Why India wiped out 86% of its cash overnight

By Justin Rowlatt

South Asia correspondent

14 November 2016

India is in the middle of an extraordinary economic experiment.

On 8 November, Prime Minister Narendra Modi gave only four hours' notice that virtually all the cash in the world's seventh-largest economy would be effectively worthless.

The Indian government likes to use the technical term "demonetisation" to describe the move, which makes it sound rather dull. It isn't. This is the economic equivalent of "shock and awe".

Do not believe reports that this is primarily about bribery or terror financing, the real target is tax evasion and the policy is very daring indeed.

You can see the effects outside every bank in the country. I am in Tamil Nadu in the south of India and here, as in every other state in the country, queues of people clutching wads of currency stretch halfway down the street.

Mr Modi's "shock and awe" declaration meant that 1,000 and 500 rupee notes would no longer be valid.

These may be the largest denomination Indian notes but they are not high value by international standards - 1,000 rupees is only £12. But together the two notes represent 86% of the currency in circulation.

Think of that, at a stroke 86% of the cash in India now cannot be used.

What is more, India is overwhelmingly a cash economy, with 90% of all transactions taking place that way.

And that is the target of Mr Modi's dramatic move. Because so much business is done in cash, very few people pay tax on the money they earn.

According to figures published by the government earlier this year, in 2013 only 1% of the population paid any income tax at all.

As a result huge numbers of Indians have stashes of tax-free cash hidden away - known here as "black money".

Even the very poorest Indians have some cash savings - maybe just a few thousand rupees stored away for a daughter's wedding, the kids' school fees or - heaven forbid - an illness in the family.

But lots of Indians have much more than that.

It is not unusual for half the value of a property transaction to be paid in cash, with buyers turning up with suitcases full of 1,000 rupee notes.

The size of this shadow economy is reckoned to be as much as 20% of India's entire GDP.

Mr Modi's demonetisation is designed to drive black money out of the shadows.

At the moment you can exchange up to 4,500 (£48) of the old rupees in cash for new 500 (£6) and 2,000 (£24) rupee notes.

There is no limit to the amount that can be deposited in bank accounts until the end of December, but the government has warned that the tax authorities will be investigating any deposits above 250,000 rupees (£2,962).

Breach that limit and you will be asked to prove that you have paid tax. If you cannot, you will be charged the full amount owed, plus a fine of 200% of the tax owed. For many people that could amount to be pretty much the full value of their hidden cash.

This is brave politics. Some of the hardest hit will be the small business people and traders who are Mr Modi's core constituency. They voted for him because they believed he was the best bet to grow the economy and improve their lot. They will not be happy if he destroys their savings.

Mr Modi says he is simply delivering on his pre-election promise to tackle corruption and tax evasion.

He says he warned that he would squeeze black money out of the system and had already offered amnesties to those who declared their black money holdings.

And, so far at least, the policy seems to be popular, in spite of the long queues and the fact that much day-to-day business in India has ground to a juddering halt.

Most Indians resent the fact that many of the richest among them have used black money to evade paying their fair share of tax and are happy to suffer a few weeks of what Mr Modi called "temporary hardships" to see them face justice.

They also recognise the benefits of drawing more people into the income tax net.

India has very low rates of tax compared to many other countries. The tax-to-GDP ratio - how much tax is raised as a proportion of the output of the economy - was 17% in 2013.

The average across the economies of the Organisation for Economic Co-operation and Development - a club of mostly rich nations - was over 34%.

Demonetisation is part of a wider project to draw Indians into the formal economy and to get them to start paying the tax they owe.

Curbing tax evasion is part of the agenda for the "aadhaar" scheme, a giant digital database designed to give hundreds of millions of Indians a unique ID, and of the new Goods and Services tax.

And reducing tax evasion can only be good for India. The more money it raises in tax, the more it has to spend on useful stuff like roads, hospitals and schools.

The more the country spends on public goods like that, the faster the Indian economy is likely to grow - or so the argument goes.

So the big question is: will it work?

Some economists have questioned the decision to introduce the 2,000 rupee note. They say if the policy is designed to force people into the banking system why issue a higher denomination note - presumably an even more convenient vehicle for black money transactions?

But the headlines about chaos and confusion are a bit misleading.

There have been virtually no reports of violence despite the huge disruption this policy has caused.

The queues are orderly and the worst you hear are the irritated mutterings of those whose days have been wasted standing in line.

But Mr Modi needs to be careful. The new notes are in short supply and there are not enough smaller denomination notes to go around, so the banks regularly run out of cash.

That cannot go on for long without irritation turning to anger.

But some queuing may be excusable, because in one regard the policy has already been a complete success: it came as a surprise to the entire country.

Think what that means. The government managed to plan this audacious policy, printing billions of new notes without anyone letting slip what was happening.

Reportedly, even senior members of the cabinet were not told what was being planned, for fear that if word got out the entire policy would be undermined. The hoarders would have time to empty their mattresses and launder their stashes into gold or other assets.

Keeping a secret of this magnitude in India, a country that thrives on rumour and gossip, is nothing short of a triumph and surely a reasonable justification for a few hiccups along the way.

https://www.bbc.com/news/world-asia-india-37974423

nlfpmod

Nigeria will get it right.
We have the human resources, natural and economic resources.
We will get there.

This cash redesign policy don finish agbado urchins. See as this zombie go dig news because of thiefnubuu.

The cash redesin has come and deadline is 31st.

cry bluud, we no care!!

Oga 4 hours is different from over 1 month notice,

Vote buying in the mud

I stand with President Muhammadu Buhari and Godwin Emefiele on the new naira redesign

Tinubu can cry from now till tomorrow we don't care

I was in India when this policy was enacted. The policy was a failure as it didn't achieve its main aims. I'm on mobile right now.. will try to find links when I'm a bit free.

EDIT!!!!!!!!
So I'm back..

This is an article from 2018.
https://www.businesstoday.in/opinion/prosaic-view/story/lets-admit-it-demonetisation-was-a-failure-108895-2018-08-31

The problem is that two big objectives that the Prime Minister had touted in his late evening speech - about catching black money and weeding out fake notes - have been less than successful to say the least.
Obviously even the government knows that demonetisation was a big failure. The Prime Minister was careful not to mention it while touting the long list of achievements of his government during his Independence Day speech. The RBI report itself was released quietly, and initially only a few government spokespersons tried to defend it once the report was released. (They are still trying to do it, though few of their reasons sound convincing).

The problem is that two big objectives that the Prime Minister had touted in his late evening speech - about catching black money and weeding out fake notes - have been less than successful to say the least. The fact that the new currency notes were not all that counterfeit-proof is apparent from the RBI report which talks of the amount of new, fake currency seized already. Ditto for black money - yes some was probably caught and some probably came back to the government through higher tax paid on deposits, but the amount was nowhere near the windfall gains that the government hoped for. (S Gurumurthy, co-founder of Swadeshi Jagran Manch, a recently nominated board member of the RBI, and the person who apparently came up with the idea of demonetisation had said that as much as 20-40 per cent of the demonetized cash would not come back to the RBI, resulting in windfall gains to the government. It is obvious that his calculations were way off). Neither is the number of new tax assesses enough to justify the pain of demonetisation. There were plenty of other tools available to bring non tax payers into the tax net.

Later justifications about the real benefits of demonetisation - ranging from a cash less (or less cash) economy to hitting terror networks have also proven to be far-fetched. The RBI report shows that people are again keeping a lot of their savings in cash. Digital transactions have gone up - but hardly enough to justify a drastic measures as demonetisation which slowed the economy.

To the poster above , iam still living in India and project is successful . Indians have moved from cash based to semi cash based and they are slowly eliminating 2000 notes .
This Move along with GST (Goods and service Tax) is why India is able to spend Billions of dollars of its own money on constructing new Airports, Metros, Ports, expressways etc .
They are opening 10,000 Mw of power plants every year for past 5 year.
I expected Buhari to be like Modi but alas i am very disappointed at least Buhari is trying now.

Brendaniel:
Oga 4 hours is different from over 1 month notice,

Vote buying in the mud

CBN gave 100 days , about 3 months for this exercise. The problem with Nigeria is that most people don't take implementation of government policies serious. They believe that the policy will not work, BUT now eye don clear.

If only President Buhari has been operating like this since he came into office, his government wouldn't have performed woefully like this. This last minute thrust will not have strong impact on review of his government.

I am not sure it is Tinubu that's their target

FreeStuffsNG:
"Do not believe reports that this is primarily about bribery or terror financing, the real target is tax evasion and the policy is very daring indeed."

You guys expected that by now, Lagos money cornered by Tinubu will be flowing through all corners of the country for vote buying. If he got 2 bullion vans for someone’s election he will get 200 to prosecute his own election

ITS IS STRANGE THAT ONLY TINUBU’s SUPPORTERS ARE CRYING SO BITTERLY ABOUT THE NEW NOTES

This post should be taken to front page asap so to educate Nigerians about cashless policy in country which has implemented about 7 years back

The policy is a good one, the cashless policy is a policy that has been existing in Nigeria for over 10 years.

I wander why Emefiele is in a rush now

Is not possible to change a Country currency in less than 3 month.

The cashless policy is for helping the Nigerian Economy not to fight corrupt politicians.

HappyPagan:
I was in India as as the time this policy was enacted. The policy was a failure as it didn't achieve its main aims. I'm on mobile right now.. will try to find links when I'm a bit free.

That didn't work quite well and cash was available unlike how there's no cash now to replace the one that will be banned, but Modi actually tried alot for the taxation of the people that were not being taxed before. He achieved his aim albeit slowly, and steadily.

When we warned you guys about Buhari, you called us Wailers. Now the chicken has come home to roost. No going back on 31st, We die here.

The Nigerian govt puts more time is pushing propaganda online than actually doing their jobs. It's really a sad state of affairs.

Both are clearly not the same , India decommissioned some cartegories of notes the inept useless Buhari led govt is changing the colors of some note cartegories for a whopping 286 billion naira and the notes are still not even available

FreeStuffsNG:
"Do not believe reports that this is primarily about bribery or terror financing, the real target is tax evasion and the policy is very daring indeed."

The policy is also good against terror financing, bribery and tax Evasion.

Every transaction will be checked. A terrorist cant withdraw large sum of money without being tracked, like wise a kidnapper.

The downside is bank failure, if a bank fail that means, many people will lose their money and this might trigger a dangerous recession.

Another downside is that owners of banks in Nigeria will be come extremely powerful and wealthy, the upside for shareholders is that the price of bank stock will increase

Even if this policy will fail or not let us test it for a period of 3months and if after the elections it didn't work then we can know what to do next but for now let that deadline not change. We need an election where people can vote whoever they want without candidates inducing voters with money. We need a free and fair elections this time around.

Oga 4 days ieds different from over 1 month notice,Vote buying in the mud

I will comment when it gets to FP

Cashless policy is beautiful.

Let me buy land here.

Buhari is too dull....and wicked
Sani Abacha is 100x better than Buhari..

Urchins creating threads upon threads. Urchins have turned the highest wailers.

BeardGangJnr1:
Buhari is too dull....and wicked
Sani Abacha is 100x better than Buhari..

How did he become your president?!

BRIMBRAM:


How did he become your president?!

I dnt blame those who voted for him in 2015...but God will judge those who voted for him in 2019....even after the overwhelming and colossal failures
Seems as tho, The devil 😈 used him yo jinxed this country 🤦

BeardGangJnr1:

I dnt blame those who voted for him in 2015...but God will judge those who voted for him in 2019....even after the overwhelming and colossal failures
Seems as tho, The devil 😈 used him yo jinxed this country 🤦

Failure?! How?

BRIMBRAM:


Failure?! How?

Are u residing outside Nigeria??
Cus u ought to be aware of the happenings since Buhari's reign...
Not one of his promises have been fulfilled

BeardGangJnr1:

Are u residing outside Nigeria??
Cus u ought to be aware of the happenings since Buhari's reign...
Not one of his promises have been fulfilled

Like the electoral reforms. There has been a great improvement with practical results.

BRIMBRAM:


Like the electoral reforms. There has been a great improvement with practical results.

How many people eats electoral reforms as food, health care, education, electricity, fuel subsidy, transportation....azin common essential services he hasn't provided even one
The so-called electoral is failing in osun.... politicians have found a way to either temper, manipulate or bypass it.