FOR the Nuxalbari Estate in the lush hills of India’s north-east, relief came in the nick of time. With winter pruning of its tea plantations at hand, 600 workers were threatening to strike. They could scarcely be blamed: the estate had not paid them in mid-November and now owed another fortnight’s wages. This was not for lack of funds. Nuxalbari’s account showed a healthy balance. But day after day its bank repeated the same refrain: yes, the government says it has a plan to help tea estates, but our local branch has no rupees. At his wits’ end, the estate manager marched into the branch, along with bosses of trade unions and a tea planters’ group, even as Nuxalbari’s owners barraged the bank’s headquarters with pleas. The bank at last relented, dispatching a courier weighted with sacks of cash from its vault on a night flight from Kolkata. The workers got their money in the morning.
Nuxalbari is lucky. Its owners enjoy sound finances and influence. As India enters its fourth week since Narendra Modi, the prime minister, abruptly voided 86% of the country’s paper currency, many of its 1.3bn people have had no such luck. The Reserve Bank of India (RBI), the central bank, has been unable to print money anywhere near fast enough to replace the $207bn in 500- and 1,000-rupee notes that were outlawed overnight on November 8th. Unless India’s four existing money presses can be speeded up, or bills quickly imported, experts reckon it could take five or six months before the money removed from circulation is fully replaced.
According to J.P. Morgan, an investment bank, Indians were making do at the end of November with a little more than a quarter of the cash that had been in circulation at the beginning of the month—and this in a country where cash represented 98% of all transactions by volume and 68% by value. The RBI has in effect been forced to ration new cash, most in the form of 2,000-rupee notes that are, owing to the lack of 1,000s and 500s, exceedingly difficult to break for change.
In such a vast country, the impact has naturally been variable. Employees of the finance ministry in Delhi, the capital, received a plump advance on their November salaries in crisp new bills, whereas the state governments of Kerala in the south and Bengal in the east say they have only a small fraction of the cash needed to pay bureaucrats’ wages. Cheques won’t do because banks do not have enough money either: reports in the Indian press reveal that whereas banks in the centre of Mumbai, the country’s financial capital, are getting as much as three-quarters of the cash they need to meet demand, branches in the city’s suburbs are getting less than half. Scroll, an online news site, reports that for one country branch in Bihar, a poor northern state, the ratio is more like a fifth.
Such was the case with Nuxalbari’s local branch; it could meet some needs but not those of big planters. “Thanks to this so-called business-friendly government we are being made beggars for our own money,” storms one of the estate’s owners. “I feel like I’m in the middle of some Soviet-era nightmare.”
The parched branches of big banks are still fortunate. For unexplained reasons the RBI has supplied almost no new cash at all to India’s hundreds of smaller rural co-operative banks or to its 93,000 agricultural credit unions, so keeping millions of farmers from deposits that total some $46bn. It has also banned these institutions from competing with “pukkah” banks in exchanging old bills for new. With no cash flowing, farmers cannot even seek help from informal networks that in normal times account for more credit in rural areas than formal institutions. And although India’s 641,000 villages house two-thirds of its people, they contain fewer than a fifth of its ATMs. These are being slowly modified to supply the new notes, which unhelpfully are smaller than old ones; for now most stand idle.
Starved of cash, India’s rural economy is seizing up. A study by two economists at Delhi’s Indira Gandhi Institute of Development Research found that in the second week of the drought, deliveries of rice to rural wholesale markets were 61% below prior levels. Soyabeans were 77% down and maize 29%. Prices have also collapsed. In Bihar, Scroll’s reporters found desperate farmers selling cauliflower for 1 rupee ($0.01) a kilo, a twelfth of the prior price.
It is not only farm incomes that are pinched. An investigation by Business Standard, a financial daily, found that virtually none of the estimated 8m piece workers who hand-roll bidis, a kind of cigarette, has been paid since the cash ban. Another Indian daily, the Hindu, reports that more than half of the 600-odd ceramics factories in the town of Morbi, a centre of the tile industry in the state of Gujarat, with a combined output worth some $3.5bn a year, have temporarily closed because they cannot pay workers. In Agra, the hub of Indian shoemaking, some firms are paying workers with supermarket coupons to keep them on the job.
India’s wealthy few have servants to take their place in the still dismally long queues snaking outside banks, but the pain reaches even to the top. A dentist in a posh part of Delhi is shocked by a 70% fall in trade since the cash ban. “All my patients can pay with plastic so I assumed I was safe, but I guess people are just being careful about spending in general.” This does seem to be the case. A brokerage that surveys consumer-goods firms says November sales have fallen by 20-30% across the board. Property sales, which traditionally are made wholly or partly in cash, have plummeted even more.
Small wonder that Fitch, a ratings agency, on November 29th cut its forecast for India’s GDP growth for the year to March 2017 from 7.4% to 6.9%. That is in line with most financial institutions’ trimmed estimates, although some economists think the damage could be even worse. “There will be no or negative growth for the next two quarters,” predicts one Delhi economist who prefers anonymity. “Consumer spending was the one thing really driving this economy, and now we are looking at a negative wealth-effect where people feel poorer and spend less.”
Perhaps more embarrassingly for Mr Modi’s government, there are few signs that its harsh economic medicine is achieving the declared goal of flushing out vast hoards of undeclared wealth or “black” money. Officials had predicted that perhaps 20% of the pre-ban cash would not be deposited in banks, for fear of disclosure to the taxman. Yet within three weeks of the “demonetisation”—well before the deadline to dispose of old bills, December 30th—about two-thirds of the money had already found its way into “white” channels. Some of this is doubtless illicit: inspectors of Delhi’s bus system have found that the bulk of daily takings now mysteriously appears in the form of the banned bills, which public-sector firms can still deposit, rather than the usual small change. Reports from Maharashtra, in the centre of the country, suggest that brokers are offering to buy old notes with a face value of 10m rupees for 8.4m, suggesting that they have found ways of laundering them.
India’s economy will eventually recover and may even gain strength: the forced priming of bank accounts and the switch to electronic payments will mobilise more money for lending and taxes. But there may be lasting damage to institutions, most notably the RBI itself. It failed, among other things, to warn the impatient Mr Modi that there were not enough new notes to replace old ones. It has issued a bewildering blitz of complex and sometimes contradictory instructions to banks. Its governor, Urjit Patel, has been perplexingly silent. Its reputation for probity, competence and independence is in tatters.
Some analysts in Delhi predict that once enough cash is printed to get the economy moving again, Mr Modi’s government may simply insert cash into some bank accounts, such as those created under a government programme to bring banking to the poor, and declare this to be revenue from the black-money sweep. After all, pivotal elections in India’s largest state, Uttar Pradesh, loom early next year. But if more cash does not soon appear, Mr Modi’s future may look very different.
Disclaimer : This article was first published in Economists.com