Cash-starved India assesses its pain

Two months after India's Prime Minister Narendra Modi announced the controversial decision to withdraw currency notes of Rupees 500 (USD 7.4) and 1,000 from circulation his country is still reeling from the effects. 

On November 8, Mr. Modi had sought 50 days – until December 31 – for things to become normal after an estimated 86 percent of currency notes were abruptly withdrawn from circulation. But the calculations of his government have proved as accurate as the Prime Minister's count of 53 days as 50.

On January 1, Indians were exactly where they had been for days after the November announcement – in queues outside banks and at automated teller machines to withdraw their own money for use in an economy that is still largely cash-driven in terms of the everyday transactions that make up life. There are limits to the cash they can withdraw – Rs 4,500 (USD 66) a day from ATMs or Rs 24,000 (USD 354) in all every week from their accounts - and there seems little hope of respite in the foreseeable future. 

The distress is so acute in India's villages – where some two-thirds of people live – that India's  Central Bank was forced to issue instructions that 40 percent of cash supplies be sent to rural areas. 

Characterised by policy flip-flops and shoddy implementation, the decision to withdraw old notes and to replace them initially with new 2,000 notes – for which no one seemed to have change – and later with Rs 500 notes in a new series was said to have several objectives. 

Mr Modi had said these were to snuff out black money, detect fake notes and paralyse underground groups sitting on large piles of extorted money. Later, spin doctors put it out that it was all part of government's plan to make India a digital, cashless economy.

By themselves, the objectives were unexceptional, even laudable. But as is always the case with pious intention, there is more to the story.

Black money has two faces – the first worn when tax has either not been paid or underpaid on honestly earned income, and the other which is the fruit of crime, extortion or corruption and is spawned by the first. 

Paying tax is part of a social contract whereby the citizen agrees to give to government a portion of earnings in order to secure services that include infrastructure, defence and, most important, social security. Sadly in India, this has largely been a contract neither party – citizen or State – has honoured.

Who breached the contract first is a moot question, as indeed whether the two parties worked in tandem to do so. Less than four percent of Indians pay income tax and as for farmers, even the richest of them, pay no tax. The result is that governments – at the federal and provincial levels – have performed pathetically in terms of meeting social obligations. 

Things are so bad that in order to meet two of its most basic commitments – public sanitation and education – the state levies a tax surcharge on citizens. Seventy years after independence, a majority of Indians have no social security to speak of.

The other face of black money – fruit of crime and corruption – is a necessary component of the social fabric. Bribes are sought – and paid – to navigate the cumbersome processes of an opaque bureaucracy, to secure government contracts, to avail undeserved tax sops and to overcome the intrusions of the policeman, the taxman and the alderman. It is not without reason that most politicians and many bureaucrats are considered corrupt. 

The cash for paying these bribes comes from under-invoicing exports (and sales), over-invoicing imports (and purchases) and evading local taxes through the device of what is called a "kutcha" (handwritten and loose-leaf) invoice. 

The fact that most of the "old" cash in circulation has been deposited into bank accounts would suggest that very little of it was "black" and thus debunks Mr. Modi's primary hypothesis. The truth though is that almost every one with unexplained cash on hand on November 8 has found a way to bring it into the system.

Money changers – formal and informal - in Delhi's Chandni Chowk, Kolkata's Bara Bazar, Singapore's Lucky Plaza and Bangkok's Sukhumvit Road were happily accepting old Indian notes at a 70 to 75 percent discount until the last week of December. The cash changed overseas found its way into India through porous land borders with Nepal and Bhutan and was deposited into bank accounts of friends, relatives but mostly of low-income strangers who offered the service at a charge.

Of course, all deposits above a threshold limit will be scrutinised by the taxman but clearly many Indians think this is a procedure they will "manage" (another Indian-English word with myriad connotations) because taxmen are believed, for the most part, to be notoriously manageable. 

The irony of Mr. Modi's anti-corruption measure though is that it gave birth to a new class of the corrupt – bank officers and tellers, petrol pump operators, railway counter clerks, school and municipal body cashiers (until December, old notes were accepted for fuel, train tickets, school fees and local body taxes) – who had the power to change old into new notes.   

But cash isn't all bad. It can't be because after all it is an instrument of the state. A majority of Indians prefer to receive wages and make payments in cash. They find it convenient and reliable, while plastic and digital transactions are deemed suspicious. Digital security in India is suspect; just six weeks before the demonetisation, an estimated 3.2 million ATM cards were hacked.

While India scores fairly high on the World Bank's index of infrastructure – ahead of Greece, Saudi Arabia and Thailand – the benefits do not percolate to the country's interiors where power supply is erratic and internet connectivity spotty. In essence, the government's hope of a digital India is far-fetched in at least the medium term.

With most of the cash that was in circulation before November 8 now deposited in banks, many believe it is only a matter of time before it re-enters the system and does all the things – good and bad – that it once did. If that happens, Mr. Modi's venture would have failed. 

Two consequences though will be inevitable. One, the taxman will have become even more powerful. Two, someone will have to pay for putting people to such misery. Mr. Modi must hope it is not he who does. 

The writer is Editor, The Statesman, India.

(This is a series of columns on global affairs written by top editors from members of the Asia News Network and published in newspapers across the region.)