NEW DELHI — On Nov. 8 — the same day American politics was upended — India's prime minister announced the sudden invalidation of all high denomination currency notes, accounting for a whopping 86 percent of the country's cash. Demonetization, as it is referred to here, has thrown Indians rich and poor into a protracted state of confusion and frustration.
The move's primary intention has been to catch tax evaders. A significant portion of India's cash is ill-gotten or undeclared, and it passes hands in an extensive shadow economy that goes untaxed. Invalidating 500 and 1,000 rupee notes meant that all Indians, including those hoarding large amounts of cash, would have to exchange those notes for new ones at a bank. In the process, official thinking went, all cash would become accounted for, and those who had been evading taxes would either have to stomach huge losses or declare their assets and pay major penalties.
For the plan to work, however, it had to be done in secret. Otherwise, those in possession of India's “black money” could have converted it into noncash assets such as gold and avoided detection. That secrecy meant that the minting of new notes — new 500s, and 2,000s instead of 1,000s — could not happen in earnest until well after the invalidation was announced, lest a whiff of the change seep out. At current rates of printing, analysts say it may take three more months, if not double that, to restore the economy to its previous level of liquidity.
As such, India is now in the throes of a major cash shortage. Banks have each set their own limits on ATM withdrawals, leading to long lines as people's cash runs out quickly. People are spending hours in those lines, often to find out that cash has run out before their turn. That's not to mention entire sectors of the economy — including segments of agriculture and even manufacturing — that are entirely cash-driven and have gone through major slowdowns because of the shortage.
For the first few weeks of demonetization, it was common to meet Indians who felt that their collective suffering and inconvenience was justified because it would ultimately usher in a less corrupt, more equal India. But as the initiative enters its second month, more and more reports are emerging of seizures of vast quantities of hoarded cash in the new notes. Like water reaching the sea, the corrupt, it seems, have found ways to navigate around the government's new obstacles.
In just two states alone, India's Income Tax department said on Wednesday that it had recovered 202,200,000 rupees (roughly $3 million) in new 2,000 notes, according to ANI News. In those two states, Karnataka and Goa, the department said it had registered a total of 36 cases and recovered unaccounted-for assets — mostly in cash, jewelry and gold — in excess of 10 billion rupees (roughly $150 million).
Stories of humongous seizures of assets including new currency have become so common that news outlets are simply adding them as bullet points to stories with running tallies. A sense is building that while millions of Indians languish in ATM lines, the old black money system is simply restarting itself with the new notes.
The biggest question is how people are getting their hands on such huge stashes of the new currency. A sting operation by the India Today news channel revealed one way: visiting your local politician. Reporters posing as businessmen approached four politicians in and around New Delhi, none of whom were from the party led by Prime Minister Narendra Modi. They said that they had large quantities of old notes that they wanted to launder into new ones. Each of the four politicians said that they could arrange the deed for a 30 or 40 percent cut. On Dec. 6, a politician from Modi's party was arrested in the state of West Bengal with 3.3 million rupees in new notes.
Bank employees, from local tellers to a staffer of the Reserve Bank of India, have also been implicated in laundering schemes. The RBI played down the involvement of its employee, whose title was “senior special assistant,” saying he was a “junior functionary.” On Tuesday, the RBI instructed banks around India to keep strict records of all deposits and withdrawals, and promised large-scale audits in the near future.
Modi has staked his reputation on weeding out corruption through demonetization, but the endless news of cash seizures has many wondering if corruption is more deeply endemic than he realized. It was just last week that police in the central city of Hoshangabad stopped a minivan and found 4 million rupees in new notes stuffed in a black cloth bag inside. On the front of the car, in thick gold lettering, were the words: President, Anticorruption Society.