The government’s decision to demonetise currency has hit India’s poor, day-wage earners particularly hard.
New Delhi, India – On November 8, 2016, India’s Prime Minister Narendra Modi in a shock decision declared all 500 and 1,000 rupee notes to be “worthless pieces of paper” from midnight onwards. This surprise demonetisation sucked out 86 percent of cash from circulation, ostensibly in an attempt to flush out unaccounted wealth, or “black money”.
More than one billion Indians had less than eight weeks to return all of their old notes. For the nation’s largely cash-based society, this unprecedented move induced a period of chaos. Banks scrambled to keep up while lines trailed out their doors and around street corners. Life’s basic daily transactions screeched to a standstill as people struggled to withdraw cash, causing immense stress and even death in some cases.
The country’s finance ministry’s recently published Economic Survey 2016-17 admits that the demonetisation caused short-term damage in the form of “job losses, decline in farm incomes [and] social disruption, especially in cash-intensive sectors”. It also concedes that the official GDP underestimates the costs of demonetisation.
However, the Survey is banking on long-term benefits, such as “reduced corruption” and a more formalised economy, which could lead to a “greater GDP growth” and “greater tax revenues”.
Nearly 90 percent of India’s industries are in the informal sector, where transactions are overwhelmingly conducted in cash.
But it remains to be seen if the demonetisation really reduced corruption and whether black money hoarders were truly affected by the policy and will be deterred from tax evasion and other illicit activities in the future.
Analysis of the Reserve Bank of India’s published data suggests that 96.5 percent of old currency, about 15 trillion rupees ($2.23bn) has returned to the system.
With almost all of the recalled notes now accounted for, it seems that those with black money either deposited their cash honestly, risking investigation from tax authorities and possible prosecution, or they invented more creative ways to disappear their untaxed wealth.
Disposing of cash, quickly
“As far as my business is concerned, we were never affected, nor are we going to be affected,” says Sunil*, a young businessman with garment factories on the suburb outside of New Delhi. Though he had stored hundreds of thousands of rupees in untaxed cash, he claims demonetisation left him without any significant losses.
When he first heard word of the demonetisation decree, he was having dinner with a friend at his parents’ home. Stressed about what this decision would mean for them, they drank through two bottles of whisky that night. However, it was not long before Sunil discovered that there were several solutions to his problem.
He contacted his suppliers and purchased fabrics in advance, all in 500 and 1,000 rupee notes worth $7.4 and $14.8 respectively. He said that for him, this was “the main source of getting rid of old currency notes”.
Of Sunil’s 400 employees, many are low-paid tailors and labourers that normally receive cash payments. He decided to give them all hefty cash advances, also in old notes.
This appears to be one of the most common methods to dispense of unaccounted currency.
Uraaj*, a casino manager who was sitting on a substantial stack of untaxed cash, says he paid the trusted members of his house staff six months in advance as one way to dispose of his money.
In situations where there are pronounced power dynamics between employers and employees, it can be difficult for a labourer to refuse advance payments. “It’s actually like indentured servitude. You are kind of sugar-coating it when you say, I’m paying you in advance for three months,” says Udayan Baijal, a Delhi-based filmmaker.
“People who already had [film] projects lined up had a very good opportunity to get rid of their old notes,” claims Baijal. “They paid their crew for projects that were still to happen in the cash they had lying around.”
There is always the possibility that an employee could run away with the advance payment. Sunil finds this highly unlikely in his situation because many of his tailors have been with his company for years. Moreover, he says, “If [a tailor] leaves me after 10 days, I know where he is, I know his hometown, I know his address. I can just go and catch him.”
Suyash Rai, a Senior Consultant at the National Institute of Public Finance and Policy or NIPFP, says that this method of laundering cash is so widespread because “90 percent of employment is in the informal sector”.
Additionally, he argues that most of these labourers would not report their employers.
“You have a person whose entire livelihood is dependent on this business. Do you think that they really want it to shut down? No. That’s the reality of India. That’s the way things work. The government should have known that’s the way things work and responded accordingly.”
Shuffling cash to one’s low-wage earning employees was not the only way to get rid of black money. Because the tax authorities would not flag deposits under 250,000 rupees ($3,700), Sunil chose a few of his trusted senior managers and gave them each around 200,000 rupees ($3,000), which they would gradually return to him over a few months.
Some people seized the opportunity to pay off debts in cash. Ramya Pothuri, a 20-year-old singer-songwriter from Mumbai, had not received payment for months from the restaurant where she performs weekly. After demonetisation, the restaurant manager “dumped 40K on [her]” in old notes.
“At first, I was like, no,” she says, “because I didn’t want to go to the bank and stand in that line. But I knew that if I didn’t take that cash then, it would take ages for me to get paid”.
Other black money hoarders paid professionals to change their currency. Ashish*, who works for a political party, claimed he sent 3 million rupees to his contact within a bank, who exchanged the currency for a 35 percent commission.
The poor suffer more than the rich
Indians with black money found a variety of ways to funnel their 500 and 1,000 rupee notes, worth about $7.5 and $14 respectively, inconspicuously into the system. Even though many people incurred some losses in paying a commission to exchange their notes illegally, in most cases, this hardly made a dent in their overall income.
“From more than 23,000 tax raids conducted [since 2006], if you put all the data together, what you find is that less than 5 percent [of undisclosed income] is actually in cash form. All other parts are in the form of a house, or gold, or an offshore account, or shares held through another person,” Suyash Rai, from the NIPFP, explains.
Even if demonetisation were completely successful in destroying cash holdings of black money, the overall impact on these individuals would be marginal.
“You have to think about welfare loss,” says Rai. “For a person who loses five percent of his huge wealth, his welfare loss is negligible. But for a person who loses 20 days of wage… [demonetisation] has increased the unpredictability [of work], and made the incomes even smaller.”
Rukhsar Ahmed, a 22-year-old Delhi farmer who lives on the bank of Yamuna River, said that because of the cash crunch, she and her community had to sell crops at a quarter of their normal price.
“The life of an urban farmer doesn’t yield much anyway,” she says. “But this was a bad stretch.”
The difficulty of withdrawing cash also affected her family. She says her father fell sick after waiting for hours in an ATM line. One day, when she ran out of cash and could not withdraw any more, she and her three-year-old daughter went hungry.
Although Rukhsar assumes that the politicians behind demonetisation must be corrupt, she maintains faith that perhaps this policy will invoke change.
“It’s obvious that the poor suffer more than the rich,” she says. “But let’s wait and see what [Modi] does. He must have thought this through. If we don’t trust the government, what will change?”
This persistent faith in authority is ironically pervasive among those most badly affected by demonetisation.
However, Sumati Ganesh, a single mother of three, has no such faith. Holding a number of jobs as a domestic worker, she “had to shuttle between the banks and taking care of [her] kids, and for a while [she] could not buy any food”.
She is saving up for a house, but she could not make payments to the builder because he was demanding cash. She expects that he has long been a black money hoarder, but that he will not suffer from demonetisation.
“He has lots of cash,” she says. “But he will have people to deposit it for him.”
Unlike Rukhsar, Sumati has no trust in the government, particularly regarding their campaigns to end corruption.
“Don’t all these people run in the same circles?” she asks. “The people that have money were not affected by this, but the lives of the poor stopped. The country runs on cash, they can’t just cancel the whole system or change it without asking. If they can make policies, they should also know the people they are making them for.”
In Prime Minister Modi’s New Year’s Eve speech on demonetisation, he declared that Indians “have demonstrated to the world an unparalleled example of citizen sacrifice for the brighter future of a nation”.
But will Modi’s decision and the Indian people’s sacrifice really lead to a brighter future?
“[Black money] is gonna return to the same amount,” states Sunil, the businessman. “There are loopholes. In India, there is a loophole for everything.”
Rai is waiting for government bodies to release all the official data. In the meantime, he doubts the success of this policy.
“I feel no problem if the government or any social leader makes a call for people to rise up and fight a problem for the nation. But that is conditional upon one basic thing. It should solve the problem.”
*Names have been changed to protect identities.