- - Wednesday, January 4, 2017

Indian banks quickly run out of rupees

Wedding planning is always stressful. But Deepak Shoran and Khushboo Majra faced a more particular — and very Indian — problem when organizing their nuptials: finding the cash to pay for their food, music and other matrimonial expenses.

It’s not that they lacked the means. What the couple lacked were physical rupees.

“I remember standing in lines at banks from 6 in the morning until the afternoon and then finding out that they had run out of money,” said Mr. Shoran, an engineer.

The hassles the couple faced while arranging their wedding in Majra, a village in the northern Indian state of Haryana, illustrate how millions of Indians are struggling to cope with Prime Minister Narendra Modi’s unparalleled economic experiment: demonetization.

On Nov. 8, Mr. Modi abruptly declared that the use of 500 and 1,000 rupee notes, which government figures said account for 86 percent of all cash in circulation, would be invalid after midnight that day and new 500 and 2,000 rupee bills would be issued the following week.

Mr. Modi called the measure a “historic purification ritual” for the economy that would put the brakes on the widespread corruption, tax evasion and counterfeiting in the world’s second most populous country.

“I urge all parties and leaders to move away from a ‘holier than thou’ approach, to come together in prioritizing transparency and take firm steps to free politics of black money and corruption,” the prime minister said in a New Year’s Day national address in which he showed no signs of backing down.

But the shock policy has caused chaos among the estimated 75 percent of Indians who still operate in a largely cash-based economy. A 500 rupee note is equivalent to about $7.30. The demonetization was roughly equivalent to removing $5 and $10 bills from circulation. Many rushed to convert the popular notes to smaller denominations.

More than seven weeks after the switch, long lines continue outside the nation’s bank branches, and the supply of the new currency has lagged far behind demand. Economists say the Modi reforms delivered a bigger shock to India’s financial system than government officials anticipated.

“It’s like taking 86 percent of the blood from a person and then forcing him to go run a marathon,” Jayati Ghosh, a professor at the Center for Economic Studies and Planning at the Jawaharlal Nehru University, told the Al Jazeera network.

Mr. Modi has repeatedly appealed to Indians to bear with the problems in the transition. “Cooperate with me and help me for 50 days, and I will give you the India you desired,” he said in Goa shortly after introducing the currency swap.

But the prime minister proceeded to send a series of mixed signals on the policy’s details.

The limit on how many of the 500 and 1,000 rupee notes one could exchange rose from 4,000 to 4,500 rupees per person per day in the first week. It was abruptly reduced to 2,000 rupees about a week later. Then the government halted over-the-counter exchanges of notes altogether, forcing Indians to put money into banks.

In late November, Finance Minister Arun Jaitley announced a 50 percent income tax on funds uncovered in black markets after demonetization. According to government figures, a mere 1.6 percent of India’s 1.3 billion citizens pay income taxes.

Faced with a host of bills, no cash to pay them and vendors who refused to accept checks, Mr. Shoran visited banks throughout Haryana looking for paper money — to no avail. Ultimately, family, friends and neighbors handed over what little paper money they had stockpiled.

Now he is struggling to find cash to pay them back.

“You cannot imagine the pain we have gone through,” said the newlywed, who set the date of his marriage in August before Mr. Modi’s announcement. “It has been a constant trial, and it’s still not over.”

To persuade Indians to use cashless payments in lieu of the retired notes, the government put forth incentives to encourage digital transactions, like an online Christmas lottery.

But half of India’s adults do not have bank accounts, and only 15 percent of account holders use them to make or receive payments, according to a 2015 World Bank report. Only a fraction of Indian small businesses accept credit cards.

Deeply disruptive

Analysts were divided over whether the policy would achieve its goal in the long term, but nearly everyone agrees that demonetization has been deeply disruptive.

Economist Arun Kumar, an analyst in India’s black markets, said Mr. Modi’s policy had disastrous effects.

“The black economy is not affected, but the white economy gets damaged very severely,” he said. “The burden has come to the poor people, whilst the rich save their unaccounted money in property, gold or jewelry.”

On Dec. 13, the Asian Development Bank decreased its growth estimate for India from 7.4 percent in 2016 to 7.0 percent because of demonetization. But the bank still forecasts the Indian economy to grow at a rate of 7.8 percent this year.

Girish Vanvari, who heads the tax office at KPMG in India, was optimistic that the Indian economy would benefit from Mr. Modi’s modernizing reforms. “It will eliminate unaccounted money in sectors like real estate and car sales where Indians pay huge sums — up to 30 percent — in cash,” said Mr. Vanvari, adding that the government would collect more tax revenue.

But Mr. Kumar disagreed.

“Tax collections and the national budget will go down as the government will have to expend more on social services for the poor,” he said.

Online businesses already have benefited from the change, however, said Abhiraj Bhal, co-founder of UrbanClap, one of the largest mobile-based service providers in India.

“Demonetization has bought a large wave of Indians who had never transacted online through credit, debit cards or online wallets to try it for the first time,” said Mr. Bhal.

Swati Bhargava, co-founder of CashKaro.com, a coupon website, was among the losers in the shift.

“We saw a 20 to 30 percent decline in our business in the weeks following Modi’s announcement because cash on delivery was the normal delivery order for half of our customers,” she said.

Cash on delivery is the payment method of choice for poor Indians in particular who have borne the brunt of Mr. Modi’s experiment, said Mr. Kumar. “They are unbanked and only use cash,” he said.

Congress Party politician Ghulam Nabi Azad, the opposition leader in the upper chamber of India’s parliament, recently charged that the pain inflicted by Mr. Modi’s policy was more than financial. He said demonetization had caused at least 84 deaths as a result of lack of care and similar reasons.

Uttar Pradesh lawyer Rajat Raghuwanshi said his sister-in-law’s unborn baby died as a result of Mr. Modi’s policy. While she was at the hospital complaining of pain, she was told to come up with 10,000 rupees in cash for immediate care. Without the money, she waited three hours to see a doctor.

“When the doctors finally did the ultrasound, they stated that the baby had died,” he said.

The hospital didn’t reply to an email request but told the Indian broadcaster NDTV that the lawyer’s accusation was a “baseless rumor that the baby had died due to a nonacceptance of old notes.”

The complaints led the government to grant a handful of exceptions to the new rules. One even mandated banks to honor withdrawals of 250,000 rupees, about $3,700, for families planning weddings.

Mr. Shoran, the groom from Majra, said he took his wedding invitation to the bank manager to show he qualified for the exception, but the manager still refused to give him the cash.

“We were not given any special allowance,” he said.

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