De­mon­eti­sa­tion was the talk in both In­dia and In­done­sia at the end of last year.

Money is the topic of the day. In­dia has un­der­gone one of the most dra­matic de­mon­eti­sa­tion schemes in his­tory while In­done­sia has re­vived plans to re­de­nom­i­nate its cur­rency.

Norway-Asia Business Review - - Contents - SOFIE LISBY

On the morn­ing of 9 Novem­ber last year, queues were form­ing out­side banks and ATMs across In­dia. Tens of thou­sands of peo­ple took the day off work to go to the bank and de­posit cash.

At 8pm the pre­vi­ous night, they had seen their Prime Min­is­ter, Naren­dra Modi, an­nounce the im­me­di­ate de­mon­eti­sa­tion of all INR 500 ( USD 7.50) and INR 1,000 (USD 15) notes in an un­sched­uled, live tele­vised ad­dress. In or­der to com­bat cor­rup­tion, black mar­ket trade and tax in­va­sion as well as fight ter­ror­ism funded by coun­ter­feit notes, the notes would be in­valid past midnight and new INR 500 and INR 2,000 notes were al­ready be­ing printed, the Prime Min­is­ter said.

In­dia has de­mon­e­tised its cur­rency twice be­fore, in 1946 and again in 1978, both times in an ef­fort to fight shady op­er­a­tions that ex­ist out­side the for­mal eco­nomic sys­tem. In a coun­try where the vast ma­jor­ity of trans­ac­tions are still made in cash, de­mon­eti­sa­tion is a huge dis­rup­tor. Up to 86 per­cent of the value of all the ban­knotes in cir­cu­la­tion in In­dia are INR 500 and INR 1,000 notes, mean­ing that a stag­ger­ing INR 15.4 tril­lion were de­mon­e­tised over night.

Down­grad­ing the econ­omy

In­di­ans were given a 50-day win­dow to de­clare and de­posit their INR 500 and INR 1,000 notes, caus­ing long queues out­side banks. How­ever, many were left with­out cash for day-to-day ex­penses and the new notes INR 500 and INR 2,000 notes were not made widely avail­able. Ac­cord­ing to The Guardian, only about one-third of the cash re­moved from the sys­tem were re­plen­ished by the end of De­cem­ber, and just 40 per­cent of the coun­try’s 220,000 ATMs were able to reg­u­larly dis­trib­ute cash.

Mar­ket re­sponses have been swift and sig­nif­i­cant. Shortly af­ter the de­mon­eti­sa­tion, the World Bank down­graded In­dia’s eco­nomic growth fore­cast as the coun­try’s au­to­mo­bile and real es­tate sales dropped. The bank pre­dicted that In­dia’s econ­omy would grow by a “still ro­bust” 7 per­cent in the fis­cal year to March 2017, which rep­re­sented a 0.6 per­cent drop from ear­lier fore­casts. How­ever, the Wash­ing­ton­based fi­nan­cial in­sti­tu­tion said that the ef­fects of the de­mon­eti­sa­tion was likely to be short-term. “In­dia is ex­pected to re­gain its mo­men­tum, with growth ris­ing to 7.6 per­cent in fis­cal year 2018-19 and strength­en­ing to 7.8 per­cent in fis­cal year 2019-20,” the bank said.

So­ciété Générale (SocGen), the French-based fi­nan­cial ser­vices com­pany, took a sim­i­lar stance, cut­ting In­dia’s fis­cal 2017 growth rate to 6.6 per­cent on-year from 7.3 per­cent pre­vi­ously. For fis­cal year 2018, which ends in March 2019, SocGen ex­pects growth to be 7.2 per­cent on-year, down from an ear­lier pro­jec­tion of 7.7 per­cent. Con­cerns about in­fla­tion

The move to de­mon­e­tise has spread con­cerns about in­fla­tion. De­spite calls for in­ter­est rate cuts in face of the sud­den cash short­ages, the Re­serve Bank of In­dia kept its key pol­icy rate un­changed

at 6.25 per­cent in Jan­uary and again in Fe­bru­ary, stat­ing that the cash squeeze was likely to be short-lived and that it needed more time to fully un­der­stand how de­mon­eti­sa­tion would ef­fect the econ­omy.

Oth­ers ar­gued that in­fla­tion was set to ac­cel­er­ate, lead­ing the Re­serve Bank of In­dia to in­crease rates much sooner than ex­pected. Speak­ing to CNBC, Shi­lan Shah, an In­dia econ­o­mist at Cap­i­tal Eco­nom­ics said: “De­mon­eti­sa­tion it­self is likely to be in­fla­tion­ary over the longer term if it leads to sup­ply dis­rup­tions even as de­mand re­cov­ers. For ex­am­ple, some farm­ers in ru­ral ar­eas have re­port­edly been un­able to pur­chase seeds and/ or fer­tiliser. This could lead to smaller har­vests later in the year, which in turn would boost prices.”

Bad for busi­ness In ad­di­tion to cash short­ages and slashed growth fore­casts, in­dus­try suf­fered heav­ily in the months fol­low­ing the de­mon­eti­sa­tion. Ac­cord­ing to Reuters, a sur­vey by IHS Markit found that the Nikkei/Markit Man­u­fac­tur­ing Pur­chas­ing Man­agers’ In­dex, which tracks eco­nomic in­di­ca­tors across a va­ri­ety of sec­tors, fell to 49.6 in De­cem­ber from Novem­ber’s 52.3. The read­ing was the first be­low the 50 mark that sep­a­rates growth from con­trac­tion since De­cem­ber 2015. It also rep­re­sented the big­gest month-on-month de­cline since the start of the global fi­nan­cial cri­sis in Novem­ber 2008. Speak­ing to Reuters, Pollyanna De Lima, an econ­o­mist at IHS Markit, said that short­ages of money in the econ­omy steered out­put and new or­ders in the wrong di­rec­tion, thereby in­ter­rupt­ing a con­tin­u­ous se­quence of growth that had been seen through­out 2016. The sur­vey found that con­trac­tions in mo­men­tum were re­ported across all ma­jor subindexes, such as pur­chas­ing ac­tiv­ity and em­ploy­ment.

Mean­while, The Econ­o­mist re­ported that fast-moving con­sumer goods re­trenched by 1 to 1.5 per­cent in Novem­ber, ac­cord­ing to Nielsen, and The Guardian re­ported that data from the So­ci­ety of In­dian Au­to­mo­bile Man­u­fac­tur­ers showed the largest fall in sales in 16 years, with a 19 per­cent drop in sales in De­cem­ber com­pared to a year ear­lier. Ac­cord­ing to a re­port by prop­erty con­sul­tants Knight Frank In­dia, prop­erty sales came to a com­plete stand­still with sales fall­ing by 44 per­cent across eight ma­jor In­dian cities be­tween Oc­to­ber and De­cem­ber 2016, com­pared with the same pe­riod in 2015.

Sil­ver lin­ing While the im­me­di­ate and short term ef­fects of the de­mon­eti­sa­tion have been ev­i­dent, the jury is still out on the mid and long term ef­fects. Ini­tially touted as a strat­egy to com­bat cor­rup­tion and un­taxed wealth, of­fi­cials in In­dia are now fram­ing de­mon­eti­sa­tion as the first step to­wards a “cash­less” coun­try where the ma­jor­ity of trans­ac­tions are com­pleted on­line and un­der the watch­ful eyes of tax au­thor­i­ties. In­deed, with nearly INR 15 tril­lion of the 15.4 tril­lion taken out of cir­cu­la­tion now ac­counted for, ac­cord­ing to The Econ­o­mist, many are now won­der­ing whether the rich were re­ally hoard­ing as much dirty cash as sup­posed, or whether they have just been very good at laun­der­ing it.

Ac­cord­ing to The Guardian, dig­i­tal pay­ments boomed in the weeks fol­low­ing de­mon­eti­sa­tion. How­ever, In­dia’s ru­ral econ­omy and its huge in­for­mal sec­tor, which is es­ti­mated to em­ploy 80 per­cent of the work­force and con­trib­ute to 45 per­cent of the coun­try’s GDP, are still far from dig­i­tal­i­sa­tion. In De­cem­ber 2016, In­dia’s Labour Min­is­ter Ban­daru Dat­ta­treya an­nounced it would soon be manda­tory for em­ploy­ers to pay their staff into bank ac­counts, an am­bi­tious goal in a coun­try where up to 90 per­cent of work­ers are paid in cash. In ad­di­tion to in­creas­ing the tax base – only one per­cent of In­di­ans pay in­come tax – the move would also al­low au­thor­i­ties to mon­i­tor whether peo­ple are be­ing paid the min­i­mum wage, some­thing that is rare to­day. Ac­cord­ing to In­dia’s Fi­nance Min­is­ter, Arun Jait­ley, by the end of De­cem­ber, there had been a 14.4 per­cent in­crease in the value of in­come tax col­lected since the pol­icy was in­tro­duced, while in­di­rect tax collection had grown by 26 per­cent, re­ported The Guardian.

In­done­sia In­done­sia’s Bank In­done­sia Gover­nor Agus Mar­to­war­dojo an­nounced in De­cem­ber 2016 that the coun­try plans to cut tree ze­ros off the face value of the ru­piah in a move to sim­plify the cur­rency sys­tem. In­done­sia is one of the few coun­tries in Asia where the term “mil­lion­aire” ap­plies to the ma­jor­ity of the pop­u­la­tion. Due to hy­per­in­fla­tion, In­done­sia’s cur­rency has been de­val­ued sev­eral times, the last time in 1965.

A plan to re­de­nom­i­nate the cur­rency was shelved in 2013 due to in­sta­bil­ity in the fi­nan­cial mar­kets at the time.

Ac­cord­ing to the gover­nor, if the bill is ac­cepted this time, the cen­tral bank would need two years to pre­pare the new notes and it would take as long as seven years to fully im­ple­ment the scheme. In or­der to con­trol in­fla­tion, the bank would al­low for a long pe­riod of time where peo­ple will be able to use both the old and the new notes, said the gover­nor. He said the de­nom­i­na­tion would not de­crease con­sumers’ spending power as the prices of goods and ser­vices would be ad­justed.

Left: Long queue of peo­ple out­side bank in Gur­gaon, Delhi to de­posit old 500 and 1,000 cur­rency notes to get new cur­rency in Novem­ber 2016.


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