India is in the throes of an unprecedented social experiment in enforced digital disruption, and the world has much to learn from it.
Prime Minister Narendra Modi launched a surprise in early November, demonetizing 500 and 1,000 rupee bank notes. Modi’s war on cash is not without international precedent: Singapore, for example, withdrew its largest currency recently; the European Central Bank eliminated the 500-euro bank note; South Korea plans to eliminate at least all coins by 2020.
And yet India’s initiative had the potential for chaos. Here’s why: the government effectively took 86% of cash out of circulation in an economy that is close to 90% cash-reliant.
One of Modi’s strongest motivations for this action was corruption — to expose undeclared “black” money, i.e. income illegally obtained or not declared for tax purposes, in Asia’s third-largest economy. But the government seems to have failed in meeting this objective. As of December 3, about 82% of the demonetized bills, amounting to about $185 billion, had been deposited in bank accounts and validated to be legitimately earned money (or legitimized after any additional taxes owed are accounted for). In other words, very little of the estimated $2 trillion black money estimated to be stashed overseas has been captured.
In the meantime, retail and wholesale markets have stalled around the country. Supply chain transactions, real estate deals, and even weddings and funerals have been frozen. Consumers are coping with lines that are frustrating even for Indians used to standing in lines or waiting for basic services. People up and down the income spectrum are dealing with changing cash withdrawal policies and empty ATMs. The nation’s status as the world’s fastest-growing big economy has been severely imperiled and its currency risks being further devalued, a situation made worse by prospects of a strengthening dollar after the U.S. election.
Read the full article at https://hbr.org/2016/12/indias-botched-war-on-cash
ARTICLE SOURCE: Harvard Business Review