I have been learning a little about why the government here withdrew Rs500 and Rs1,000 notes so abruptly (overnight – with no notice.) I can also tell you about the impact we have seen so far on normal people.
So, last week, with no warning, the rupee notes which are most used, were demonetised. That is, everyone was told they now had no value. Cashpoint machines closed, and the only way to change old notes for the new currency was through the banks. This meant that 100 rupee notes soon became scarce, as people needed them. So, even if people had the new bank notes, no one would give them change if they bought something with a higher value note. (Eg. You could buy some apples using a $10 note, but no one would give you any change.)It also meant that no one received tips – which when you’re very poor, matters. So, why did the goverment do this?
There are a whole host of rumours on social media in India, most of which seem to be untrue. There seem to be several different reasons, but two main ones are often mentioned: to stop tax evasion, and to stop money that terrorists/criminals are printing.
India is largely a cash based society. Lots of people have no bank account, they are paid in cash, store their wealth in cash and pay others in cash. This means there is huge potential for tax evasion. A high proportion of the poorest people in India run shops or market stalls. These are automatically taxed ( you pay a ‘market tax’ to have your stall in the street.) So, the poor people are paying tax, even though their income is very low. However, the richer people, those who own businesses, often deal only or partly, in cash ( a bit like plumbers in the UK!) so they have the ability to pay no tax. Which means the government is losing vast amounts of income. This isn’t fair. The vendors who I listened to, approved of the government’s decision, even though in the short term, it made their lives very difficult. It was forcing people to open bank accounts, which enabled the authorities to track cash and stop tax evasion.
India also has a lot of ‘black money’. This is counterfeit money, produced by terrorists and criminals, which has begun to flood the market. One report I read said that terrorists are using counterfeit money in India to fund their campaigns. By withdrawing the currency quickly, with no notice, the government stopped these people from converting their money into gold or other assets. The only way to exchange old currency for new money is through the banks, which criminals and terrorists don’t want to do as they are more likely to be caught.
One report I read said that in India, property is also bought partly for cash. The current currency crisis ( bit of alliteration there) means house prices will probably drop, making them more affordable for the less wealthy. This will lead to an increase in building work, which will produce more work for labourers. Not sure if that’s true, or wishful thinking…
For normal people, this is a difficult time. When we visited the slums in the East of New Delhi, the women were complaining (and laughing) because all their secret cash had now been exposed. They told me that wives tend to hide money, so their husbands cannot drink it. They have now had to reveal all this hidden money, so it can be changed by the banks, which means their husbands now know they have it and can take it from them.
People are not buying cheaper goods, they are not giving money as tips, which impacts the poor people. They also complained that while they are queuing at the banks, they are not working, so are losing pay. Some people pay others to stand in line for them, but this caused disputes too, with those people who were losing work saying it wasn’t fair. If they needed money, people would exchange it for them, but at a bad rate, so they made a loss they couldn’t afford.
The queues outside the banks are getting longer. We saw one line begin to disintegrate, with people at the front trying to push past the guards and shouting. It could so easily turn to riots. Every bank has a guard on the door, holding at least a stick, sometimes a gun. It’s tough to be poor in India. I hope this doesn’t make life even harder.
Thank you for reading.