Demonetisation towards a cashless India?

“You came to India in a crazy moment” people say. They are not wrong at all. Since my first step in Mumbai, beyond the regular amount of people walking in the street and driving madly every mean of transport, my sight is caught by lines and lines of people waiting outside every bank in the city. 

“Waiting for what?” I asked my guide here. “The government said 500 and 1000 rupees (RS) banknotes we cannot use anymore, we have to change them! Corruption prevention they say but here is chaos.” RS 500 and 1000? We are talking about 5-6 and 10 euros, the most commonly used money on a daily basis. The demonetisation of 500 and 1000 banknotes is already a Wikipedia issue.

The announcement was made by the Prime Minister of India Narendra Modi in an unscheduled live televised announcement, when he declared the issuance of new RS 500 and RS 2000 banknotes of the Mahatma Ghandi new Series in exchange for the old banknotes.The demonetisation was done in an effort to stop the counterfeiting of the current banknotes alleged to be used for funding terrorism and for cracking down on black money in the country. Within the same plan to fight black money, the world 7^th largest economy is now supposed to take the first step towards a cashless India. Is India really ready for it? What is the short term effect?

Thee  short term impact on people's live

The effect of this reform on the lives of India people is heavy. Suddently people find themselves with worthless banknotes no one would accept. In addition, in the rural India there is a scarcity of banks and the majority of people rely on informal economics and does not have any bank account. Some people does not even have the capability to understand the decision taken by the government. There has been a case of a woman who committed suicide because she thought to be ruined.

Luckily, this case is the first which has happened so far, but there still is a great amount of people who are phisically obstacled from moving to the banks and change their money.

Also, for those who diligently pay tax, demonetization will be an administrative nightmare. The efficacy of demonetisation in flushing out illegal wealth is at its highest when it comes as a surprise reckon economists. But then it also causes the maximum hardship on law-abiding citizens and economic agents, especially small economic units. The long lines of people waiting in front of the doors of the banks is an evidence. Can banks cope with the pressure of handling the volume?

This isn’t the first time the Reserve Bank of India (RBI or central bank of India) has demonetised currency: RS 1,000 and RS 10,000 banknotes were demonetised in January 1946 and more recently, in 2014, the RBI had demonetised all banknotes printed before 2005. What accounted for this move was the rapid rate at which these notes have grown in circulation in the last five years: the RS 500 notes by 76% and the RS 1,000 notes by 109% over the 2011 numbers (Economic Affairs Secretary, Shaktikanta Das, during an interview on the 8^th November for scroll.in).

 

How do locals judge this reform? People standing in the queue with worthless money to be changed and the risk that the bank has ended up the new banknotes do not seem to be losing the patience so far, and do not act beyond some complaints. However, to prevent people from losing their patience and to keep their tempers, the goverment decided that old banknotes can be used for paying hospitalisation charges at government hospitals, for purchasing tickets at government stands within 72 hours after the notification.

 

On the long term people seem to have the convinction that the reform is good. That means black money will return to the conventional economy and the tax payers percentage will increase from the current 19%. Howewer people do not seem to have a clear mind about the whole process and the real effect of the reform in the future. They are now facing a new problem: the ATM (Automated Teller Machine) are running out of cash and the new banknotes seems to be bigger than the old ones, that means a problem for the machine to dispense them. 

I cannot avoid thinking of India as a country with the biggest slum in Asia: Dharavi slum and one of the greatest gap between the richest and the poorest people. Is really going cashless a priority? 

An article by the journalist and collaborator in Mumbay, Silvia Simonetta.

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