the past, the Indian government has largely blamed the neighboring country of Pakistan of smuggling in fake Indian currency.
Now that new banknotes have been introduced by the government, Indian citizens have taken the initiative of printing fake money at home. In a shocking case that came to light during the past month, a young engineering graduate and a beneficiary of Mr. Modi’s ‘Make in India’ program used his skills to print fake Rs. 2000 notes worth Rs. 4.2 mln. Abhinav Verma and his accomplices were not only printing fake Indian currency but also running a racket exchanging old notes for new in the north Indian city of Mohali, Punjab.
The police in other parts of India have also seized counterfeit notes of the new Rs. 2000 denomination including in Hyderabad in South India, where according to the Hindustan Times:
“Of the Rs 2,22,310 fake currency seized from the gang, Rs 2000 notes were worth Rs 2,10,000. The remaining fake currency was in small denominations of Rs 100, Rs 50, Rs 20 and Rs 10. The police also seized two colour Xerox machines and Rs 50,000 in cash among other incriminating material.”
It would appear that non-familiarity with the new currency is opening up avenues for many domestic counterfeiters to dabble in the currency exchange business. The chaos and the panic created by the situation have also led to the proliferation of this business. It is highly unlikely that people who have untaxed wealth are likely to complain to the police if they are stuck with counterfeit notes by certain unscrupulous people and criminal elements.
Terrorists and corrupt politicians get hold of new cash
If Mr. Modi’s move was aimed at terrorism, then it can be argued that it has had limited success. Central India has been recently hit by the Naxals, a left-wing terror group. The government claims that demonetization has impacted their resources and there appears to be some truth to these claims.
However, there is also proof that the opposite is true. In Jammu and Kashmir, several terrorist individuals were reported to have held the new Rs.2000 notes, less than a fortnight after its issuance. There have also been news stories of several corrupt politicians and others having been caught with huge stack loads of the new money.
A lot of these politicians are curiously from the ruling Bharatiya Janata Party, the party of Mr. Modi. At least Rs. 2 mln was caught from one ruling party functionary according to the Hindu, which writes: “Police said personnel from the Hasthampatti police station, who were conducting the vehicle check, intercepted a car coming into the city. They found a total of 926 Rs. 2,000 currency notes, 1,530 Rs. 100 denomination notes and 1,000 Rs. 50 denomination notes in a bag in the car.”
Government is singing a new tune
Perhaps the biggest proof of the failure of demonetization has been that the government is no longer talking in terms of its initially stated benefits. The new tune is one of a “cashless economy.”
The government’s stated target now is to push India towards a cashless economy, and to that end, the Finance Minister Arun Jaitley announced a slew of rebates and discounts for people who choose to make digital payments. This includes a discount of 0.75 percent on purchase of petrol and diesel through cashless modes, discounts on the payment of insurance premiums of state-run insurance policies, discounts on toll booths where people choose to use RFID-based payments and a free 1 mln rupee accident insurance for those that buy their railway tickets, accommodation or catering through digital mode.
BJP run northeastern state of Assam, famous for its tea, had its Chief Minister Sarbananda Sonowal also launching a digital banking campaign to instill awareness into Assamese about the benefits of a cashless economy.
You would recall that we covered India’s cashless efforts not so long ago on Cointelegraph. The Chief Minister of Assam told the Times of India: “The Assam government is taking all possible measures to make people aware about digital banking as a way of life. After the demonetization of Rs 1,000 and Rs 500 notes in the country, it has become imperative for all citizens to reduce cash transactions to discourage the accumulation of black money.”
Perhaps the brave new cashless world would be a long-term boon for India, but it is highly unlikely the same can be said about demonetization that has hit the country hard where serpentine queues can still be seen at ATMs and banks one month after the exercise was announced. Prime Minister Modi’s words now ring increasingly hollow.