Banks reopened to long lines and angry customers throughout India on Thursday after the government’s surprise move to devalue high-denomination currency in an effort to fight corruption and so-called “black money”.
On Tuesday the government announced what it called a “strike” against those who keep unaccounted-for cash in India, where many jobs remain in the informal sector and few pay taxes. The country’s reserve bank temporarily shuttered banks and ATMs and voided its large bank notes, issuing a 2,000-rupee note (about $30) as the largest bill today.
Panicked customers lined up at banks to exchange and deposit old notes – sometimes standing in line for hours. Fistfights broken out at petrol pumps when clerks ran out of change; at toll booths operators simply gave up charging and let cars stream through.
Gold and silver prices soared as investors sought to move their money into tangible assets – partly a response to the currency switch as well as a reaction to global uncertainty following the US presidential election.
Indeed, some of those lined up at banks praised the government's move, exhibiting the same populist, anti-elite fervor that drove voters to Donald Trump and Brexit.
“I'm happy about it. The country's rot is at its roots. Now the roots are going to be treated,” said Kalindi Jagdish, 63, an interior designer who designs homes for Mumbai's wealthy and is often paid in cash.
India's Finance Minister, Arun Jaitley, called for calm at a news conference today, reminding consumers they had until 30 December to change their legitimate bills into new currency. The move brings “ethics and transparency” and is a decisive move toward a “cashless” society, he said.
Experts predicted the worst-hit would be wealthy professionals in real estate, doctors and lawyers who are often paid in cash to avoid taxes and stash their money in overseas accounts. Only those with large sums of money “will have to face the consequences under existing laws,” Mr Jaitley said.
Prime Minister Narendra Modi has long made fighting black money a priority – as the country moves to legitimize its shadow economy, change an age-old culture of corruption and bribes and attract foreign investment. A voluntary disclosure program has netted $19 billion so far, a fraction of estimates of the total, which range from $400bn to over $1 trillion.
Dinesh Rana was driving around Delhi on Thursday with a sack full of his boss's money, depositing 49,000 rupees (about $735) in separate accounts at five different banks. Anything over 50,000 rupees would have garnered official scrutiny.
“Rich people are worried,” he said. “They are trying to get rid of cash or spread it around.”
Some economists questioned whether the government's move would be effective in the long run.
Neeraj Hatekar, the director of the economics department at the University of Mumbai, said that the demonetization program will be an effective tool in ridding the system of counterfeit bills - some $20m alone was seized last year in his state, he said.
But it would likely not have much impact on India's black market economy overall – as much illegitimate funds are in real estate or gold.
“Will it shut off new black money that's being created? It won't,” said Rama Bijapurkar, a market strategist and consumer expert in Mumbai. “But as a one-time shut-off it's a masterstroke.”
The impact on regular folk was immediate and widespread. Rural villages whose economies are almost entirely cash-based ground to a halt as villagers scrounged for coins to pay for eggs and their daily vegetables.
Wives who secretly squirreled away hundreds in kitchen kitties - away from the control of domineering husbands – suddenly had to admit their secret stash or ponder opening their own bank account. Modi's government has made a major push to provide bank accounts to those who previously did not have them, but still 233 million remain “unbanked,” Bijapurkar said.
Dashrat Kumar Pal, 40, a steel company clerk and a Delhi resident, said that the lavish wedding party for his niece had been postponed in lieu of a small religious ceremony because the family did not have enough cash to pay the vendors.
“The big party we had planned is called off,” he said glumly. “The cooks, the music band, the florist – all of them want to be paid in cash. Where do we go? What do we do?”
He went on, “Now we are calling everybody and canceling.”
The government’s move was a boon to India's growing online payment industry, which has long operated on a cash-on-delivery model designed to address low credit card use.
After the government's announcement, downloads of digital payment apps have soared.
Paytm, an online payment system, saw a 200 per cent increase in application downloads and 1,000 per cent growth in the amount of money flowing to digital wallets since Tuesday evening, according to Madhur Deora, the chief financial officer.
“The government's decision will structurally change the digital payment behavior of Indians,” said Rajnish Wahi, senior vice president for corporate affairs at Snapdeal, one of the major online retailers.
Suchi Goenka, a restaurateur in Mumbai, said that while she supported the government's plan, it will take time for the country to make the change.
“In India we prefer cash,” she said. “We were brought up that way.”
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