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Modi’s « notebandi » crippled India’s economy and growth

Categories : Cash connects people, Cash is a social network, Cash is the first step of financial inclusion
January 29, 2018
Tags : Cash, India, Unbanked, Underbanked
Modi's demonitisation has had dramatic consequences on the Indian economy in general, and on the poor in particular.
Communication Team / Equipo de Comunicación

This post is also available in: Spanish

Over a year after Prime Minister Narendra Modi’s demonetization of the Rs 500 and Rs 1000, the country’s balance sheet is looking quite grim. Oxford University Emeritus Professor, Barbara Harriss-White analysed the current situation during an interview for the Madras Courier.

Harriss-White believes that instead of fighting corruption as initially declared, the overnight decision to scrap two of the country’s most popular denominations ended up especially hurting those that already struggle, the poor, and the Indian economy’s backbone: the informal economy. And although this latter victim could make the initiative sound like a success, it’s quite the opposite. Indeed, India’s informal economy – which is strictly cash-based – is The economy, contributing an estimated 25% to 70% to the country’s GDP. “Domestically, the informal economy is dominated by trade and services, some of which are sophisticated but still mediated through verbal contracts […] This flexibility in loaning substitutes for the lack of state social protections”. That can be translated into 70%-80% of credits in rural areas done by the informal economy, generating 26% of GDP. So although these activities are not recorded by the government – and therefore taxes are not collected – they are the foundation of the Indian economy. By crippling cash-heavy activities overnight, Modi brought many activities to a halt. And although things are beginning to stabilize as the government prints out the new Rs 2,000 and Rs 500 notes, the economy is not anywhere near catching up to the shock, and it might never truly be able to make up for the loss.

It is also alleged that Modi’s motivation was not solely driven by a desire to fill the government’s treasury, but also to undermine the cash reserves of opposition parties given the unexpected nature of the measure. “Opposition rallies have been cancelled, will be smaller in size and will have fewer freebies attached.”

What demonetisation has especially done is help digital payment platforms increase revenues thanks to the transaction fees collected via cashless payments. Meanwhile, almost half of the Indian population is unbanked – up to 80% for women – and to exchange the old demonetised notes, individuals were required to have a bank account. This resulted in many poor people losing all their hard-earned savings.

Overall, this “experiment” has cost India a lot as it has caused the economy to slump (GDP is expected to drop by at least 2%), it put the poor in an even more precarious situation and, ironically, has left the wealthy unscathed. The long term consequences could be disastrous for the majority of the population as “many economic commentators, arguing that the wealthy are least dependent on cash and least affected by notebandi, foresee increases in economic inequality.”

To read Madras Courier’s full article, click here.

This post is also available in: Spanish