Indians are increasingly realising that if their nation is to develop and prosper, they have to change the way they deal with money and do business
Indian Prime Minister Narendra Modi needed a radical idea to rejuvenate his stalled economic reform programme. Bureaucratic red tape, fraud and a lack of finances are among the obstructions, so replacing high-denomination banknotes made sense; 90 per cent of transactions are done in cash, making corruption and tax avoidance easy. But the announcement was made at short notice without proper preparation or regard for the consequences, leading to a currency shortage. The difficulties will be short-lived, though, and from the experience could come greater public revenue and a shift towards digital money. Only about 3 per cent of India’s 1.3 billion people pay tax. Many do not have bank accounts, nor are they familiar with electronic payment systems or credit cards. The reliance on cash has created tax avoidance schemes and an informal job sector where workers are poorly paid. Business people and criminals buy off politicians with bundles of money and the economy is awash with counterfeit currency.
Modi’s scheme hits at those problems by flushing out of the system the highest-denomination banknotes, 500 and 1,000 rupees, and replacing them with new 500 and 2,000-rupee ones. The old notes have to be put in bank accounts by the end of the year, with amounts greater than 250,000 rupees being scrutinised. About 86 per cent of the vast nation’s cash is affected, making it the most sweeping currency policy anywhere in the world in decades. The prime minister was well aware of that, yet inadequate supplies of notes were produced, banks and post offices were ill-prepared and people have been left with insufficient money to buy everyday essentials, in the process putting small businesses and shops at risk.
The anger of those caught with cash they are unable to use is understandable. Anti-government protests are growing and authorities can only advise patience. Economists believe growth will be hit by up to 2 per cent.
But amid the chaos, Indians are increasingly realising that if their nation is to develop and prosper, they have to change the way they deal with money and do business. More bank accounts are being opened, more applications made for credit cards and greater numbers of ATMs planned. But it is financial tech firms, especially in China, which see the greatest potential. With just 20 per cent of Indians having smartphones and cash still king, it will take time to change habits. But the crisis has brought a realisation that the future lies in electronic payments, e-commerce and e-wallets and the time has come to embrace a shift.
South China Morning Post