India’s economy in chaos after dropping of bank notes

India's demonetisation woes continue, nearly seven weeks after prime minister Narendra Modi announced the surprise withdrawal of high-currency notes on November 8th.

Millions of frustrated people continue queuing up daily for hours outside banks across the country to withdraw paltry amounts of their own money, severely limited by the federal fiat, following derecognition of 500 rupee (€6.80) and 1,000 rupee currency notes.

Mr Modi declared that demonetising these high-value notes – constituting 86 per cent of all money in circulation – would neutralise tax dodgers, money launderers, counterfeiters, drug dealers and terrorists.

But on the ground a majority of banks across India, especially in rural areas, are running short of currency within a few hours of opening each day and thousands of ATMs continue to be cash-less.

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Ruined

This endemic money shortage is having a catastrophic impact on over 400 million daily wage earners, small agriculturists and retail outlets, over 80 per cent of whose transactions were cash dependent.

“This demonetisation has ruined me,” said Muthu Swamy a coffee plantation worker in Chikmagalur in southern Karnataka state. “I have no cash to buy rice and feed my family.”

Many foreign tourists have cancelled trips to India. Those who haven’t have faced severe problems caused by the €62 limit on all cash exchanges per day.

Foreign embassies – permitted to withdraw a mere 50,000 rupees each week – are also too cash-strapped to run their missions.

India’s external affairs ministry recently promised amends by raising the cash withdrawal limits, following repeated petitioning by embassies. However, their problems have persisted, as New Delhi’s banks simply do not have enough money to dispense.

Currency in India is printed in four state-owned mints. But concerns over secrecy, ahead of announcing the demonetisation, and flawed planning have spawned the severe currency shortage for 1.3 billion Indians.

‘Reverse Bank’

Mr Modi's Bharatiya Janata Party government and the country's central bank, the Reserve Bank of India (RBI), have added to this bedlam and public frustration by continually altering complex rules regarding cash deposits and withdrawals.

On Thursday, the Reserve Bank announced the 60th amendment to the demonetisation directives, withdrawing its instruction of a day earlier, resulting in social media dubbing it the ‘Reverse Bank of India’.

"This [demonetisation] is not an exercise for which there was a road map," explained Arundhati Bhattacharya, head of the largest public sector bank, the State Bank of India, to India Today television on Wednesday. You make up the rules as you go along, she said.

Former federal finance minister P Chidambram termed these flip-flops the "desperate measures" of a desperate government, while opposition Congress Party leader Rahul Gandhi accused the RBI of changing rules like the prime minister changed clothes. Gandhi was referring to Modi's penchant for changing his attire several times every day.

Economist warnings

Senior economists have warned that demonetisation will generate a 2 per cent drop in India’s GDP to about 5 per cent, usher in possible recession and greater unemployment, and discourage foreign investment.

But the government argued that over the next 12 months India would not only emerge fiscally stronger, but also as a cashless and transparent economy.

It claimed that since there had been no major protests against the demonetisation, as there had been recently in Venezuela, millions were accepting this measure for the economic good it would herald.

"This argument is infirm," countered economist Prabhat Patnaik of Delhi's Jawaharlal Nehru University. "The absence of protests against oppression worldwide does not indicate an acceptance of oppression." Likewise, he said, the absence of protests against India's demonetisation measure did not suggest acceptance of it.