Pay day or pain day: How world’s fastest growing economy fell down like house of cards


The timing was perfect. With Deepawali just gone by, people were done with the giving and receiving of gifts. Salaries had been disbursed. People had started getting over the festive mood, settling down in their mundane routines.

On the fateful night of 8th November 2016, PM Modi declared a surprise attack on black money, counterfeit currency, tax evasion and cash hoarding. With just an announcement, 86% of currency in circulation was declared illegal.

For decades to come, it will be remembered as the day when the Indian economy came to a standstill, literally. Overnight, the old Rs. 500 and 1000 rupee notes went from money in hand to money down the drain. Overnight, the world’s fastest growing economy fell down like house of cards. Overnight, millions of people were left with just one question, “Where is my money?”

Hailed as a radical and remarkably bold step taken by any Indian prime minister so far, the aim of the demonetisation drive is to wash out black money out of the economy so that all transactions are banked and taxable. This will also tighten the noose around terror financing which flourishes on forged currency notes. No longer will large cash business deals go untaxed and no longer favours be bought. For how long is anybody’s guess, for underhand deals do have a habit of bouncing back.

Since the announcement of withdrawal of old Rs. 500 and 1000 notes, the demonetisation drive has been plentiful with pitfalls and bottlenecks. The hoarders of black money were no doubt left scrambling with their cash, but the thunder actually fell on those who didn’t have any unaccounted illegal money. From foreign tourists to housewives to the salaried, the government’s decision hit hard on everyone. Of all the people, the hardest hit were probably the daily wagers, migrants, farmers and millions more who had no access to plastic money and were living outside the banking system.

The salary week

The first week of December is going to be equally chaotic, if not more, as the first week of demonetisation. Cash strapped banks will be under immense pressure to cater to the increased withdrawals and hectic transactions as people will scramble for cash to pay utility bills, rent payments, staff salaries and household purchases. Fearing more changes in the demonetisation policy, people are panicking and are withdrawing maximum cash from their accounts.

The first week of every month sees the maximum cash outflow from majority of households and so do the banks. The biggest challenge for the Modi government will be to ensure a smooth flow of cash to the banks.

For companies that transfer salaries electronically, via online bank transfers, it will be just another pay day. But business which pay salaries in cash, will be caught in dry wind.

In most small scale industries, constructions and retail businesses, salaries are paid in cash. Such sectors will require huge amounts of cash during the first week. And not just for salaries, small manufacturing units doing business with local vendors will need cash to buy raw materials too.

The only people who will not feel the pinch of salary day will be those black money hoarders who have found a loophole to turn their unaccounted pile of illegal money into white, by paying advance salaries to their employees in demonetised currency.

Demonetisation or not, the first week of every month, witnesses people rushing to the banks to deposit or withdraw money from their accounts. Banking staff will be under immense pressure to cater to the long queues of irritable people who spent most of November lining up for hours to exchange old currency and now to get their salaries.

Prior to demonetisation, withdrawing money was an anytime affair, at any of the country’s 200,000 ATMs. Prior to demonetisation, each ATM could hold Rs. 6.5 lakh. Almost half of them need to be filled up twice a day during the 10 days.

Now with the old currency notes out and new not enough, the road ahead is going to be painful and tiring. ATMs dry up quickly as each now gets no more than Rs. 2.5 lakh a day. Banks are also stretching their staff for overtime to cater to the additional footfall.

As many companies credit salary on the last day of the month, the morning of 30th November saw chaos and unprecedented rush to the banks. Many are setting up additional counters to meet the withdrawal rush and increasing security in anticipation of untoward incidents. The next five days are going to be a test for the government’s efficiency in delivering cash and

Plight of the unbanked

In rural India, uneducated daily wage labourers are still paid in demonetised notes. Majority of these are without bank accounts or no means to visit a bank to exchange their earnings (three out of four people in India do not have access to banks and close to 96% of the population does not use plastic money). Left to the unscrupulous ways of the touts, this section of the society is the hardest hit. For those who do manage to queue up, lose a day’s earning.

Prime Minister Narendra Modi’s Pradhan Mantri Jan Dhan Yojana (PMJDY) is a part of his dream of financial inclusion, to ensure that every Indian household has a bank account.

According to a report by PricewaterhouseCoopers , India’s unbanked population has more than halved to 233 million in 2015 from 557 million in 2011. Despite the promising figures, there are still a whopping 41 million households outside the banking system. If one of the minor achievements of the demonetisation drive was to encourage the unbanked population to open new bank accounts, then it was off the mark.

At a time when banks are struggling to deal with the massive rush, new account openings have taken a back seat as most of the banking staff is busy with deposit or exchange of old currency. Besides, as most of the unbanked population comprises of migrants, these do not have valid permanent address proofs required for opening a Jan Dhan account.

Rural areas, where most of the India’s unbanked reside, have been badly hit. Especially because rural economy is primarily agriculture based. In many parts of the country, November is the sowing season for Rabi crop and most of the purchases, like seeds, fertilizers etc., are made in cash.

If not timely sowed, the produce will not give desired results and the poor farmer will get burdened by debt. Farmers are finding it difficult to sell their kharif crop due to the scarcity of cash. Majority of India’s workforce is in agriculture and it’s reeling in distress. The life line of rural monetary system, the Cooperative banks have been rendered non-functional and have been prevented from handling cash.

Is India ready for a cashless society?

With urban population warming up to the use of mobile wallets and debit cards, a cashless economy is still an alien world to many. Erratic internet connectivity coupled with poor smartphone penetration and an inherent aversion to technology, rural India poses far greater challenge to the policy makers than filling up the ATMs with cash.

Mobile wallets too come with their own risks, fear of fraud and the cost to transfer money to the wallet and then from wallet to merchant. Although people in rural India are using mobile internet, the idea of online money transactions are unfathomable to many.

To a majority of population, whether urban or rural, both banking and internet are a new experience. Hence the reluctance. In a paperless environment, people are sceptical about the safety and security of their money. Illiteracy too hampers the process. People who cannot write their own names, feel lost in the digital world.

For such a massive drive to be successful, the banking infrastructure is far from adequate. In 2014, there were 18 ATMs and 13 commercial bank branches per 100,000 adults – in comparison, the number in Brazil was 129 and 47 respectively. Out of the total 200,000 ATMs, only 18% are deployed in rural areas.

According to World Bank’s Global Findex report, merely 26% of India has internet access, and there are only 200 million users of digital payment services. As compared to other middle-income nations, Indians are wary of digital banking, use of debit or credit cards, mobile wallets etc. Cash transactions are a part of every Indian’s life and wiping out a cash economy will have a major impact on the life of the common man.

Where is the black money?

People standing in bank queues from morning till evening to exchange or deposit the demonetised currency are not the real hoarders of black money. The real owners of black money do not keep cash under their mattresses. They convert their money in to tangible and in tangible assets like gold and silver, real estate and overseas bank accounts.

While the poor keep their cash in pockets, the rich invest its illicit money in real estate, shares, gold and oversees account Only 5 to 6 percent of India’s illicit wealth is estimated to be held in cash components. Demonetisation drive has hit the tip of the iceberg only.

Demonetisation attacks the stock without touching the flow of black money. To prevent the generation of black money after the new currency is in full flow, an effective and accountable tax administration system will need to be put in place. For corporates, stricter and more transparent laws should be implemented to identify practices of under-and over-invoicing, false transactions etc. Individuals should be encouraged to declare assets from unidentified income.

But most of all, the undisclosed funds parked out of the country and other assets should be brought back, as promised by the Prime Minister. None of the names have yet been disclosed and no action been taken.

Unless the real black money is accounted for, the demonetisation derive will go down in India’s history as one of the loudest yet poorly executed move. If handled correctly, India will emerge out of its current economic crises and will continue onward on the digitisation path.

Though highly inconvenienced, the population, in general, has been supportive of the demonetisation drive. As rightly said by the Finance Minister, Arun Jaitley, replacing such a large currency without any social unrest and any significant economic disruption has been an “achievement” so far.