What happens when the government suddenly declares that the money in your pocket is worthless? The people of India found out at midnight on 8 November 2016, when Prime Minister Narendra Modi made a surprise television announcement to the effect that 500 and 1,000 rupee notes (worth about £6 and £12) were now illegal tender. Anyone holding undeclared money would either have to put it in a bank account to make it “legal”, or destroy it. Predictably, chaos ensued.
Modi presented this move towards demonetisation as a shock measure to destroy the widespread circulation of so-called black money, the catch-all term for illegal or unaccounted-for income. In India, some see black money as a barrier to economic growth, because it is untaxed. It is also hard to measure the GDP of a country when so much of its financial activity happens off the books.
Citizens were given a small window of time to spend the old currency on approved things, such as hospital bills, travel tickets and fuel. From 9 November banks were closed and cash machines were shut for two days, after which withdrawal of legal tender was capped at 2,000 rupees a day. A new 2,000-rupee note was introduced on 10 November. Residents could exchange their old currency at the banks until the end of December.
The bank queues stretched for miles and the price of gold rose by 40 per cent. Rural India suffered particularly badly, as access to supplies of the new notes was limited, and farmers reportedly suffered bankruptcy in the ensuing liquidity crunch.
Things have settled somewhat in 2017. Cash is more readily available, though reports of empty cash machines continue to surface. Official economic growth predictions have been revised down from 7.5 per cent to between 6.5 and 7 per cent. Even so, this doesn’t appear to take in the full, as yet unknown impact of demonetisation on India’s huge informal sector.
The annual Mumbai Derby is the premier horse-racing weekend of the year, and cash is vital to the sport. Where better to gauge the effect of demonetisation than among bookies at the Mahalaxmi Racecourse? So one recent afternoon I put on a suit and panama hat and went to find out.
Gambling is illegal in India, except in horse racing, and because of the danger of discussing illegal money in public, everyone I spoke to requested that I use a false name for them. After I placed my first bet (500 rupees on Undisputed – I lost) Sanjay told me that he bets on behalf of other people, often placing well over a lakh (100,000 rupees) on any given horse.
“Black money returned to the races immediately after demonetisation,” he said. “When the move was announced, all the horse racing was cancelled for a week, but as soon as it reopened people came and spent big . . . I’d say at least 70 per cent of the money here is black.”
During my third punt (300 rupees on Aspen – it lost), Rahul told me that the big problem India faces is tax collection. Rahul works in the aviation industry, an official employer that is compliant with income-tax rules. Yet between only 1 and 2 per cent of Indians pay direct income tax.
“If there is a loophole,” Rahul said, “we will always take it. Traditionally, going back to the British Raj and the rulers before that, tax has been used to punish people. There’s still no faith in government or banks among normal people here, so there is no desire to pay income tax.”
In a recent report, Bloomberg claimed that just 6 per cent of black money in India is in the form of cash. The rest is in property, offshore accounts and commodities such as gold. The economist Prabhat Patnaik and others have said that demonetisation will do nothing to eradicate black money and will lead to recession.
Sanjay told me that he did know of big-time racing clients who had been asked by the government to explain where their post-demonetisation cash deposits came from. But, he said with a wink, “It’s very easy to pay an accountant to work out where it came from on your behalf.”
The government rhetoric has since moved on from eradicating black money, and there is now talk of moving to a digital future. Jokes about the new “cashless India” being more like “less cash India” abound. A group of lads at the bar told me that the “cashless” system was just a Big Data collection – a way for the government to acquire digital records for more citizens.
With the exponential growth of Paytm (a form of mobile money transfer) and the Jio network (which offers three free months of unlimited phone data for Indians with registered identification), it’s easy to see the origins of these quips. Furthermore, India’s controversial mass surveillance project, known as “CMS”, will become fully operational this year. Add to this the recent statement by the country’s attorney general, Mukul Rohatgi, that “violation of privacy doesn’t mean anything because privacy is not a guaranteed right”, and it becomes even more evident that this is a popular conspiracy theory in the making.
I placed my final bet on the last race of the day, throwing 600 rupees on Allora, a hot tip from Sanjay. Allora came from behind to win, leaving me jumping for joy and finally in profit. But the real winners of demonetisation are yet to be revealed. Will Modi’s great gamble with India’s economy pay off? Only one thing is clear: the odds are fluctuating every week.
This article appears in the 08 Mar 2017 issue of the New Statesman, The return of al-Qaeda