Demonetization in India 2016

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A sign on a counter stating that 500 and 1000 rupee banknotes would no longer be accepted

On November 8, 2016 , Indian Prime Minister Narendra Modi stated during a televised address that from the following day all 500 and 1000 rupees (₹, INR) banknotes (the equivalent of 6.89 and 13.77 euros and 7, respectively) 30 and 14.60 SFr ) would no longer be valid as a means of payment and would have to be deposited or exchanged at the banks by the end of the year. Modi's statement came as a complete surprise without notice. Even the majority of cabinet ministers had only found out about the measure an hour before the address. This currency devaluation affected 22 billion banknotes, the equivalent of around 12 percent of India's gross domestic product and 86 percent of the amount of money in circulation. Modi gave the reason that the fight against black money , corruption and counterfeiters made this step necessary. In order not to give the money launders , forgers, etc. the opportunity to prepare, strict secrecy and the abrupt implementation of the measure were necessary. This demonetization in India , as the drastic intervention in the money economy was called in the media, caused considerable turmoil in the entire Indian economy. Whether the measures have generally been more beneficial or harmful to the Indian economy in the long term has been the subject of controversial debate among economic experts.

procedure

Prime Minister Modi (2015)

At 8:00 p.m. Indian Standard Time, the national television broadcaster NDTV broadcast a speech by Prime Minister Modi. In the address that Modi gave in English, Modi first emphasized the economic and political successes of his government. India is one of the fastest growing economies in the world. On the other hand, India also occupies one of the top positions in the global ranking of corruption. Corruption is hindering the further development of India and international terrorism is financed by money from the shadow economy . The government has long set itself the goal of fighting black money and has already achieved some success. Now the government has decided to take a further step in this direction and implement a compulsory exchange of all ₹ 500 and ₹ 1,000 banknotes. As a result, undeclared black money should be unmasked or devalued.

On the following day of the address, November 9, 2016, all banks remained closed to give them time to replenish the banknote stocks required for the expected mass exchange. At airports, train stations, in hospitals, at petrol stations, as well as at cemeteries and crematoriums, the two banknote denominations were accepted until November 11, 2016, but not afterwards. Until November 24, 2016, the amount of money that could be exchanged directly for cash was limited to 4,000 rupees (55 euros) per person per day. An identity card had to be presented for the exchange. Immediately after the announcement, the amount of money that could be withdrawn from a bank account per day or per week was limited to 10,000 rupees (137.70 euros) per day and 20,000 rupees (275.40 euros) per week. These limits were relaxed in the following weeks. For electronic bank transfers (bank transfers, credit card debits, etc.), as well as for deposits on bank accounts, there was no restriction.

When exchanging their banknotes that had been invalidated as a means of payment, customers received new banknotes in the denominations of 500 rupees and 2000 rupees. The new banknotes were equipped with additional security features. A new 1000 rupee banknote has also been announced for the near future. The central bank announced the goal of reducing the amount of cash in circulation.

Indian citizens who were able to demonstrate that they were abroad between November 9 and December 30, 2016 (with the exception of the direct neighbors Pakistan , Bangladesh , Nepal and Bhutan ) were granted a special deadline. They were given the opportunity to exchange their banknotes at five branches of the central bank in Mumbai , New Delhi , Chennai , Calcutta and Nagpur until March 31, 2017. Indians who lived abroad permanently could do so until June 30, 2017.

Immediate consequences

Long lines in front of a bank branch in Kolkata on November 10, 2016
Queue outside an ATM in Darjeeling ( West Bengal ) in the days after November 8, 2016

The impact of the sudden inflation on everyday life was dramatic. When the banks reopened on November 10, 2016, there were chaotic scenes due to the crowd of people who wanted to exchange or deposit their cash. Long queues formed in front of all bank branches. Since the banks were completely overwhelmed by the sudden onslaught of masses, there were waiting times for days. Poor people in particular were reliant on standing in line at the bank counters, while wealthy Indians often hired other people to stand in line for them. Somewhat better-off people were able to use cash withdrawals from ATMs. However, the availability of bank branches and ATMs is comparatively sparse, especially in poorer rural areas. Until November 18, 2016, i.e. H. a week after the announcement, dozens of deaths occurred across the country, some of them in those long lines due to heart attacks, etc. were collapsed. The main sufferers and burdens of the sudden inflation were the "little people", for example small traders who relied on daily cash transactions to pay their bills. Despite this, the government's measure, at least in its initial phase, was astonishingly popular with the population and met with relatively broad approval. This popularity was based on the widespread opinion of the Indian public that large parts of the country's wealthy upper class were escaping their financial obligations in society through corruption and relationships. Feeling that it was this corrupt elite that was now on the brink of being, the common man was ready to bear the considerable burdens. Only later, when doubts arose as to whether the measures would achieve the desired purpose, did protests increase. Under the pressure of the shortage of money, a brisk cashless exchange economy developed and many small businesses were carried out on credit. Coin was also increasingly used again, although the highest nominal value of the rupee is only 15 rupees (the equivalent of a little less than twenty euro cents). People with internet access or credit and debit card holders switched their payment transactions to cashless online transactions.

Objectives of the measures

Shrinkage and expansion of the circulating money supply in India
date in billions of rupees
Nov 4, 2016
  
 17,742 000000000
Nov 11, 2016
  
 17,645 0(-0.55%)
Nov 18, 2016
  
 14,037 (–20.44%)
Nov 25, 2016
  
 11,643 (-17.06%)
Dec 2, 2016
  
 10,308 (-11.46%)
Dec 9, 2016
  
 9,577 0(-7.09%)
Dec 16, 2016
  
 9,350 0(-2.37%)
23 Dec 2016
  
 9,186 0(-1.75%)
Dec 30, 2016
  
 9,138 0(-0.53%)
Jan. 6, 2017
  
 8,734 0(-4.42%)
Jan. 13, 2017
  
 9,262 0(+ 6.04%)
Jan. 20, 2017
  
 9,629 0(+ 3.96%)
Jan. 27, 2017
  
 9,921 0(+ 3.04%)
3rd Feb 2017
  
 10,245 0(+ 3.27%)
Feb 10, 2017
  
 10,727 0(+ 4.70%)
17th Feb 2017
  
 11,068 0(+ 3.18%)
Feb. 24, 2017
  
 11,395 0(+ 2.96%)
3rd Mar 2017
  
 11,738 0(+ 3.01%)
10 Mar 2017
  
 12,212 0(+ 4.04%)
17th Mar 2017
  
 12,557 0(+ 2.82%)
24 Mar 2017
  
 12,881 0(+ 2.59%)
31 Mar 2017
  
 13,102 0(+1.71%)
April 7, 2017
  
 13,366 0(+ 2.01%)
Apr. 14, 2017
  
 13,646 0(+ 2.10%)
Apr 21, 2017
  
 13,924 0(+ 2.04%)
28 Apr 2017
  
 14,070 0(+1.05%)
Data source: The Indian Express , based on data from the Reserve Bank of India.
Share of cash in gross domestic product according to data from the World Bank (2015)

The monetary policy measure essentially pursued the following three objectives:

  1. Curbing the shadow economy. Substantial portions of the Indian economy take place outside of government controls and regulations. The estimates of how high the share of the shadow economy is in total economic value added vary widely. The World Bank estimated the share of the shadow economy in India's gross national product in the years 1999 to 2006 at an average of 21% of the gross domestic product. People in the shadow economy do not pay direct taxes, but benefit from state-funded facilities (e.g. infrastructure, public order, etc.). Due to the sudden unannounced devaluation, owners of large untaxed cash assets should either be forced to declare them and thus also pay tax, or write them off completely (if they were of criminal origin, for example). Under current Indian law, people who deposit more than ₹ 50,000 in cash at banks are required to provide their permanent account number (PAN), an income tax number . In this way, people with large undeclared assets - according to the calculation - could be identified by the tax authorities and ultimately forced to pay taxes for them.
  2. The fight against terrorist activities and organized crime. These activities were mainly financed by undeclared black money (often in the form of counterfeit banknotes, some of which came from Pakistan). This source should be "dried up" by the currency devaluation. In particular, Maoist rebels ( Naxalites ) in the eastern states were to be hit.
  3. A third objective pursued by the measure was to accelerate the transition of the Indian economy to the cashless economy, i. H. electronic payment management. A study published in 2014 by the Fletcher School at Tufts University estimated the share of cash transactions in total financial transactions in India in 2012 at 86.6%. Most of the transactions in everyday life in India so far take place in the form of cash. Wages and salaries are usually paid in cash, and bills are paid in cash. This is also characterized by the relatively high share of cash in India's total gross domestic product (10–12%), which is significantly lower in other developing and emerging countries. The high proportion of the cash economy in India is generally seen by economic experts as an obstacle to growth and modernization. In previous years, the Indian government had tried with various incentives to induce the majority of the population to set up their own bank accounts and deposit their assets in banks and not, as is traditionally customary, to hoard them outside the banks in the form of cash and various valuables. To this end, the government launched the Pradhan Mantri Jan Dhan Yojana (प्रधानमंत्री जन धन योजना) program (“People's Money Scheme of the Prime Minister”) on August 28, 2014 , with which the opening of bank accounts even by very poor people is state promoted and State guarantees for smaller deposits were given. Many millions of new accounts have been opened under the program. However, analysis showed that many of these accounts either had no deposits at all or only had the symbolic value of one rupee. and thus obviously not used by their owners.

Medium-term macroeconomic consequences

India's economic growth in the first two quarters of 2017 was 6.1% and 5.7% - the latter the lowest quarterly value in 3 years - and thus well below the original expectations. This was at least partially attributed to the turbulence of the banknote devaluation with the accompanying shortage of the money supply (another factor was uncertainties regarding the upcoming introduction of VAT). According to various estimates, the demonetization led to the loss of around 1.5 million jobs between January and April 2017. Mainly due to the increased costs of printing new banknotes, the Indian Central Bank paid only 307 billion rupees (4.8 billion US $) to the Indian government in the current fiscal year - 53 percent less than in the previous year.

Criticism and judgment

One of the main points of criticism was the allegedly poor preparation of the entire operation. With the demonetization, 22 billion banknotes were withdrawn from circulation. The money printing plants in India had the capacity to print 3 billion banknotes a month. In theory, printing 22 billion banknotes would have taken more than 7 months. The Indian Central Bank ( Reserve Bank of India ) had started printing new banknotes a long time ago. However, it was assumed that the newly printed banknotes could in no way correspond to the amount to be withdrawn from circulation. Basically, critics acknowledged the need to combat the shadow economy and corruption. However, the concrete measure of currency devaluation that has been taken is not ideally suited for this, since the Indian economy is still very much based on direct cash transactions. Small business people and traders would be disproportionately affected by the inflation. They would not have the opportunity to suddenly switch all of their businesses to cashless traffic.

The parties in opposition to the Modi government tried to make political capital out of the situation. The Congress and the Left parties (Communists, left-wing socialists) criticized shortly after proclamation of inflation, the large loads that had been imposed on the little people, while Trinamool Congress , Bahujan Samaj Party and Samajwadi Party even called for a complete withdrawal of the measures. Ultimately, the opposition's calculation of fueling the displeasure of the masses and converting it into votes in upcoming elections did not work out. The important parliamentary election in the most populous state of Uttar Pradesh in February / March 2017 was triumphantly won by Modis BJP , whereby other political questions also played a role.

Analysts largely agreed that a major goal of demonetization, namely the removal of hoarded black money, had not been achieved. In its annual report published on August 30, 2017, the Indian central bank estimated that around 99 percent of the canceled banknotes had been deposited or exchanged at the banks and that most of them were back in circulation. This was a far higher percentage than originally expected by the Indian government. Previously, there had been press reports that there had been complex money laundering networks in order to be able to exchange the old banknotes. Some of these were sold at a discount to dealers who then resold them until they were paid into the banks in small sums by quasi-end customers. Large quantities of wages were paid to employees in advance. There were also reports that large amounts of money (more than one trillion rupees) had been deposited without the aforementioned PAN tax number being given.

Finance Minister Arun Jaitey

The former Indian finance minister and opposition politician P. Chidambaram ruled in a tweet that the main goal of forcing people with black money to write it off had "been miserably missed". Chidambaram posed the rhetorical question as to whether the demonetization had not rather helped to whitewash black money.

At a press conference on August 31, 2017, one day after the Reserve Bank of India's annual report was published , Treasury Secretary Arun Jaitley admitted that some of the black money had found its way into the banks legally. Overall, however, the demonetization was a success. The money supply has been reduced, cash transactions have decreased by 17% according to information from the central bank, the digitization of payment transactions has advanced and a step has been taken to integrate the informal economy into the formal economy. Jaitley also stated that the Treasury Department has taken steps to identify suspected illicit money deposited with banks. Operation Clean Money was launched on January 31, 2017 , with the aim of checking 1.8 million bank accounts that prima facie did not comply with the tax return of their owners. More than 300,000 registered companies, according to Jaitley, are under scrutiny and 33,000 straw companies for money laundering have already been identified. In the period between November 9th and December 31st, 2016, more than US $ 120,000 were deposited to 148,000 bank accounts, with the average deposited amount totaling nearly US $ 500,000.

Regarding the goal of counter-terrorism, Jaitley said that the situation in Kashmir and Chhattisgarh shows that the terrorists and Maoists have been turned off by the measure.

Assessment by economic experts

In view of the high economic costs and the hitherto apparently largely unsuccessful goal of unmasking the black money, some economic experts rated the whole operation as a “terrific failure”. On September 22, 2017, ex-prime minister and opposition politician Manmohan Singh , who, as economics minister at the beginning of the 1990s, had driven forward fundamental reforms to deregulate the Indian economy , also spoke up . Singh called demonetization an "unnecessary adventure". If 86% of the cash were withdrawn from an economy, failure was in sight.

Other economists were more cautious. As an example, a financial analyst at the Dutch Rabobank said that it was too early to judge whether the whole action had been useful.

In a report by the World Bank from April 2017, a significantly more positive judgment was made. The fight against the shadow economy is typically always a lengthy process. Above all, the faster digitization is positive, which has probably been significantly accelerated by the demonetization. In the longer term, the transition from a cash economy to an electronic money economy was clearly promoted.

Web links

Commons : Demonetization in India 2016  - Collection of Pictures, Videos and Audio Files

Individual evidence

  1. ↑ Volker Pabst: Modi's surprise attack. In: Neue Zürcher Zeitung. November 9, 2016, accessed September 20, 2017 .
  2. ↑ a b c Volker Pabst: 1.25 billion guinea pigs. In: Neue Zürcher Zeitung. December 1, 2016, accessed September 20, 2017 .
  3. ↑ a b PM Modi Announces Notes Ban In Anti-Corruption Move, Millions Face Cash Crunch. In: NDTV.com. November 9, 2016, accessed October 31, 2017 .
  4. ↑ a b India rupees: Chaos at banks after 'black money' ban. In: BBC News. November 11, 2017, accessed October 31, 2017 .
  5. ↑ Frequently Asked Questions: Withdrawal of Legal Tender Character of the Old Bank Notes in the denominations of ₹ 500 and ₹ 1000 and The Specified Bank Notes (Cessation of Liabilities) Act 2017 & Specified Bank Notes (Deposit of Confiscated Notes) Rules 2017. 26 May 2017, accessed October 31, 2017 .
  6. ↑ Demonetization: 33 deaths since government scrapped Rs 500, Rs 1000 notes. In: The Indian Express. November 18, 2017, accessed September 21, 2017 .
  7. ↑ Indrani Basu: 3 People Have Died Collapsing In Queues In India Because The Government Didn't Think Through A New Scheme. In: The Huffington Post. November 12, 2016, accessed October 31, 2017 .
  8. ↑ Common people most affected by demonetization: Ram Gopal Yadav. In: The Indian Express. November 16, 2016, accessed October 31, 2017 .
  9. ↑ a b worldbank.org (ed.): South Asia Economic Focus, Spring 2017: Globalization Backlash. Washington, DC 2017, ISBN 978-1-4648-1095-4 , pp. 10 , doi : 10.1596 / 978-1-4648-1095-4 (English, online ).
  10. ↑ Friedrich Schneider, Andreas Buehn, Claudio E. Montenegro: Shadow Economies All over the World: New Estimates for 162 Countries from 1999 to 2007 . In: Policy Research Working Paper . tape 5356 , July 2010 (English, online [PDF] For Germany, the share of the shadow economy was estimated at 16% in the same period, for Austria at 9.8% and for Switzerland at 8.5%.).
  11. ↑ Bharti Jain: A year after demonetization, seizures of fake notes see sharp dip. The Times of India, November 7, 2017, accessed November 12, 2017 .
  12. ↑ Modi's demonetization set to cripple Naxalites financially. In: The Times of India. November 12, 2016, accessed October 29, 2017 .
  13. ↑ This Is How Big Note Ban Will Affect Maoist Activities In Chhattisgarh. In: NDTV.com. November 13, 2016, accessed October 29, 2017 .
  14. ↑ Demonetization to hit Maoist activities in Chhattisgarh: Police. In: The Indian Express. November 13, 2016, accessed October 29, 2017 .
  15. ^ A b Benjamin D. Mazzotta, Bhaskar Chakravorti, Rama Bijapurkar, Rajesh Shukla, K. Ramesha, Dhananjay Bapat, Deepankar Roy: The cost of cash in India - part two of a series on the cost of cash around the world. (PDF) Retrieved November 1, 2017 (English).
  16. ↑ Objective of "Pradhan Mantri Jan-Dhan Yojana (PMJDY)". In: pmjdy.gov.in. Retrieved October 29, 2017 .
  17. ↑ Shyamlal Yadav, Jay Mazoomdaar: The One-Rupee Trick: How banks cut their zero-balance Jan Dhan accounts. In: The Indian Express. September 13, 2016, accessed October 29, 2017 .
  18. ↑ Asit Ranjan Mishra: India GDP growth rate slumps to 5.7% in Q1 in challenge for economy. In: livemint.com. September 1, 2017, accessed October 28, 2017 .
  19. ↑ 1.52 lakh casual, 45,000 part-time jobs lost post-demonetization. In: The Hindu. May 3, 2017, accessed November 1, 2017 .
  20. ↑ 1.5 million jobs lost in the first four months of 2017. Center for Monitoring Indian Economy Pvt. Ltd., July 11, 2017, accessed November 1, 2017 .
  21. ↑ a b Yen Nee Lee: India tried to get the 'black money' out of its banking system - it ended up doing the opposite. In: cnbc.com. September 7, 2017, accessed October 28, 2017 .
  22. ↑ Demonetization: Congress and Left stress on inconveniences in all party meet. In: the New Indian Express. November 15, 2016, accessed November 5, 2017 .
  23. ^ Criticizing Demonetisation Hurt Congress And Samajwadi Party In Uttar Pradesh, Says Nitish Kumar. In: outlookindia.com. March 13, 2017, accessed November 5, 2017 .
  24. ↑ a b Simon Mundy, Amy Kazmin, Kiran Stacey: India demonetization fails to purge black money. In: Financial Times. August 31, 2017, accessed October 28, 2017 .
  25. ↑ Appu Esthose Suresh: Demonetization violation? Banks accepted over Rs 1 lakh crore without PAN details. In: Hindustan Times. March 16, 2017, accessed October 29, 2017 .
  26. ↑ Aswin Mannepalli: Is India's Demonetization a Failure? In: The Diplomat. September 18, 2017. Retrieved October 28, 2017 .
  27. ↑ Demonetization has succeeded in its objectives: Finance Minister Arun Jaitley. In: The New Indian Express. August 31, 2017, accessed October 29, 2017 .
  28. ↑ Arun Kumar: Demonetization: now a proven failure? In: The Hindu. September 8, 2017, accessed October 31, 2017 .
  29. ↑ Vivek Kaul: Viewpoint: Why Modi's currency gamble was 'epic failure'. In: BBC News. August 30, 2017, accessed October 30, 2017 .
  30. ↑ Demonetization of an 'unnecessary adventure': Manmohan Singh. In: The Hindustan Times. September 22, 2017, accessed November 1, 2017 .
  31. ↑ Karen Gilchrist: India's demonetized currency finds its way back into the system - but can we still call it a success? In: CNBC.com. September 1, 2017, accessed October 29, 2017 .
  32. ↑ Alekh Archana: Meet the economist who predicted India GDP growth at 5.7% in Q1. In: livemint.com. September 2, 2017, accessed October 31, 2017 .