On November 8th 2016, a joke went viral across India’s Whatsapp users: “Tomorrow, a lot of married men in India are going to find out how much black money their wives have.” The US elections of that evening overshadowed another huge political announcement elsewhere in the world – that in 50 days time 86% of India’s currency in circulation would be void.
This demonetization is Prime Minister Narendra Modi’s attempt to reduce bribery and the black economy so that India may shift towards digitalized money transfers, which are more traceable and taxable. Only 2.89% of Indians filed any income taxes in 2013, compared with 45% of US citizens. Although the majority of Indian’s incomes are probably below the tax threshold in the first place, there is no doubt that India’s black market is huge: the World Bank estimated it to be 23.2% of the total economy in 2007.
It’s unsurprising that scrapping the 500 and 1,000 rupee note overnight (worth about £6 and £12 respectively) was a huge shock to India. Nearly 87% of transactions in India use cash, meaning the country is more cash driven than Russia, Brazil and Mexico. A huge government push for financial inclusion drove up bank account holdings from 35% to 53% (an extra 175 million Indians became account holders) between 2011-2014, but the majority of these new bank accounts are empty and only 15% of adults reported using their account to make or receive payments. Crucially, only 39% of account holders in India own a credit or debit card, meaning the remainder would require a bank teller to carry out each transaction. Even online shopping in India is done with cash: about 70% of online commerce is paid with cash on delivery.
Although the government was primarily targeting wealth tax evaders in an attempt to redistribute income, the poor, and particularly women and those living rurally, have perhaps suffered the most. Lower income Indians are unlikely to have their own bank account, and even given 50 days to do so, would struggle with limited education and resources to open one. They might even not be able to reach a bank in the first place, as only 27% of Indian villages have one within 5km. Women also have been particularly effected, as most do not already own a bank account – according to the UN, 80% of women in India did not have access to one as of 2014.
This demonetization has caused chaos throughout India. The Indian Express reported that at least 33 people have died as a result of demonetization, with causes of death ranging from people collapsing of exhaustion after waiting in the queues for the bank, a child dying in hospital as the parents only had only currency notes, and others committing suicide as they were unable to feed their families. Outside of these extreme cases, the rest of the country faced hours of queuing outside banks and ATMs and huge income losses, as customers and employers had no cash to pay workers with. The huge cash shortages haven’t been helped by the government’s failure to introduce the new 500 and 2,000 rupee notes: to make demonetization a surprise, they couldn’t start printing any new cash before the announcement.
Domestic abuse rates spiked in November, with calls to India’s One Stop Crisis Centre (OSCC) – a domestic abuse charity – more than doubling the month that Modi announced demonetization. 50% of the women who received counseling said their abuse was due to troubles to do with demonetization. India has a culture of women stowing away small sums of cash without their husbands’ knowing, in cases of emergencies. In a country where the percentage of work-age women with jobs has fallen by 10% to 27% since 2005 (the largest drop in any country), for many this cash is a lifeline and the greatest source of control and independence they have. After demonetization, many women were faced with the choice of losing their money or handing it over to their husbands.
This isn’t the first time India has tried demonetization, and it very well may not be the last. In 1946, all 1,000 and 10,000 rupee notes were recalled and in 1978, all 1,000, 5,000 and 10,000 notes were. That the country has tried this measure two times already suggests both that demonetization isn’t enough to end corruption and that the new money quickly becomes ‘black money’ again. Yet despite the IMF cutting India’s growth rate from 7.6% down to 6.6%, Modi has held on to most of his popularity, with most seeing demonetization as a genuine stand against tax evasion and the black market. Increased financial inclusion and transparency are of course fantastic goals, and if achieved, would alleviate poverty and increase productivity, but the question is whether demonetisation is worth the price Indians have had to pay.