Economics

 
 

India’s demonetisation woes, a year on

Jake Read

Development | South Asia

 

At 8:15pm on the 8th of November 2016, Indian Prime Minister Narendra Modi appeared on live television to announce that the two highest banknote denominations of the Indian Rupee had become worthless. Citizens had until the New Year’s Eve of 2016 to either bank deposit their 500 and 1000 Indian Rupee (Rs) banknotes (~AUD$10/$20 respectively) or swap them for lower banknotes at registered banks.

86% of India’s cash value had been abruptly wiped out in one speech, with India’s central bank destroying the now-defunct banknotes from the next day. Prime Minister Modi announced that bearers of the bills also had the option to trade old banknotes to a new replacement series of 500rs and 2000rs bills.

These bills were however initially scarce: 24 billion notes were subject to withdrawal and, according to RBI Deputy Governor R. Gandhi, just over 1 billion new notes were printed in time. Subsequently, the rest of the year was followed by mass queues, severe currency shortages, national protests and reportedly, even a number of casualties due to exhaustion from queues and crowd rushes.

One year on, the situation has stabilised and to an extent, cash flow has returned to India.

Purpose

Prime Minister Modi’s ‘war on black money’ campaign was part of a promise to curtail the plague of hidden markets upon the government’s economic management. A major objective was to digitalise the economy and to force the creation of more transactional paper trails.

In 2017, Credit Suisse estimated 90%-95% of Indian transactions were cash conducted and few were ever formally recorded. Merchants of all income levels were stashing their bills to avoid their tax obligations and holding ‘unaccounted’ wealth. Counterfeit banknote numbers were also unacceptably high.

To combat this underground money market, Prime Minister Modi implemented a range of policies on top of demonetisation, including introducing federal GST, cancelling tens of thousands of shady business registrations and broadcasting government support behind digitalising banking.

The drastic policy aimed at curbing cash hoarding was Prime Minister Modi’s 2016/17 pièce de résistance, temporarily stripping the population of cash in favour of account credit – which leads us to the cash situation of 2017/18 India.

 

[caption id="attachment_6615" align="alignnone" width="700"] Pictured: Low-valued, sparse 100 Rupee bill distributed to holders of 500 and 1000 Rupee bills following demonetisation (Jake Read)[/caption]

Indian (Cold, Hard) Cash

Upon India’s demonetisation, 100 Rupee (AUD$2) became the next highest banknote (followed by 50rs, 20rs, 10rs and 5rs). Holders of the 500 and 1000 Rupee bills had no choice but to wait in lines for hours to accept stacks of the low-valued, now-sparse 100 Rupee bills. If lucky, they were able to access new 500 and 2000 Rupee (AUD$10/$40) bills. As the months passed, the number of  100 Rupee bills increased and were soon followed by the introduction of 200 Rupee (AUD$4) banknotes in August 2017.

Cash will remain king in India in the long-term future despite the government’s large scale efforts towards digital payments. Before demonetisation, the Reserve Bank of India registered 17.9 trillion Rupees worth of “currency with the public”. In a matter of weeks, this dramatically halved to under 9 trillion Rupees. RBI public data shows that week-by-week, the currency supply increased as Indian money printers worked tirelessly to print more new bills. One year later, the figure stands at 16.3 trillion Rupees, plateauing below pre-demonetisation levels.

The Indian government has heralded demonetisation a success – pointing towards the fact that while 99% of the 500/1000rs bills were handed in, cash demand in the Indian economy dropped to a new low. This indicates that instead of using cash, more Indians have been pushed into electronic payments and mobile wallets. Monthly Indian debit card transactions even rose 58% to 345.7 billion rupees in the eight months after demonetisation, from 219.4 billion rupees before demonetisation.

In the post-demonetisation “Digital India” era of increased transparency, enrolling into the Indian government’s biometric database has been mandatory for submitting tax returns, spending/transferring over 50,000rs and for opening new bank accounts. This has led to 99% of Indians being digitally recorded as of the 2016/17 Financial Year, another measure at targeting India’s hidden cash markets.

Prime Minister Modi and his government, albeit with harsh backlash, plan to continue their program of ‘phasing out’ cash reliance - at least until next year’s federal election. The newly introduced 2000rs bills is considered inappropriate for frequent, everyday transactions. India is now reserving its cash for smaller purchases, with electronic payments increasingly becoming the preference of Indians for both their expensive and cheaper transactions.

3 minute read

Read more
 

China’s internal migrants: Flowing into big cities – but ending up with disappointment?

Ruiying Zheng

Politics

 

When I first talked to Xiao Zhang he was packing his bag in a tiny, shabby room near a construction site where he worked. He has lived there with his wife and other fellow workers since he came to this city.

“I fled from a remote village in Guangxi province to Shenzhen to change my life three years ago.” He said. “But now I realise it is much harder than I expected. I could never actually become part of this city, so I am planning to leave.”

In fact, Xiao Zhang is just one of more than 280 million migrant workers in China. There are also a great number of fresh graduates and office workers moving from rural or less developed areas to large cities.

Today, China’s internal migration is characterised by a flow of people, especially the youth, moving into first-tier cities located in developed provinces in search of fortune, status and a higher quality of life. Beijing, Shanghai and Shenzhen are their main destinations.

It is of great significance to raise people’s awareness of the current situation confronted by rural migrants as a disadvantaged group, and tackling the issues arising from this mass migration. It also helps China’s government to improve essential services that these rural migrants risk losing when they move to the big cities.

[caption id="attachment_6466" align="aligncenter" width="511"] Source: 'The Impact of Chinese Migration', The Economist, 2012[/caption]

The importance of studying urban migration in China
China’s rural-to-urban migration is a good case study for people who are interested in or doing development studies. The phenomenon of population movement is an important indicator of urbanisation in the modern world.

Regional migration also changes the spatial distribution of China’s population, thereby posing challenges to urban land use such as expanding overall built land and increasing proportion of residential land. It also results in the expansion of urban infrastructure systems. This increasing demand on land and urban facilities could lead to potential environmental disturbance that goes against principles of building resilient and sustainable cities.

[caption id="attachment_6471" align="aligncenter" width="540"] Source: 'Land-use change in China,' National Bureau of Statistics of China, 2004 - 2010[/caption]

Additionally, demographics of a country plays an essential role in its economic, political, cultural and societal domains. Studying urban migration helps the government to formulate appropriate policies and regulations for the society as a whole

 
New attitudes and reforms needed
Since many rural migrants are under great pressure due to the barriers they come across in terms of housing, job seeking, and education for children, is it really worthwhile for people to leave their hometown and struggle in big cities?

While it may be better for them to weigh the opportunities and difficulties of their migration rather than blindly following the trend, the government is still responsible for reforms that aim to assist and support these rural migrants.

For those studying China’s phenomena of rural to urban migration, there are key points to consider when making recommendations for effective policies that can mitigate the threats rural migrants face during their resettlement.

The government is expected to construct affordable and low-rent houses. For example, the average housing price in Beijing is more than 50,000 in RMB (nearly 10,000 in AUD) per square meter which is too expensive for low-income migrants. They can hardly afford their accommodation if there are no alternatives provided.

Relaxation of institutional barriers to civil rights is also crucial. Social welfare systems in China are largely based on the Hukou (known as the household registration system) which limits rural migrants’ access to equal rights such as voting and medical insurance.

Another big concern is their children’s education, so the implementation of preferential schooling policies for their children is required. Left-behind children in rural China has become a social concern because the lack of parental accompany and care has profound impacts on their future outcomes.

It is also helpful to provide subsidies for their transportation costs. China’s great migration during the lunar New Year is the largest movement in the world. It is reported that some poor migrants have to travel approximately two thousand kilometers by motorcycle to head home for reunions.

The most difficult factor can be the changes in Chinese society’s attitudes towards these rural to urban migrants because of prejudices they face in decision-making processes as a marginalised community. They sometimes receive disrespect or even discrimination from citizens, which leads to disharmony in society.

The study of China’s rural to urban migration can help to motivate the Chinese government and China’s general public to pay more attention to this imperative issue. It also contributes to eliminating the potential problems that come with the inequality suffered by these rural migrants who seek only to live a better life.

4 minute read

Read more

Back to Top