Chaotic scenes have continued across India, with businesses fearing closure, farmers prevented from buying seeds for crops, and people dying while queuing to withdraw
cash after Rs 500 and Rs 1,000 notes were dramatically pulled from circulation two weeks ago.
The shock move by prime minister Narendra Modi aims to bring billions of dollars worth of unaccounted wealth or “black money” into the mainstream Indian economy and
Modi said on November 8 that all Rs 500 (£5.88) and Rs 1,000 (£11.77) notes – some 85 percent of all bills in circulation – would cease to be legal tender within hours, but the drive threatens to push Asia’s third-largest economy into a liquidity crisis.
The announcement has thrown India’s cash dependent economy into turmoil and triggered a mad rush among people with undeclared, unaccounted cash to exchange old notes or use them to buy gold and luxury items.
It has also curbed consumption, hurt the agriculture and real estate sectors, and triggered long lines at banks and ATMs as people wait to deposit cash, withdraw money and exchange old notes.
At least 33 people are reported to have died from exhaustion while standing in queues for hours across the country.
There have also been reports of suicide and even a murder in West Bengal over the demonetisation scheme. It has had a disproportionate impact on women, more than three-quarters of whom are outside the banking system.
Daily labourers and informal workers who earn cash incomes – numbering about 482 million according to consulting firm Deloitte – have also been badly hurt.
“The impact on such women is disastrous. They are facing a severe financial crisis,” said Kiran Moghe, national joint secretary of the All India Democratic Women’s Association.
“Women in villages and in tribal areas use only cash, and they scrimp and save to put aside money. Now they cannot even buy daily necessities,” she said.
Women often put aside money without the knowledge of their husbands, building a nest egg for themselves and their children, and as a safety net for emergencies, Moghe explained.
They do not have bank accounts as they do not have the minimum amount required, or because their husbands have an account, or because they lack the necessary documentation, according to a World Bank study of rural Jharkhand state.
In Mumbai’s red-light district of Kamathipura, sex workers who get paid in cash have had to settle for smaller payments and rely on brothel owners to exchange their money, leaving them vulnerable to further exploitation, said Manju Vyas, director at Apne Aap Women’s Collective.
Tax evasion is rife in India, with many small businesses and professionals such as doctors and lawyers asking to be paid in cash to avoid taxes.
Only six people earning over Rs 500 million filed returns in 2012-2013, despite there being an estimated 2,100 ultra-wealthy Indians whose net worth exceeds £40 million.
But the government is cracking down and banks must report anybody depositing more than Rs 250,000 (£2,945) while holding undeclared cash can lead to a penalty of double the tax owed.
Supply chains at small, medium and even larger companies are breaking down, underlining just how much corporate India – not just the shadow economy – relies on hard cash.
The government has acknowledged that the disruption would last weeks because of delays in note printing and technical problems with ATM machines, but Modi has made a plea for patience until December 30.
Politicians said they could not have printed new notes or recalibrated cash machines in advance for fear of the news leaking out.
Businessman Vimal Somani, who owns Rockdude Impex, an aluminium foil maker, has seen sales plunge by roughly a quarter in the past week. He says the cash shortage that followed the demonetisation drive has left his supply chain in tatters – his trucks are stranded with no money for fuel, workers won’t load goods for free, and distributors can’t pay up.
He employs 150 people across India from his base outside Mumbai. Problems at Rockdude go from its network of suppliers to its 1,500 distributors and 150 stockists. Its sales team, spread from Delhi to Nagaland in the east and all the way to the south, is rapidly running short of cash to promote a planned new product.
Revenues have frozen, Somani says, but fixed costs continue, including wages. These are paid online, but his staff cannot get access without being given time off to queue at the bank.
“We are cutting production,” he adds. “If this goes on for two more months, then it will hit us very badly.”
An executive at a mid-sized hair oil manufacturer, who did not want to be named, said sales had slumped as consumers simply stopped buying shampoos and lotions.
Wholesale markets, which operate in cash, are shut. Distributors have no cash.
“We are planning to extend some discounts to the distributors so that they at least replenish the amount of stocks they are selling, instead of not buying from us at all,” he said. “We are cutting production every day.”
In the year to March 2017, the cash crunch is estimated to pull down India’s gross domestic product (GDP) growth from last year’s 7.6 per cent by as much as 4.1 percentage points.
Brokerage Ambit Capital says that it does not rule out a contraction of the economy in the October- December quarter.
Corporate operating profits are tipped to fall by as much as 40 per cent in the current quarter.
Residents ranging from taxi drivers and street hawkers to big consumer goods firms have seen their earnings plummet by as much as 80 per cent in the first week of the swap alone, according to some analysts’ estimates.
For Indian farmer Buddha Singh, who works a small plot of land in the village of Bajna south of New Delhi, the scheme could not have come at a
He and millions of other farmers cannot get enough cash to buy the seeds and fertilisers they need for their winter crops, threatening production of key commodities and hurting rural communities which are only just recovering after two years of drought.
“We can’t buy our full requirements of seeds, fertiliser and pesticides on credit. There is a limit,” said Singh, a turbaned man in his 50s, who tills a two-acre field near the highway running from the capital to the holy city of Mathura.
“We’re running out of time as we’ve only 10-15 days more to plant crops like wheat, mustard and chickpeas,” he added, to murmurs of assent from around 30 fellow farmers sitting under a neem tree and discussing their predicament.
India’s 263 million farmers mostly live in the cash economy, exposing them to the full impact Modi’s move. Delays to the planting season that began last
month threaten to dent India’s agricultural and economic growth, wiping out gains for farmers who, this year, cashed in on decent monsoon rains after being hit by drought in 2014 and 2015.
Farmers who have already spent money on ploughing and irrigation to keep the soil moist can ill afford to leave their land fallow.
Late sowing typically reduces yields and increases the risk that inclement spring weather could damage crops.
“In all likelihood, we’ll not be able to recover our cost of cultivation as the prime sowing time has nearly lapsed,” said Prakash Chandra Sharma, another local farmer.
At the other end of the spectrum, wealthy Indians rushed to make purchases with unaccounted cash soon after the news was announced.
Several luxury retailers stocking brands like Rolex and Dior sent emails to clients stating their stores would be open until midnight that day, according to Indian media reports.
One leading global fashion brand store in Delhi remained open all night immediately after the move was announced, selling merchandise worth more than £120,865 in less than three hours.
Some affluent buyers have reportedly been paying almost twice the market value for gold in old notes.
Jewellers who had shut up shop for the day on November 8 reopened their stores within hours and were selling gold all night, media reported.
Customers lined up outside jewellery stores in Delhi and Mumbai with bags of cash, with one report saying they paid as much as Rs 52,000 (£612) per 10 grams of gold, almost double the going rate.