The Law of Unintended Consequences*

It is now over a month since the government of India withdrew the validity of 500 and 1,000 rupee notes in order to stamp out “black money” – cash obtained through bribes or illegal activity. This amounted to 87% of the cash on the streets. The government redesigned the 500 note and issued a new denomination of 2,000. There was chaos outside banks but we were reassured that all would be well in “a few days”. This became “a few weeks”, and now “a few months”. The latest estimate is six months.

Unfortunately, the new notes are a different size, so the ATMs needed to be altered. The shortage of new cash was so acute that the government felt obliged to issue a batch of misprinted notes, where the interrupted silver foil strip was inserted in a different position relative to Gandhi’s head. This will be a boon to forgers in future. People are not yet that familiar with the notes to know if they are genuine or not.

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The aim is admirable if one thinks that most of the black money is stashed under the mattress. It won’t be worth anything unless you deposit the notes in a bank. It was possible to change notes at the bank but only in limited amounts. Smart rich people would pay poor people to queue at different banks to exchange old notes for them, but the banks decided they would only change money of those who had an account with that bank. They even started putting indelible ink on the fingers of those who had exchanged old notes for new – but this method is also used to ensure you can’t vote more than once and there will be elections soon in Uttar Pradesh. Left index bank withdrawal, right index recently voted.

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Poor people and the daily waged do not normally have bank accounts. They have been encouraged to open “Jan Dhan” accounts. Over the past month, an additional three hundred billion rupees (£35 billion) has been deposited into these new JD accounts. Some of this money has been “loaned” to poor people in order to launder it white. Prime Minister Modi told people in this situation to keep the money and to write to him personally if anyone tried to repossess their “loan”. I am not sure that this is good advice for obvious reasons.

Quite a few bank managers have been arrested for assisting with the laundering process, and even a few senior police officers. There have been some high profile cases of vast quantities of notes being transported to NE India, where tribal people are exempt from tax (if you deposit more than 250,000 rupees without explanation of how you came by this money, you would be taxed at the extortionate rate of 200%).

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Dozens of people have died in the queue outside, waiting for the bank to start dispensing money over the counters or from ATMs. One man was trampled to death in the stampede to get money from a bank in a town called Tarkulwa.

 

I stood outside the State Bank of India ATM during lunchtime earlier this week but the money ran out when I was sixth in the queue. But I have a debit card and can load up my mobile phone with credit to pay for things like cinema tickets or even milk. Most Indians don’t have these modern tools and are forced to use cash. Many people who work for a daily wage have left or lost their jobs because of the shortage of small denomination notes. People would rather save their change than give alms to beggars.

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If you manage to get money out the ATM, it is usually in the form of a single 2,000 rupee note. Unfortunately, if you want to buy some vegetables for 200 rupees from a market vendor, it is unlikely that you will get back any change. Some market vendors have been unable to sell their produce and have been slashing prices in order to get some return on deteriorating fruit and veg.

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Just imagine the chaos at the toll booths on the motorways when change is not available and you are not able to pay by credit or debit card. The government have tried to alleviate the problem by allowing vehicles to pass through without charge at peak times.

There was a tragic story in the newspaper this week of a man who was unable to get his money from a bank to pay for medication for his wife, who was in hospital suffering from cancer. He went back to the bank the next day with his wife’s corpse to get money for her cremation. This time he was successful. Even a police officer contributed a few thousand rupees to help him.

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Indian weddings are notoriously lavish and expensive. The government has limited withdrawals of money for weddings to 250,000 rupees (less than £3,000). Many couples have deferred their nuptials until cash is more freely available.

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In Jagatpuri, fifty local residents organised an ATM pooja – worshipping the cash dispenser as though it was a temple idol in the hope that it will deliver money.

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Newspapers have reported that some rural areas have returned to a barter system when they ran out of cash. This has even started to happen in parts of Delhi.

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Recently, the government has refused to allow inmates to leave prison on parole to exchange their old notes, perhaps the result of ill-gotten gains.

The government reckons that there were about 14 lakh (100,000) crore (10,000,000) rupees in circulation before the notes ceased to be legal tender. The authorities were hoping for a windfall if not all these notes were deposited into banks. However, already over 90% of the money has been deposited or changed and it is projected that the amount will exceed the 14000000000000 rupees. The assumption is that counterfeit notes will have been deposited along with genuine bills.

* American sociologist Robert Merton first wrote about the law of unintended consequences, how the actions of government often have unanticipated and unforeseen effects. Demonetisation is a perfect example. When it comes to making money, people can be relied upon to come up with ingenious schemes to evade the government’s “surgical strike on black money”.

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