What the government giveth, the government taketh away.
December 22, 2016 11:43 AM   Subscribe

So How is the demonetarisation going? For a start the Police have been kept busy.
How do you think I can pay the workers with a cheque if they don’t have a bank account?" India's small businesses facing 'apocalypse' amid biggest financial experiment in history. Demonetisation revolution hits firms and workers as cash runs out; the next stage – making all salary payments digital.

The sudden withdrawal of 500- and 1,000-rupee notes will batter India’s currency-reliant poor and middle classes, leaving tax evaders unscathed.
The country’s bungling effort to cut down on cash has undermined Narendra Modi’s credibility.
Have policymakers lost their minds? The demonetisation move by the Indian government will not achieve its goals, but it will hurt ordinary people.
Withdrawing 86% by value of the cash in circulation in India was a bad idea, badly executed.
Good news for Bitcoin. (Previous)
posted by adamvasco (22 comments total) 11 users marked this as a favorite
Not widely reported, the damage it's doing to women, especially poorer women.
posted by aramaic at 11:51 AM on December 22, 2016 [7 favorites]

I'm trying to think of a more obvious distinguisher of how high on the economic scale a person is than what percent of their spending is in cash.
posted by Etrigan at 12:20 PM on December 22, 2016 [10 favorites]

Given Modi's extreme conservativism I can't help but wonder if the effect on women was part of his intent here.
posted by sotonohito at 12:27 PM on December 22, 2016 [2 favorites]

Can mefites across India report on their personal experiences? In the domestic media landscape. it's hard to get a gauge of what the true spectrum of reaction and effect looks like. India is a very large country. It's easy for a reporter to collect a dozen anecdotes or examples supporting either disposition towards the measure.

As for me, in Mumbai, I have visited the banks thrice. First time was just after a week of the measure. Spent three hours but could withdraw the full weekly limit. 2nd time was a week later. Spent all of 20 minutes and could withdraw the amount I wanted. Third time was a few days ago. Again, spent 15 minutes in line. It was late afternoon, bank was out of 100s and 2000s. Did get cash, but in 10s and 20s.
posted by Gyan at 12:29 PM on December 22, 2016 [8 favorites]

wonder if the effect on women was part of his intent here.

Or for that matter the effect on the poor.

Holy shit though, what a disaster.
posted by spitbull at 12:30 PM on December 22, 2016 [2 favorites]

Eh, humor is always good.
posted by asra at 12:33 PM on December 22, 2016 [1 favorite]

When I first heard about this last month, it sounded like a deeply stupid idea but I hoped that it had be planned by people who knew what they were doing and remained cautiously optimistic.

Every time I hear more about how this has been implemented, I get a little sadder about the fact that apparently my ignorant first instincts were correct.
posted by sparklemotion at 12:39 PM on December 22, 2016 [5 favorites]

There's so much that needs to happen before you can really start getting rid of cash, and a country with a rural electrification rate of about 75% is very much not there yet. What an awful, awful idea, with the consequences borne disproportionately by the most disadvantaged.
posted by Dysk at 12:54 PM on December 22, 2016 [3 favorites]

As for me, in Mumbai, I have visited the banks thrice.

Gyan, thank you for this, it is helpful to hear from people who are actually affected. Do you mind sharing more about how this experience has impacted your daily life? Do you do most of your transactions with cash (and has the amount you've been able to get been sufficient)? or are you relying on credit cards/cashless transactions more than you used to? Is there anything that you, personally, can't do now that you could before?
posted by sparklemotion at 12:59 PM on December 22, 2016 [1 favorite]

End result is going to be many months of chaos, damage and privation - followed by a solid-and-growing underground economy of people still using the "worthless" paper money because they didn't get it exchanged in time. The number of bills won't be growing, but the number of people realizing that "money" doesn't have to be blessed by the government to work in a community will be.

Husband used to spend time in Jamaica in the 70's/early 80's; said that he'd seen "dollars" that were basically a 1" corner of a bill that were respected as U.S. dollars. India has apparently decided it would like two forms of currency: the stuff you can use to pay your taxes, and the stuff you can use for everything else.

(grumble grumble problems caused by fiat money grumble dammit need a currency backed by the only renewable resource that scales to the population: human labor)
posted by ErisLordFreedom at 1:12 PM on December 22, 2016 [3 favorites]

need a currency backed by the only renewable resource that scales to the population: human labor

Can you point me to something that elaborates on that, I'm curious.
posted by Wandering Idiot at 1:15 PM on December 22, 2016 [2 favorites]

Wandering Idiot, I don't have anything nicely organized. I've been reading books on economic theory recently, including Debt: The First 5000 Years (PDF at the wayback machine) and The Gift (amazon), which was subtitled "Imagination and the Erotic Life of Property" when I read it; the new version is "Creativity and the Artist in the Modern World."

They both point out that money is created by governments for government purposes - not the economic myth of "first we had socialism, then we had barter, then people made money to avoid the hassle of needing to do a 10-person string of exchanges to get what they wanted." One of the firm statements in Debt is that official currency money was made by gov'ts so they could collect taxes.

Any economic book or in-depth article will go into some detail about the problems with fiat money and inflation, including some well-documented historical events. And they point out the problems with resource-based money, like the gold standard, where (1) if you have plenty of the resource, you get weird value fluctuations every time a new mine is opened and (2) you have big problems when your economy grows but the resource doesn't. (Why the gold standard won't work: we don't have enough gold. It'd be ridiculous to say a dollar is worth .025 grams of gold - but if we print more dollars next year, dollars are worth .021 grams of gold.)

There are no labor-based currencies, afaik. Implementing one would be just as disruptive as any other major economic change... among other things, it'd bring to the forefront the issue of currently unpaid women's work in home and childcare. But any high-tech nation that doesn't want a constant inflation-crash cycle for its economy needs to start looking at alternatives, because fiat money only works until the gov't starts printing more to cover its bills; individuals start looking for more stable investments at that point.

Doctorow's Down and Out in the Magic Kingdom posits a reputation-based currency combined with a universal basic income. (The author has admitted this is actually a terrible idea for a real economy.) It's hard to find research, even total speculation, related to alternative currencies.

Tying currency to labor seems obvious to me, and I'm wondering what I've been missing about it, in that governments seem to think that it's more sensible to have something like, "we will invent a currency and call it the $upresto, and one $upresto will be enough to buy a dozen eggs... this year. After this year, that'll change." (That's pretty much exactly what Brazil did, and it worked for a few years and is now having big problems again.)
posted by ErisLordFreedom at 1:40 PM on December 22, 2016 [3 favorites]

It's also having an effect on US universities. As a rough estimate, the number of Indians applying for university graduate programs has collapsed to 1/5th of last year's numbers or lower.

Combine that with the current political climate, and there's going to be a lot of STEM programs taking a hit next year. Which had worrysome implications for my job.
posted by happyroach at 1:43 PM on December 22, 2016 [5 favorites]

Unless you make every hour of labour worth the same (something that's an obvious non-starter) how does a labour based currenacy differ from what we have now?
posted by Mitheral at 6:50 PM on December 22, 2016 [2 favorites]

There are no labor-based currencies, afaik.

Actually there are! Small communities can sometimes make their own currencies work. See the Wikipedia article on time-based currency or look up time banks. I know I've seen a few of these types of local currencies pop up in the PNW but have not encountered any in the wild yet.
posted by Feyala at 7:46 PM on December 22, 2016

Here's a labor-based currency that seems to be successful: Ithaca HOURS
posted by Feyala at 7:56 PM on December 22, 2016 [3 favorites]

My recently-indicted former Congressman was tight with Narendra Modi, just a huge fan, which is pretty much all I need to know about either of them.

When someone as ignorant as Aaron Schock thinks you have great economic ideas, you're in big trouble.
posted by Eyebrows McGee at 8:54 PM on December 22, 2016 [1 favorite]

@sparklemotion : It had a moderate impact during the first ten days. We have been paying our utilities..etc electronically for many years, so no effect there. Groceries were somewhat affected, as in I could not place large orders, since I couldn't exhaust my reserve of small notes. But I had a talk with the owner, who accepted the old notes for a few days. They didn't take cards at that point, but they have started since. Other than that, there were a couple of maintenance purchases that I deferred. I'm neither poor nor run a cash-based business, so personal impact has been modest.
posted by Gyan at 10:06 PM on December 22, 2016 [2 favorites]

@ErisLordFreedom : followed by a solid-and-growing underground economy of people still using the "worthless" paper money

After the new year, those notes can't be deposited in banks. How many people will be ready to carry out a cash transaction where they are receiving old money and giving away legal money? The parallel economy of these notes, if any, will forever be a closed loop. There are a couple of tidbits I know that I could share in a DM about how some rich people/firms I know are still having trouble getting rid of the old notes.


Whatever the net effect of demonetization, the 'lack of planning` criticism is bizarre. The primary means of the measure is shock therapy. That left not much scope for planning such as accelerated printing of new notes. Which would have increased chances of a leak, and defeated its rationale. The choice was to either do it with planning under wraps or not at all.

What the NDA has bungled is the use of ad-hoc improvised tweaks they have applied after November 8. The govt. is monitoring for methods to launder the cash and based on that feedback, trying to suppress said whitewashing. In doing so, they have compromised a basic tenet of governance: consistency and predictability of treatment. The enduring impact of this haphazard behaviour will ultimately depend on the eventual cost/benefit outcome.

Demonetization can't stop the generation of undeclared income. That would require structural changes to the tax code. It can't stop unethical income. That would require a more equitable economy - one that isn't focused on continuous high growth. What demonetization can do is give a jolt to people who have accumulated undeclared income over the years, and in doing so, force them to either take a bath or declare it and bring that money into the fold. Either way, the price signals in sectors such as real estate should become more sane. It also forces many poor people to enter the banking system and integrate them in the formal economy. Their funds aren't tainted but their detachment from the monitored economy does affect govt. planning, utilization of their money, and full participation in the economy. In the normal course of things, governance should be incremental, but if it has been lax for a long time, as was arguably the case under Congress and then the coalition regimes, then a catalyst or two may be required.
posted by Gyan at 11:47 PM on December 22, 2016

"Whatever the net effect of demonetization, the 'lack of planning` criticism is bizarre."

Haven't there been multiple reports of bank branches running out of the new currency? And ATMs needing to be retrofitted to accept the new bills? That sounds like a big lack of planning.
posted by I-baLL at 9:27 AM on December 23, 2016 [1 favorite]

The first is tied to the printing and distribution capacity. Ramping up those commensurately before the announcement or preparing to do so, would have given the game away. Similar rationale for the ATM retrofit. All ATMS across India needed to be recalibrated. You start doing that beforehand and again...

The aim was to catch the hoarders unaware. If that wasn't achieved, the exercise would definitely have been futile. Like I said, it was either do it similar to how it was done or not do it at all.
posted by Gyan at 9:42 AM on December 23, 2016

Delhi ATM queues are somewhat better but still pretty bad. I'm fortunate to live in an area with half a dozen ATMs within walking distance, and it's become a weekly exercise to wander between them to find the one with cash and the willingness to dispense it. I think Tier 2 cities have it a bit easier - I've been in Chandigarh for the past few days and while the number of non-functional ATMs is still high, the ones that have cash have few or no queues. They'll still dispense only Rs. 2000 at once though.

We had to help our cleaning lady open an account so she could deposit her savings, but it's still not easy because the poor and illiterate have a hard time coming up with the KYC documents that banks require. And more so for rural migrants from out of state, as she is.
posted by vanar sena at 10:24 PM on December 23, 2016 [1 favorite]

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