India’s Demonetization and its impact on the poor
di Fr. Stanislaus Jebamalai SJ & Antony Arulraj
Demonetisation is not a new phenomenon in India. The pre-independent India had witnessed demonetisation of high-value currency in January 1946 and, again, on 16 January 1978. On both occasions, demonetisation impacted only a miniscule segment of the society and economy.
Less than four hours after Prime Minister Narendra Modi’s unscheduled live televised address at 8 pm (IST), use of all ₹500 and ₹1000 currency notes became invalid with immediate effect from 9 November 2016. His announcement also indicated the issuance of new ₹500 and ₹2000 banknotes in exchange for the old banknotes. This demonetisation removed a huge sum of ₹15.4 trillion from circulation.
People had to deposit the demonetised currency notes as credit in bank accounts until 30 December 2016. They were also told that demonetised currency notes could be exchanged at bank branches upto a limit. The initial limit was ₹2,000 per person from 8 to 13 November. This limit rose to ₹4,500 per person from 14 to 17 November. However, the limit was reduced to ₹2,000 per person from 18 November. Finally, all exchange of demonetised currencies ground to a halt from 25 November 2016.
Restrictions were imposed on cash withdrawals from bank accounts: ₹10,000 per day and ₹20,000 per week per account from 10 to 13 November; and ₹24,000 per week from 14 November 2016. Of course, exceptions were granted to some cases: from 17 November 2016, families were allowed to withdraw ₹250,000 (₹2.5 lakh) from one account for wedding expenses and farmers were permitted to withdraw ₹25,000 per week from their accounts against crop loans.
Withdrawals from ATMs were also restricted to ₹2,000 per day till 14 November and to ₹2,500 per day till 31 December. From 1 January 2017, a daily withdrawal of ₹4,500 was permitted and from 16 January ₹10,000 per day. Obviously, there were no standard, consisting guidelines about withdrawals.
From day one, the government has been inventing different reasons for demonetisation: 1) purging the system of all the black money; 2) a fight against counterfeit currency and terrorism; 3) infusion of people’s money in Public Sector Unit banks to scale up their lending capacities; 4) promotion of digital payment and creation of a cashless society. The last two seem to be genuine reasons.
Infusion of People’s money in Banks
Demonetisation was Prime Minister’s masterstroke that made people queue up before banks to deposit their hard earned money in the banks. The need for such infusion could be best understood in the light of these facts: 1) the bad loans to the tune of 6 trillion rupees that the Indian Banks had given crippled their capacity for further lending; more than half of this loan amount has been given to just 3 corporate titans: Rs 1.25 trillion to Anil Ambani (Reliance Group), 1.03 trillion to Anil Aggarwal (The Vedanta Group), Rs 1.01 trillion to Shashi Ruia & Ravi Ruia (Essar Group); 2) in October 2016, Moody’s, a credit rating agency, had stated that Indian banks required Rs. 1.25 trillion capital infusion.
The recent move by the State Bank of India (SBI) to increase the monthly average balance (MAB) of its savings account holders to as high as ₹5,000 for branches in six metros, to ₹3,000 for urban branches and ₹2,000 for semi-urban branches is mainly to retain and trap the infused money. This move by SBI will hit 310 million of its depositors including pensioners and students. The SBI benchmark for MAB and penalties are likely to be followed by other public sector banks.
Promotion of Cashless, Digital Payment
Demonetisation itself is a ploy to end the reliance on cash On 14 October 2016, “Catalyst: Inclusive Cashless Payment Partnership”, which is a multi-stakeholder partnership, was launched in view of catalysing an exponential increase in cashless payments. This launch, which is a partnership initiative by the U.S. Agency for International Development (USAID) and India’s Ministry of Finance, will ensure a phenomenal gain for Information Technology and payment service providers who make money from digital payments or from the associated data generation on users. It must be pointed out here that every digital transaction fetches a 2.5% of the transaction value as commission to the cashless payment service providers. Worthy of mention is a post-demonetisation advertisement by a digital payment service provider on the print and digital media: “Paytm congratulates Honourable Prime Minister Sh. Narendra Modi on taking the boldest decision in the financial history of Independent India.”
Consumers are now lured to make cashless payments. Government’s waiver of service tax – in addition to a series of cuts and freebies – on card transactions up to Rs 2,000 is one of the incentives to promote digital transactions. Noteworthy is a lucky draw in April 2017 in the presence of President Pranab Mukherjee; it saw a Central Bank of India customer bag the lucky bounty of ₹10 million for a transaction of ₹1,590.
The Impact of Demonetisation
The sudden announcement of demonetisation and the prolonged cash shortages that ensued undermined economic output and disrupted the economy. Demonetisation removed from circulation a huge sum of ₹15.4 trillion (85% of the value of cash in circulation). It took two months for the government to return a sum of ₹9.2 trillion in the form of ₹500 and ₹2000. In a country where 90% of the transactions are done with cash, this failure resulted in a severe shortage of cash. Moreover, the ₹2000 notes could not be exchanged for smaller denominations owing to the absence of ₹500 or ₹1000 notes. Besides, the size of the new ₹2,000 necessitated recalibration of the ATMs and that exercise, too, compounded the problem.
People stood in long serpentine queues – at the cost of losing their wages – before banks that were understaffed and before the ATMs that went cashless within hours. Those who suffered the most on account of cash shortages were the poorest and most vulnerable. A member of a Self-Help Group in Sindagi village, in Karnataka, thus recounted her ordeal: “To withdraw ₹2,000.00. I stood in the queue for two days. I had to forego food and work, losing my wages for those two days. As a result, my entire family had to starve for many days.” This ordeal was a recurring one for her and for the likes of her.
Cash shortage negatively affected small-time traders, small-scale entrepreneurs and daily-wage labourers. Till the end of December, they had extreme difficulty to pay for essential goods and services like food, medicine or hospitals. Soutik Biswas, BBC correspondent in India, calls demonetisation “a nightmare for the poor and the middle class” (BBC, 12 Nov 2016). And his statement is corroborated by two case studies.
Case study I
A 52-year-old small farmer who is also a daily wage earner in Kunkuri village, Jashpur District, in Chhattisgarh, is the sole breadwinner of the family. Following demonetisation, he did not have work for days at length as his contractor could not withdraw enough money to pay for his work. In the meantime, he walked five kilometres to reach the nearest bank hoping to exchange the little money – ₹500 and ₹1000 notes – that he had saved for the marriage of his elder daughter. He joined the queue, braving the hot sun and hunger and fatigue. At the fag-end of the day, he found he could not exchange all his money. So he exchanged ₹2000 to meet his immediate expenses and deposited the rest of the sum in the bank, hoping to withdraw the amount for the marriage at a later time.
On reaching home, he took his new ₹2000 to purchase some rice from the local shop. The shop keeper, citing cash deficit, refused to sell rice to this farmer. The farmer had to buy rice for ₹1000 – much beyond his current need – and another ₹1000 was all he had to manage all other expenses.
When the day of his daughter’s wedding drew close, he returned to the bank to withdraw money. To his dismay, he could not withdraw his own money when he needed it most. And, the marriage had to be postponed. The family had to face the burden of uncertainty and anxiety over what would happen to her daughter.
Case study II
A retail pharmacist (58 years) who is also the head of a joint family in a remote village in Pathalgaon Block, in Chhattisgarh, he deposited all the money he had in the bank in the second week of November. When he wanted to replenish the stock of medicines, he could not withdraw the money that he badly needed for the purchase. As a result, he was not able to supply the medicine his customers wanted. The sales declined and so was his income. And, the needs of the joint family could not be met fully. His son’s college fees could not be paid in due time, leaving his son in a state of stress. What tormented this pharmacist most was his inability to alleviate the ailments of his customers in the village.
The discussions make it clear that the demonetisation project will benefit the rich and the mighty at the cost of the poor and the vulnerable. In fact, Mr Modi has placed the country on the edge of a precipice. Mr C Rammanohar Reddy, advisor to The Hindu Centre for Politics and Public Policy, sees the demonetisation exercise as a political gamble by Prime Minister Narendra Modi rather than an economic decision. And Mr P Chidambaram, India’s former finance minister, predicts that the Prime Minister’s unilateral decision will restrict growth at 6% and pave the way for joblessness and economic slowdown.
But there is yet another fact that cannot be ignored: Mr Modi’s political party has captured power in a couple of states, in the post-demonetisation assembly elections. His populism did the trick. However, the Prime Minister claims that the election results validated his demonetisation project.