India's woes continue from bank note withdrawal

By Arthur L. Friedberg

Published: Dec 25, 2016, 3 AM

India announced new notes depicting Gandhi after withdrawing two denominations of the current series overnight, angering the nation’s citizens.

Original images courtesy of Bank of India.

It has been a few months since Indian Prime Minister Narendra Modi startled just about everyone on Nov. 8 when he suddenly withdrew the 500- and 1,000-rupee notes from circulation. Events since then have made at least one thing clear: The procedure has been botched so badly that it is destined to become a case study in how not to do a currency withdrawal and replacement.

The recall of the old notes was announced simultaneously with the introduction of a replacement 500-rupee issue and a new 2,000-rupee note. The claimed purposes were to stifle India’s endemic corruption and tax evasion while also removing counterfeit money from the system. The results were utter chaos. People without bank accounts lost their life’s fortune in what is a cash economy, banks were unable to handle the recall, gold and currency dealers had an orgy of profiteering, and there was an extreme shortage of the replacement notes that is not yet alleviated.

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The paucity of available cash is so severe that the Bank of India’s annual domestic production of 20,000 tons of paper is being augmented next year by the importation of an additional 20,000 tons from, says the Indian Express, as many as nine foreign firms. According to the Express, De la Rue is not among them as it has been blacklisted for security considerations.

But there may have been an ulterior motive — elimination of cash entirely. On Dec. 13, the New York Times said that as a result of the cash crisis, electronic payments are booming. People are getting smart phones for the first time. About 70,000 merchants a day are signing up for a popular mobile payment platform, nearly 14 times the daily rate before November, and transactions on it have increased by 350 percent. The Times added that cash was used in 78 percent of Indian transactions last year as opposed to 20 percent in the United States, but now the number of Indians using electronic wallets is up to 230 million. Prime Minster Modi, according to the Times, “has begun emphasizing the benefits of a cashless economy over the anti-corruption fight.”