India’s Botched War On Cash

India is in the throes of an unprecedented social experiment in enforced digital disruption, and the world has much to learn from it.

Prime Minister Narendra Modi launched a surprise in early November, demonetizing 500 and 1,000 rupee bank notes. Modi’s war on cash is not without international precedent: Singapore, for example, withdrew its largest currency recently; the European Central Bank eliminated the 500-euro bank note; AND South Korea plans to eliminate at least all coins by 2020.

And yet India’s initiative had the potential for chaos. Here’s why: the government effectively took 86 percent of cash out of circulation in an economy that is close to 90 percent cash-reliant.

One of Modi’s strongest motivations for this action was corruption — to expose undeclared “black” money, i.e. income illegally obtained or not declared for tax purposes. But the government may have failed in meeting this objective. As of Dec. 3, about 82 percent of the demonetized bills, amounting to about $185 billion, had been deposited in bank accounts and validated (or legitimized after any additional taxes owed are accounted for), according to a Bloomberg report. In other words, very little of the estimated $2 trillion black money estimated to be stashed overseas has been captured.

In the meantime, retail and wholesale markets have stalled around the country. Supply chain transactions, real estate deals and even weddings and funerals have been frozen. Consumers are coping with lines that are frustrating even for Indians used to standing in lines or waiting for basic services. People up and down the income spectrum are dealing with changing cash withdrawal policies and empty ATMs. The nation’s status as the world’s fastest-growing big economy has been severely imperiled, and its currency is at risk of being further devalued. The situation is made worse by prospects of a strengthening dollar after the U.S. election.

Sounds bad, right? But there is a question that hasn’t been asked: Is there a digital upside to this crisis?

A digital idealist might argue that the demonetization move is a welcome shock necessary to get a cash-intensive society weaned off its addiction and onto modern systems of digital payments. Indeed, since the chaos erupted, the prime minister has tweeted: “Time has come for everyone, particularly my young friends, to embrace e-banking, mobile banking & more such technology.” He has urged the other side of the market to digitize as well: “I want to tell my small merchant brothers and sisters — this is the chance for you to enter the digital world,” he said in Hindi on television, encouraging mobile banking applications and credit card swipe machines.

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