The Crazy Cash Crisis in India EXPLAINED! 1

There has been a lot in the news and all over social media about the cash crisis in India over the last 30 or so days. As it happens I’m preparing for a trip to India pretty soon, and thought i would do a bit of research – here’s what i learnt:

1. What caused the Cash Crisis in India ?

On 8th November, 2016 the Indian Prime Minister Narendra Modi made an unexpected and unbelievable television announcement! In short, PM Modi declared that within hours of the televised announcement the country’s 500 and 1000 Rupee notes would no longer be legal tender

2. Why did PM Modi take such an unexpected step?

In his demonetisation in India speech, the Indian Prime Minister, described how removing the 500 and 1000 Rupee notes from circulation would:

  • Help combat corruption
  • Remove illegitimately “earned” and fake notes from the system
  • Assist in the country’s fight against terrorism

3. So what to do with any 500 or 1000 Rupee notes?

Modi outlined a plan whereby:

  • People can deposit an unlimited amount of “old” 500 and 1000 rupee notes into their bank or post office accounts until 30th December, 2016
  • Any money deposited into an account can be withdrawn as required
  • Given the removal of the 500 and 1000 rupee notes, and the time it would take to circulate new 500 and 2000 rupee notes withdrawal limits were imposed

4. What was the value of a 500 and 1000 Rupee note?

The notes taken out of circulation were:

  • 500 Rupee – That’s about £6 GBP | $7.5 USD | €7 EUR
  • 1000 Rupee – That’s about £12 GBP | $15 USD | €14 EUR

5. So why is there a Cash Crisis in India?

There are 3 main reasons:

  • The 500 and 1000 rupee notes represented 86% of ALL of the Indian currency in circulation
  • India is a predominantly cash based economy with around 90% of all transactions being cash based
  • Where someone does get their hands on a new 500 or 2000 rupee note, the mainly smaller traders are unable to complete the transaction because they dont have enough change to give back!

Imagine that, in a country where cash is king that 86% of all of the cash in circulation is no longer legal tender. Boom!

6. A crackdown on “Black Money”

As mentioned above, most transactions in India are via cash and in such an environment very few people pay taxes on their earnings. The BBC reported on how official Indian government figures reveal how 1% of Indians paid tax in 2013, while 2% filed a tax return. This has resulted in loads of tax-free money – referred to as black money – being hidden away from the authorities under mattresses.

With that in mind, many are concluding that the fight against terrorism and corruption are just the publicly declared reasons for demonetisation in India. But the real reason is to crack down on tax evasion, and bring the hidden “black money” into the mainstream and formal economy.

 7. Is Demonetisation in India a crackdown on tax evasion?

That’s definitely a widely held view!

  • While there is no limit to what can be deposited, the government explained that tax authorities will investigate any deposits above 250,000 Rupees (just short of £3000 GBP)
  • If individuals exceed that limit they will have to prove that they paid tax
  • If the individual cant offer proof then tax will need to be paid, plus a fine of 200% of the tax owed

Ref: BBC – Why India wiped out 86% of its cash overnight

8. Demonetisation in India: PANIC:

The Guardian and BBC report the panic and concern following the days after PM Modi’s announcement:

  • ATMs remained closed
  • 4 hour queues at banks to deposit the decommissioned 500 and 1000 rupee notes lined the streets
  • Residents in rural areas, where banks have limited presence, travelled many hours into cities
  • Simple day to day tasks such as buying a cup of tea, a train ticket becoming and paying the milkman being complicated
  • Housewives having to reveal secret savings they had put to one side for ‘rainy days’
  • Unfortunately people have died due to the cash crisis, and the disruption to everyday life – particularly in rural areas – cannot be underestimated
  • Diplomats are fuming!

9. Get Married to avoid a Cash Crisis

When it comes to weddings in India, apparently November and December are the two main months. Throw in demonetisation and you not only have a cash crisis but you got a wedding organisers nightmare! The government recognised the resulting havoc and increased the withdrawal limit for families with upcoming weddings to allow a one time withdrawal of 250,000 Rupees – more than 10 times the weekly limit (24,000 Rupees).

But some weddings have caused controversy and clearly highlight the inequality in India.

Thanks for stopping by – Take a look around…!!

10. Will Fintech handle the Cash Crisis:

This is clearly a very serious issue for many millions of people in India, and it will take patience to ride out the disruption the country is currently facing. But the following highlight some innovative and potentially viable fintech based payment solutions:

I will keep you posted about my trip to India. In the meantime i would really appreciate any tips or additional thoughts in the comments below…!

One comment on “The Crazy Cash Crisis in India EXPLAINED!

  1. Pingback: 5 Things I Unexpectedly Learnt About Transformation in India

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