It has been a year since the unprecedented changes in Indian currency. Although Hungarians may not be strangers to abrupt changes to things they build their lives on, like the attacks on private pension funds, it’s encouraging to see how people in other parts of the word deal with situations like this.
On the 8th of November 2016 Indian prime minister Narendra Modi declared that the 500 and 1000-rupee notes are going to be scrapped overnight, to combat black money. Because of this, widespread panic ensued, resulting in hours-long queues at banks, post offices and ATMs.
The reason for this sudden change in policy was to combat the huge hoards of black money some have amassed during the years, and to begin the transition from a cash-based economy to a digital one.
It all began when the Indian people elected their current PM, Narendra Modi in 2014. He promised to fight black money and corruption, which constantly hinders economic growth in the country. Black money is “Money that wasn’t taxed, and is kept in cash-stashes”, says Prem Sunny, a businessman from India.
He told me that the actions of the government mostly affected the lower classes, because “The florists, small business owners, labourers live their lives on a day-to-day basis. They use what they earned today and spend it on stuff for tomorrow.” These people, if they can, stashed some money in higher denominations around their houses for rainy days. “That’s why India wasn’t hit hard by the crisis in 2008. Most people don’t trust banks with their money, so almost everyone had some for the rainy days.”
These people had to exchange their 500rs and 1000rs notes, and they only had 50 days to do so. Overnight, their money had lost all it was worth in stores, so the masses rushed to the banks to exchange their money to smaller notes.
“The problem was, even though the government issued a new 2000Rs note, these weren’t printed and distributed in huge quantities, so the cash machines quickly ran out of notes. The wealthy got their notes exchanged by their account managers in their banks, but everyone else had to stand in line. Also, there was a 4000Rs limit for exchange until the 24th, and that really made things harder.”
The plan was to “take people into the system, and potentially find owners of black money”, and tax them. The government wanted people to open bank accounts and declare their black money. People who wanted to admit to depositing black money had one month to do so, and they had to pay 50% of the whole amount in taxes and levies, and, according to ndtv.com, “25 per cent or rest of the black money that’s being converted will be used by the government for four years in a special new fund that will be called the Pradhan Mantri Garib Kalyan Yojana and will be used to fund welfare schemes. No interest will be paid to the owner for this.”. The owner has initial access to 25% of the original amount.
I’ve asked Sunny what were the immediate effects on the population. He told me that “after the plan was declared, at around 8pm a lot of stores opened up till 3 in the next morning, and people rushed them to spend their high bills”. Apparently, people spent a lot on jewellery and gold, on cars and real-estate. “A guy came into my (jewellery) store and asked what can I get him for a huge amount of cash. They weren’t interested in ornaments, but in diamonds and other small items, that are very valuable.”. Also, a lot of small businesses had to close down especially those who sold perishables because, firstly, nobody new how to verify the new notes, and secondly their goods perished because there were no one to sell them to. “Some people committed suicide because their business was ruined.”
It was not only the sale of gold that spiked, but also the credit card usage as well. “Usually, in India most stores would rather take cash than card. There were system errors all over. They took money from the cards but somehow wouldn’t deposit it in the sellers account. They would only get their money back in a week or so.”
Some people couldn’t buy food, or medicine, “it affected the medication and normal life of people.”
So how did they manage to “stay afloat”? “In some cases, it was like natural disaster reliefs. Contractors would pay their labourers early so they can get food. People helped others.”
According to Forbes, there were around a 100 deaths in the queues.
Of course, the rich and powerful weren’t really affected. They would offer the poorer people to exchange their money through their back channels for a small fee, or would take advantage of their employees and use their daily limits to exchange more than 4000Rs a day. “You only needed to fill out a form and have some copy of an ID. If you had 100 employees, you could convert a lot in one go.”
When I asked him whether he thinks it worked or not, he is not sure. “On the one hand, there are still a lot of black money and fake money out there, even though a lot has been converted”-according to official reports, they planned to scrap 17trillion rupees worth of notes, and they say 99% has been handed in. “It’s probably not true. Probably lots of fake money was exchanged as well, so there are still some notes out there.”- “but on the other hand, there are always loopholes for the wealthy, and the “small people” suffered a lot.
We can’t tell if the change of policy was effective or not in such a short time, we’ll have to see the long run. This really is a two-sided story, because there are some improvements, but change rarely happens overnight. We’ll see.