So what’s that about the banking crisis in India? There’s a good chance you may have heard a thing or two regarding India’s recent financial turmoil on the back of Indian Prime Minister Narendra Modi’s announcement in early November that 500 (£6) and 1,000 rupee notes would be taken out of circulation and would effectively cease to be legal tender. This sudden move quickly brought about chaos in the 2nd most populated country in the world, with enormous crowds rushing to banks and ATMs of the country since these two notes made up about 80% of the money in circulation at the time.
What could possibly explain such a drastic measure? It’s all part of a plan to tackle the black market economy which has subsisted in India in the last decades. This crackdown on illicit funds earned from corruption or tax evasion and stashed away in cash will also help combat fake currency, according to Modi. India loses hundreds of billions of dollars worth of revenue in unpaid tax every year and only about 2% of the population pay any income tax at all. But in a country where 90% of transactions are conducted in cash, the initiative has caused huge disruption, with officials urging people to stomach this seemingly insurmountable short-term crisis, for the sake of the economy’s performance in the long run.
What followed was what you have already heard about – long lines outside banks and ATMs, with queuing now India’s national sport. Millions of Indians have been waiting for hours to get their hands on usable cash, only to get to the front of the line and find out there are limits on how much they can withdraw. With a shortage of 100 rupee notes as ATMs are drained of these more quickly than they can be refilled, people are only able to get 2,000 rupee notes and are finding it hard to spend them since very few small traders have enough change.
More than half of the Indian population don’t have a bank account, and some 300 million have no valid form of ID. While some people can rely on card payments to shop, those in more rural parts of the country are finding it incredibly difficult to buy food and other essential items because most stores don’t have access to card-payment systems. In a true testament of the old adage ‘crisis breeds opportunity’, some shopkeepers have started acting as a local bank, while the return of barter in other areas has also grabbed its fair share of headlines.
While the more positive interpretations of Modi’s bold move point to the potential of a long-term economic boom – since banks will be flush with money – the government’s opposition criticise the Indian PM, saying this drastic measure will not curtail corruption because people will simply hold onto their cash when the new currency becomes available.
This post is written by Pedro Jacob, you can find him if you click here