Recap: Suddenly, everybody in India was told that most of their cash no longer had any value. That was on November 8th, 2016. So while Americans were cheering or moaning about the victory of Trump, Indians were thumbing through the instantly voided pieces of paper in their pockets in what will surely go down as one of the boldest governmental initiatives of the early 21st century.
During a surprise television address, India’s Prime Minister Modi called for the immediate cancelation of all 500 and 1,000 denomination notes — 86% of currency in circulation — and gave his country’s 1.3 billion people a 50-day window to either deposit them into bank accounts or exchange them for newly designed and minted notes. This move was 100% intended to be a surprise tactic to catch the black market with its pants down, so to speak, and not even the banks were informed of it until the official announcement and mobs of people began lining up at their doors.
Almost needless to say, this didn’t go as smoothly as planned — if much planning even really went into it — as there wasn’t enough new banknotes to replace the old, ATMs weren’t calibrated for the new sized bills, and people suddenly found themselves being pushed into depositing their cash into bank accounts (which half the people in the country would need to open for the first time) to remain economically kinetic. Hundreds of millions of people suddenly rush to banks, jewelry shops, foreign-exchange counters, and ATMs to stand for hours in serpentine lines which often stretched for blocks just to re-validate their wealth.
India soon ground to a halt, businesses shut down, farmers reportedly couldn’t buy seeds, taxi and rickshaw drivers didn’t have any way to receive payments, employers had no way to pay their employees, hospitals were refusing patients who only had cash, fishermen watched their catch wither up and rot for lack of customers with usable money, weddings throughout the country were canceled, and some families reputedly even had difficulty buying food. It was a bonafide upheaval.
But India held it together. Through it all, besides some organized demonstrations by political opposition groups — who would probably protest anything the incumbent government does — the way that India handled this extreme inconvenience could be described as dutiful: most people went out, stood in line, and did what they had too do without violence or, for the most part, chaos. Indians rich and poor, Hindu and Muslim, technologically-adept and off-the-grid were suddenly all tossed into the same boat and set adrift on the same sea. If nothing else, demonetization united India on a mutual mission: to comply with their government’s policy and get life back to normal again as soon as possible.
It’s now been over seven months since the end of the official exchange period of demonetization — redubed DeMo in Indian popular slang — I have to wonder what, if anything, has really changed. So I turned to Monishankar Prasad, an Indian author and journalist who spent the demonetization period traveling the country and documenting the experience.
“The situation on the ground for the urban citizen has normalized,” he said, “with cash back in the ATMs and circulation of currency back to pre-November 8th, 2016 days.”
The dust had cleared. We can now look back and see the true impact that demonetization had on India.
One of the main goals of demonetization — as they were initially posited by Modi — was to weed black money and counterfeit notes out of the system. The thought was that those involved in such underground activities would not come forward to exchange — and own up to — their illicit wealth, and Modi could wipe his country’s currency stock clean in one fell swoop — and perhaps also net the central bank a big payday in the process, as unredeemed notes would mean a bonus for their coffers.
But these goals were never met. 97% of the demonetized notes were turned in, meaning that very little black money was caught stranded and the central bank’s estimated $45 billion bonus never transpired. India’s black market — as dynamic and active as it is — rarely stores money in cash long-term, as its players prefer other ways of storing wealth, such as jewelry or property, and what cash they were stuck with was mostly exchanged through clever tactics or brute force.
In terms of dealing counterfeiters a terminal blow, demonetization was successful at wiping out all of the fake notes that were in circulation at the onset of the initiative, but counterfeits of the new 2,000 rupee notes began emerging almost as soon as the legitimate ones were minted.
Demonetization’s goals of curbing the black economy and wiping out counterfeits — two intentions that galvanized the population and bolstered wide support for the initiative — appear to have been complete flops.
The other main goal of demonetization was to disrupt the cash-centric and largely untaxed informal economy by getting a larger slice of the population onto the digital economic grid.
Prior to demonetization, Indians used cash for upwards of 95% of all payments and 90% of the country’s vendors didn’t have the means to accept anything but. Even Uber in India accepted cash payments and most ecommerce sites had a cash on delivery option.
But this was an aspect of Indian life that was to be fundamentally upgraded. Demonetization was a stark success in its ability to get people to open bank accounts for the first time and to get acquainted with electronic payment systems. The way this was carried out was straight forward: people weren’t really given another choice.
By temporarily grinding the wheels of the cash economy to a halt — by simply not having enough cash to go around for months after demonetization was announced — India was able to coerce people into using digital payment methods, like bank transfers, debit cards, and e-wallets. Suddenly, the inconvenience of learning new ways to store and spend money and altering a culture’s ingrained habits was no match for the inconvenience caused by not being able to buy anything.