The move and its effects
The evening of Nov. 8, as the American presidential election was beginning half a world away, President Narendra Modi announced that all current 500 and 1,000 rupee notes would be taken out of circulation beginning at midnight that night.
The move made the notes immediately void, save a limited exchange at banks until the end of the year, and inspired hours-long line lines outside of banks across the country for the weeks to come.
Every newspaper in India became filled with the stories of people affected. From the housewife who couldn't wait in line for the hours it took to reach the counter because she had to take care of her children and mother in law, to a homeless girl who was asked to break large bills with the smaller notes she had begged for.
Some of the more fortunate were able to act quickly to rid themselves of large amount of the soon to be void notes. A man in Delhi allegedly purchased 1,200 Rolex watches in cash and the Delhi Gucci location stayed open until midnight the night of the announcement and brought in $5 million USD in sales rather than the usual $500k it sees on a Tuesday. On the non-luxury side of things, many people rushed to buy airline tickets to later return them for cash. The government put an end to this practice the next day by making all airline tickets non-refundable.
The move eliminated 86 percent of the hard currency in India and there was no shortage of people affected. Those who had the time to exchange at banks were met with strict paperwork to fill out and a 4,000 rupee exchange limit. Lines stretched out of banks and down streets. People waited the majority of the day to reach the counter, with entrance and transaction not guaranteed.
Due to poor interbank infrastructure, competing banks had not linked their systems to track who had already met the limit. Many exploited this to exchange as much as possible at multiple locations.
Some banks began inking the index fingers of those who waited in line. This was in effort to make sure those who had waited were protected against anyone who attempt to skip the line and keep people from heading directly to another bank.
ATMs helped ease the burden of the individual banks for the individuals who just needed cash rather than to exchange, but even those lines stretched down the sides of buildings and constantly ran out of money.
This demonetization move came, as announced, as a way to combat a rash of counterfeit notes and to gain a grasp on the black money circulating throughout the economy.
The counterfeiting finger was pointed at Pakistan. It is suspected that smaller bills are bleached in order to print larger denominations on top of the blank notes.
The other reason, to combat shadow economy activity, is a double edge sword. Shadow economies, or transactions that happen without record or taxes paid, exist under every society with taxes. The size of which is dictated by the efficiency of the economic and monetary policies being implemented.
In an effort to stamp out untaxed business activity, officials have actually harmed those who keep money out of the banking system, which slowed the economy, in the midst of the booming wedding season no less.
Whether or not the quick rip of the bandage that this announcement was could be considered necessary, the ruling Bharatiya Janata Party (BJP) have recently reported that tax collections are up 258 percent compared to a year ago.
Everyone had a theory as to why the current administration did what it did. Whether it was accepting the stated reasons by the ruling BJP or slight conspiracy stories. Theory were put forth that Modi was attempting to cut the funding of black money to his political rivals in upcoming elections and concealing the announcement behind the election news coming from the United States.
On the morning Nov. 10, two days into the abrupt demonetization of the largest bills in India, six 1,000 rupee bills were slammed on the counter of our hotel as we walked away, not realizing the extent of what was happening in the country.
A couple I was with needed to pay their bill of 5,900 rupees but the hotel could not accept cards of any type. Only cash. And now, only 100 rupee notes. The staff was stalling on whether or not they could take our large bills, instructing us to exchange them for smaller bills. As this was 9 a.m. on the second day of the bank closures, in the small town of McLeodganj, there was no chance of finding enough people to exchange with before our ride to the airport needed to leave.
This is a direct outcome of running a small business in a cash-based economy, where there are no back up plans for a policy change of this magnitude.
I exchanged hundreds of USD for INR mere hours before the announcement. My combined company and I were stuck with more than 40,000 rupees in the recently abandoned notes when we were made aware. For two days after the announcement, the banks and ATMs across the country were closed by government mandate prepping for the coming days and stocking to the brim with 100 rupee notes.
Back in Delhi, our driver took us from the airport to a very nice hotel in order to exchange money. This was our first encounter with, what would later be referred to as, “White/Western hospitality” as we were escorted to a separate counter down the hall to exchange. There were only two people in line, and the exchange still took nearly an hour.
A few days later, a connected friend of a friend allowed us to unload 20,000 rupees in large bills for two bricks of stapled 100 rupee notes. In what felt like the shadiest transaction of recent memory, there was a meeting table, an exchange of envelops, and a hasty handshake before walking away and never looking at each other again.
Punit, the interesting young man who ran the hotel I stayed at in Jodhpur, stated at check in that he could take a few 500 notes but had changed his mind by the next day. His partner had taken 40,000 rupees ($586 USD) to Delhi the weekend before and was denied outright the opportunity to deposit or exchange them. This killed their income for the last month.
A man on a train from Jodhpur to Jaipur exchanged one of my 500 notes just out of kindness. I bought a new bag solely because the dealer would take the older bills. Hostels and hotels managed to bring themselves to accept one or two of the larger denominations. Slowly, I was ridding myself of the cash that otherwise would have been easy to spend.
In my fifteen days in India after the announcement, it took thirteen to get rid of every large bill that I had received hours before their demise. This was accomplished by a combination of legit transactions, kindness, and luck.
What my experience doesn’t show is that of someone without the privilege of being able to skip a day-long line or of someone who runs a business and is now unable to realize any profit for their services. I’m not someone who earns 1,000 rupees a week who kept their savings in cash and is now finding the time to spend all day in line so that saving wasn’t in vain.
It's hard for me argue against a move that actually will benefit the country in the long term, but the potential short term effects on a sizable part of the country's population could prove disastrous. The move needed to be a surprise in order to accomplish a large part of what it was intended to do, it's just the unfortunate circumstance that India has remained a largely cash based economy for so long which compounded the negatives.