World’s “Fastest Growing Economy” hits a snag

80% of India’s cash has evaporated

“India is the world’s fastest growing economy.”

Have you heard this before?

On a statistical basis, this is true. The exports of the nation are climbing and more startups in tech and other industries have sprouted up in the Asian nation.

When we look past the generalized statistics, a different picture is painted.

Just over half of all Indian citizens have a savings account. Only 39% of of those account holders have an ATM card. A mere 2–3% earn enough to qualify to pay income tax.

The majority of India’s population lives in property, and they survive by mostly paying for goods and services in cash.

When 80% of the cash in India becomes worthless overnight, that becomes an enormous problem.

That’s right: eighty percent of the paper currency in India became worthless bits of paper on November eighth.

India’s prime minister, Narendra Modi, announced on Nov 8th that four hours after his speech, the country would end the use of all 500 and 1,000 rupee notes.

Those two bills account for about eighty percent of all cash circulated in India.

The goal, said Modi, is to pressure hoarders of ‘black money’ into exposing themselves and forcing them to pay income taxes.

What is Black Money?

A wad of 1,000- rupee notes, one of the bills being replaced. | Photo credit: flickr via VisualHunt

Black Money is the term used in India referring to un-taxed cash that is obtained under the table. This money is hoarded by the wealthy, and is used to finance purchases of homes, automobiles, food, and bribes of government officials.

Corruption in India has become an issue that affects mainly the poor and the environment, as wealthy entrepreneurs swap their cash reserves for a stash of government officials acting in their favor.

This black money is a problem for the government as well as the general population of India. When taxes are not collected on this hidden cash, the government misses out on potentially millions of dollars that are used to fund projects like road-building, plumbing, and extending the power grid.

All of these projects would greatly improve the quality of life for the poor of India.

How Modi Missed The Mark

What Prime Minister Modi missed is that all of those infrastructure projects are meaningless to those who can’t buy food.

What are roads to those without rice? Electricity to those without energy in their bodies? What is a sewer line to a family without vegetables?

This is what is already beginning to happen in India. The Prime Minister announced that Indians have until December 30th to exchange their bills at banks, but what of those without access to banks?

And for those that do stand in the hours-long lines to exchange their money, how can they survive the next month when some stores are hanging signs that say, “No Cash”?

This decision impacts the majority of Indian people

For workers like taxi drivers or restaurant owners, their daily income has already receded. In a CNN interview (link), one taxi driver told the reporter that his usual daily earnings were 1,000 rupees (less than $15). After the cash freeze, he said his earnings are now about 500 rupees if he is lucky.

For many citizens, a chunk of their savings was wiped away with the decision to end the sue of the 500 and 1,000 rupee notes. Until they can reach a bank and exchange their bills, the disposable income of many people has been squeezed, and they will not be able to afford luxuries like eating out or using a taxi.

Effects of the Decision

Even though 1.25 billion people live in India, this will probably not drastically affect the world’s economy.

The amount of money in the nation will be the same, as old bills are exchanged for new 500-, 1,000-, and 2,000- rupee notes. But the amount of money held by those without bank access will decrease.

India’s imports may decrease slightly, as the people of India will have less money after December 30th than they had before the Prime Minister’s announcement.

Sales of any “luxury goods” will most likely fall: Televisions, radios, and things of that nature. This is because the most important aspect of life is survival. Only after someone buys food and pays rent can they even think about spending that money elsewhere.

For the majority of the population without bank accounts, they may lose a substantial amount of money. Hopefully this will drive more Indians to open savings accounts and move at least some of their money to debit cards. The effect this “Cash Crunch” will have on bank account rates is yet to be seen.

Small business owners and people like taxi drivers and even shoe shiners will suffer, at least in the short term, as almost all of their business is conducted with cash.

Not to be cynical, but this will probably not incite much change with respect to the black money problem. The people that have hidden their money for this long will not walk into a bank and say, “Here’s all the money I’ve hid for the past few years. Please tax me!” Most likely, elaborate money laundering schemes will be rigged and the illicit cash exchanged without anyone the wiser.

Most importantly, this will result in a public distrust of cash and maybe currency altogether. If, at any moment, your entire savings could be wiped away, wouldn’t you spend it all before it loses its value?

The decision made by Prime Minister Modi was a noble one, but it points to the larger problems of corruption and extreme economic inequality in India.

These are problems which may not be solved in the near future, but hopefully events such as this will start a conversation and change will occur.

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My name is Parker Nolan. I’m a high school senior and I’ve had a passion for finance since I was nine years old. I started French Toast & Finance to write about the news that keeps me up at night, because like it or not, it will affect our lives somehow.

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