Bangalore, India – On November 8, as the world waited anxiously to find out whether Hillary Clinton or Donald Trump would be the next president of the United States, in India, a radical economic decision was announced by Prime Minister Narendra Modi.
The decision: that 500 ($7.30) and 1,000 ($14.60) rupee notes – about 86 percent of India’s currency in circulation – would no longer be considered legal tender. The move would come into effect less than four hours after Modi’s announcement.
It has been described by Lawrence Summers, the former US treasury secretary, writing in the Financial Times, as “the most sweeping change in currency policy that has occurred anywhere in the world in decades”.
The rationale for the decision, the government explained, was a war against unaccounted cash, known as “black money”.
The ban would counter “anti-national and anti-social elements”, Modi said, and combat the widespread use of counterfeit currency and illicit income.
“[These] will become mere pieces of paper,” Modi said.
To reimburse those with the now-useless currency, Modi announced a period of 50 days, in which the old notes could be exchanged for new 500 rupee and 2,000 rupee ($29) ones.
He framed the policy in terms of a national spirit of sacrifice. Coming soon after Diwali, Hinduism’s most important festival, the process of demonetisation was described as a new “festival of honesty”.
“For a few days,” Modi said, “we can all bear some inconvenience.”
Initially hailed as a masterstroke by many in India’s upper and middle classes, it seemed that Modi, who campaigned in 2014 on an agenda of economic transformation, was finally delivering on his promise.
It has proved to be anything but, however, as it quickly became clear that the policy was poorly thought out and its execution chaotic.
At the time of the announcement, only a fraction of the replacement notes had been printed. Moreover, the new notes were smaller in size than the old currency, which meant that the approximately 220,000 cash machines across the country would have to be modified. As of Thursday, December 1 about 90 percent of the machines had been recalibrated, but many are running empty, according to the Hindu newspaper. Banks were ordered to end over-the-counter exchanges from November 25, with people now expected to deposit their banned notes by the end of this month.
There are concerns, too, about the logic of a denomination like the new 2,000 rupee bill, given that the high-value notes were seen to be fostering corruption.
The ramifications of the policy on the ground have been reflected in scenes of chaos, with Indians queuing for hours outside banks and cash machines.
As consumer spending has fallen, usually bustling markets in India’s cities and towns have worn a deserted look.
India’s vast informal economy, almost entirely dependent on cash, has been the worst hit, putting the marginalised and economically vulnerable – farmers, daily-wage labourers, street vendors – at risk.
As a severe cash crunch took root, many of these people at the bottom of the economic ladder were skipping meals and falling into debt. Small and medium-sized businesses are also struggling.
Mohammed Iqbal, 30, who runs a mobile accessories shop in Bangalore’s City Market, said his revenue had shrunk by as much as 80 percent.
“I used to make 4,000-4,500 [rupees] a day,” he said. “Since the note ban, I’m struggling to make even 700.”
As his sales sank, Iqbal found himself unable to pay wholesalers. Two weekends ago, short of supplies and dogged by a lack of customers, Iqbal shut his shop for two days, queuing for hours outside his bank and neighbourhood cash machine in an attempt to restore some liquidity to his business.
“How could Modi do this without proper planning?” he asked. “I am worried about my rent and the school fees for my three children. How will we survive without cash?”
The long queues outside banks posed a dilemma for Iqbal – whether to spend time in his shop or queuing.
“It’s a lose-lose situation,” he said.
The has also been a cost in human lives. More than 50 deaths linked to demonetisation have been reported. Elderly people have died of exhaustion waiting to withdraw cash. Bank employees have collapsed from overwork.
There have been stampedes outside banks and cash machines, resulting in at least one death, that of a 65-year-old man in Uttar Pradesh.
India’s Supreme Court two weeks ago expressed concern and warned of riots if the situation didn’t improve.
K Nataraju, 56, a fruit vendor in KR Market in Bangalore, used to make 500 rupees a day selling watermelons, oranges and sweet lime. After Modi’s announcement, his sales have fallen to an average of 100 rupees ($1.45) a day. Like the overwhelming majority of poor Indians, Nataraju has no bank account.
Despite the hardship, he remains supportive of Modi’s move.
“Black money will come out,” he said. “Rents will come down, things will become cheaper for us.”
Ajay Kumar, 43, a marketing professional, speaking on November 20, had been in a bank queue for more than two hours. It was the third time he had done so in the past week, Kumar said, but he was full of praise for the Indian prime minister
“Modi has shown he is a strong leader,” he said. “Sometimes we should be ready for a little pain for the larger national good.”
Prabhat Gowda, a taxi driver, said his income had fallen by more than 60 percent. He drives a cab for Ola, a rival service to Uber. “I was earning 4,000 rupees a day,” he said. “After the move, my income has come down to 1,500.” In India, mobile taxi services still conduct a substantial chunk of business in cash.
Demonetisation had caused stress in Gowda’s life in a very personal way. On November 15, a week after the announcement, his daughter had fallen seriously ill. When he took her to the hospital, the cashiers refused to accept the old notes as payment for her treatment. (Though hospitals had been exempted from the demonetisation ban until November 24, and ordered to accept old notes, there have been widespread reports of private hospitals openly flouting the ban).
Gowda eventually had to ask for help from a neighbour, who allowed him to use his credit card to pay for the treatment. “It was all the more humiliating,” he said, “because I had the money for my daughter’s treatment. Before doing this, Modi didn’t think of the poor, the old and our children.”
In a strong editorial, the Economist said Modi’s “perceived need for secrecy (to take cash-hoarders by surprise) fed into the innate sense he has of his own infallibility and his misplaced faith in his technocratic skills.”
Kaushik Basu, a former chief economist at the World Bank, said in an op-ed in the New York Times that demonetisation was likely to cause the economy to nosedive. “Demonetization may have been well-intentioned, but it was a major mistake,” Basu wrote. “The government should reverse it.”
Assessing the impact of demonetisation four weeks later, TN Ninan, the editor of the Business Standard, wrote that Modi’s move “at this stage looks like a bad idea, badly executed on the basis of some half-baked notions.”