India’s Modern Money

On Nov. 8 2016, Indian Prime Minister Narendra Modi demonetized India overnight, announcing that the old 500-rupee and 1,000-rupee notes from the Mahatma Gandhi Series would be obsolete except for a few essential services such as hospitals, pharmaceutical shops, gasoline stations, etc., which could still accept the currency.

Modi then instituted a 250,000-rupee cap on the value of rupees that could be changed into the new 500- and 2,000-rupee notes. Lastly, he gave civilians a deadline of Dec. 30 for when currency holders could last change their money.

In effect, Modi’s demonetization policy, according to the BBC, removed 86 percent in total value of the circulating currency, some of which has not and will not been reinstated into the economy.

The Modi government said despite the deleterious effects, the demonetization was a necessary step to reduce counterfeit currency, mostly inflowing from Nepal and Bangladesh, which made up more than 20 percent of the money in circulation and often sponsored terrorism in both India and Pakistan.

While it is true that such a move assumes the beneficiaries of dark money keep their money in cash as opposed to credit, the demonetization should be seen as more than just an anti-dark money policy. It is, in fact, a liberalization of India’s base economy. This will allow for more opportunities for everyone in India to participate in the economy in an equal capacity.

The demonetization is a positive step forward to further develop India’s economy in the long run; however, it is undeniable that the short-term effects have been ugly and costly. As expected, the anti-dark money directive brought chaos as protesters took to the streets of India to protest the liquidation of their assets and the ensuing currency shortage.

The demonetization left the informal sector devastated, as the generally financially illiterate farmers and street workers now had to prove that their earnings had been taxed. Proving this is almost impossible for a population that keeps its money in trunks and under beds as opposed to in banks.

Forbes estimated that almost 50 percent of the demonetized currency is held by small businesses, and, therefore, there will be a disproportionate impact on them due to the policy.  Several deaths were reported from civilians not getting ambulances because of currency shortages, and the Indian economy came to a standstill with the World Bank cutting down its Indian GDP projections for the year 2017 by almost one percent.

There are strong arguments for the Modi government’s demonetization policy, as it allows India to set itself on a path to an economy with less paper — much like in most Western countries where electronic transactions are the norm. Today Western consumers have access to a myriad of credit cards, Visa cards, PayPal, Venmo and Apple and Samsung Pay as well as Facebook Pay, all of which can benefit Indian consumers.

By embracing online payment methods, most Indians will be able to participate in the international market on par with the West. The currency cut down will force millions to open bank accounts, download mobile apps and use other means that allow for the electronic exchange of currency.

The redirection of these consumers into a more connected and globalized world can only demystify the online world as well as banking and financial technology.  The country’s commercial financial apparatus will need to develop user-friendly strategies and platforms to reach the rural, financially and technologically illiterate as well as the old, integrating them into the global economy.

The rapid spread of cellphone banking across consumers of different ages from both rural and urban areas in Southern Africa attests to how popular and seamless this process can be. What can result is an economy that allows its participants more equal means of access.

Developing countries looking to make a leap from cash-based economies to credit-based economies should not just look to the West. The Indian case study is well worth noting.

Looked upon closely, it is more than just a system for financial expediency; it allows developing countries to set up the security apparatus, for better or worse, that will later allow them to trace transactions from Point A of the globe to Point B, helping to fight crime and money laundering.
Any such transition by developing countries will likely mirror that of India rather than that of the West in hardship and victory.

Demonetization is an inevitable change that many developing countries will undergo; those looking at the Indian model should seek to extend the transition period, to reach out to rural populations with cellphone technology, to mitigate these changes before the changes are well in place and, more importantly, to assess the necessity of reintroducing higher-value currency notes.
Demonetization might be a move in the right direction, but its immediate adverse effects need to be better understood and addressed so as not to harm those one seeks to benefit.

A10_columnist_MercyRadithupaMercy Radithupa is a sophomore in the McDonough School of Business. BUSINESS  OUTSIDER appears every other Friday.

 

 

 

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