Surprise! Your Cash Is Now Worthless

hard cash. While it seems to be disappearing from people's daily lives in the developed world where plastic or PayPal or Venmo, whatever you prefer, all those are ascendant, travel halfway around the world to India and the opposite is true. Most Indians get paid in cash. If they want to save it, many do it the old fashioned way. They

stuff it into boxes or mattresses. Two years ago, some two hundred and thirty three million Indians that's almost one fifth of the population didn't have a bank account at all. That same number, that's almost two thirds of the population of the United States. I'm scot landman. With me in our Washington studio is my colleague Show Chandra, who was born and raised in India and happened to visit the

nation in December. Were also joined remotely by Cornell professor Eshwar Prasad, who was also a Brookings Institution fellow and former official at the International Monetary Fund. Eshar thanks so much for joining us today. Thanks for having me on and show. Thanks for being with us in the studio too, as Scott, thanks for having me to your point, Indiana's reliance on cash isn't just an inconvenience. It also creates

opportunities for corruption and dodging taxes. That explains why Prime Minister rain Modi suddenly announced in November that he would invalidate almost nine of cash and circulation, making it worthless overnight. Everyone holding five hundred and thousand group bills, which are what about seven and fifteen dollars each year, would be

required to trade them in for brand new currency. Right, and that move sent hundreds of millions of people rushing to banks and waiting in crazy long lines from what I've read, to exchange their money. It was a big mess and the impact is starting to show. Not too long after India had surpassed China as the world's fastest growing major economy, it's now in danger of losing that title to the Middle Kingdom again. So each Hre, can you just walk us through why India would take such

a drastic action like this. The objectives were noble ones, and I think there were multiple objectives. In fact, one show pointed out was to try to deal with the corruption problem. A lot of economic activity in India works through the shadow economy, and on major transactions safe for housing purchases, a significant part of those transactions are conducted in cash and order to avoid the tax net. In addition, there was a big concern about a large number of

counterfeit notes circulating in India. M estimates suggest that a very significant proportion of the notes actually in circulation might have been counterfeit. So this was meant as a strike against the shadow economy, against counterfeit notes, and most importantly

against corruption. The sense was that a lot of ill gotten gains were being held in cash, and that this move would be a strike against corruption, and in particular, this would be one reform where the rich, who presumably had slightly larger cash holdings and in some cases much larger cash holdings, and the poor would be much more

severely affected. Of course, the implementation could have been done a little better, but then there is a question about whether in a country like India, there is really an effective way to implement such dramatic move that strikes said the pocket books of the wealthy and the elites, without

doing it in a disruptive way. Um I too was in India in December, and I got the sense that while many lower and even middle middle income class people did not like the implementation, they felt that finally Mr Mody seemed to be taking a big hammer to corruption. So they were broadly supportive with the more but certainly incredibly been implemented better. So has it actually achieved the goals? Even if whether or not people are in favor of it, is it is it something that you can judge it

or is it too soon? It's hard to say. Um. There was a sense that if a significant proportion of the currency didn't come back, that would imply that these had in fact been ill gotten gains that the corrupt would not want to sort of bring out into the

open um. There was a tax amnesty put in place, the idea being that if there was money being held without taxes having been paid on on the income that created it, um that you could put the money back in the bank at new currency notes and pay um a slightly higher tax than normal, but escape punitive measures

based on all those indications. I think there is a sense of the amount of money that was brought back into the system was not as large as expected, but certainly it has put the fear of God into those who may have been using cash for corrupt transactions. Um and I think it's had a positive effect at least in terms of giving Mr Modi some credibility if you were to use it to push forward more economic reforms and if you were to put in place more measures

to tackle corruption. There's been some movement on that front, but not as much as I had hoped for. So we'll have to wait and see. Each way you talked about implementation, is there a better way to tackle the goal that Prime Minister Modi had in mind? There was a shock value to it. Understandably it couldn't have been announced ahead, But is there really something more that could have been done to captackle corruption, strinth AP, parallel economy

and what else is being done in India right now? So? First, could there have been a less disruptive way to do this?

That's that would have been difficult, And this is where the difficulty lies, because it turns out that, as you pointed out earlier, India is an economy UM that runs largely on cash, and the value of the currency notes taken out of circulation by this move of taking out the five thousand rupee notes amounted to about eight six percent of the value of notes and circulation, and in India there there are some estimates at about two thirds of all the cash and circulation is actually used for

day to day transactions. So that was a large hit on the economy. But the significant thing in that number again is that about one third of the cash that was out in circulation was not really circulating. It was held as well. So that's where the hope was that there would be a hit in terms of corruption UM.

So I don't think there was a much better way to implement this, but certainly they could have acted faster once the Act was put in place, recalibrating the A T. M machines, getting new notes out into circulation UM, that perhaps could have been done faster. But my sense again is that the Reserve Bank of India and the government, we're doing all they could to print notes quickly and get them out into circulation. What one was hoping Mr. No They would follow by was additional measures to deal

with the corruption issue. In particular bringing uh financing of political campaigns more into the open. In the budget, there was a modest measure taken towards this end um, but I think a lot more needs to be done to deal with the root problem of corruption, including changing incentives for public officials to engage in corruption, which in turn would require reducing the intrusiveness of the government in the overall economy. On those fronts, a lot more remains to

be done. So have they have they gotten through all these implementation issues yet if things returned to normal yet in the country or they still got a ways to go so um. Speaking from personal experience, I was in Mumbai, the largest commercial capital in India, and mid December and virtually none of the ATMs, even in the commercial area

had any money in them. By the end of December, which is about forty five days after the move had been announced, many if not most of the ATMs, at least around the central area did have money and there weren't long lines. But the urban areas are not that representative. In fact, in the rural area, as I understand that, there was much more disruption because that's a more cash

lity economy. The interesting thing however, is that I, of course, as an economist, could not resist asking every taxi driver, every Uber driver that I encountered how they felt about the move. And there was broad support for the intentions behind and behind Mr Modi's move. But as I started investigating further, certainly they were concerned that there was disruption in the rural and urban areas caused by this move, and people wish they had been less disruption. So my

senses that those problems I've been dealt. It was to a significant extent. But really the issue now is whether Mr Moudy has followed through in terms of the broader corruption problem. So what about your experience did you have? Did you have similar impressions to what you sure I was talking about when you were there a couple of months ago, similar and different as well. I visited New Delhi more than a month after the announcement, so this

was around mid December. Delhi, of course is the capital of the country. You could see that the shock was over, but the pain was still rampant, and I felt too. For one thing, the long lines each were touched on what was happening at the banks. I personally visited the bank I had some old notes lying around the line, stretched out the door around the block. Customers were getting impatient, the bank officials were harried, and everybody had to just wait in long lines um to see how much bank

currency would be available. And then the bank officials would decide how much they were going to give you each day. If you wanted more, you had to come back the next day and stand in line all over again. In contrast, there was another very powerful visual which spoke to what's happening um the impact on businesses and on the economy.

The stores were just deserted. Now in New Delhi, in all of my visits over the past twenty years, I've never seen so many empty stores, jewelry stores, clothing stores, even sorry emporiums which to brisk business on a regular business day. They just had people sitting around that The staff was, you know, just waiting for customers to walk in.

Grocery stores the same thing. So business seemed to have come almost to a standstill, uh because people didn't have the money to pay and the storekeepers didn't have any other means of accepting payment. And then finally, apart from these visuals, there was this feeling of fear of what's coming next. You'd have fresh rumors every day about what was going to happen. People were picking up the newspapers, listening to the radio and television. The rules were being

made up as things unfolded. And UH, to give the government it's some credit when they realized things were not going the right way, they were trying to adjust things to to make it easier. But of course there was a lot of confusion and people felt the pay so so clearly this was a disruptive event. Uh. The government just gave its budget presentation a few days ago where I think they made some projections for the deficit and the economy. What would have to be done or what

kind of facts would have on the economy. Is this a short term disruption that will depress growth this year, is sure? Or is this something that that the ripple effects could be felt for some years to come. There are two ways of thinking about It's got. One is that this has created a lot of uncertainty in the business climate, and as show pointed out, in terms of consumption, which is some an important driver of growth in India,

and that's not good for growth. On the other hand, if this is seen as one of many reforms that have been instituted in upcoming and signals that Mr Modi is finally getting serious about the big reforms that are necessary to get growth going, that could stimulate more investment, that could stimulate more foreign capital inflows and have a positive effect on long term growth. And they should be seen in the context of some things that have been

accomplished over the last year. UM. The implementation of the Goods and Services tax is now on track. UM, It's gotten through parliament, although the implementation is still being delayed for some technical reasons. There was a bankruptcy law put in place last year, there have been a few other reforms so in scene. In that light, it seems that Mr Modi is finally using his political mandate to start rolling out some bigger reforms, even while maintaining some discipline

on the fiscal side. The latest budget that you mentioned does allow for a little bit of slippage on the phisical targets, but I think overall it's gone down quite well in terms of UH, not too many populous measures

and overall a reasonable amount of fiscal discipline. So if the government can maintain discipline on the fiscal front with inflation seeming to be under reasonable control um and if Mr Mody starts rolling out some big ticket reforms, that could be enough to solidify confidence at the economies on the right track that Mr Mody is serious about economic reforms and that could have a positive effect on growth.

But if all this disruption turns out to be for not in terms of Mr Mody not using the additional support he has gained right now to push over big economic reforms, that could be a damper on growth, both in the short term as well as in the long term. So what's the bottom line here? Putting aside the questions of whether the GDP numbers in India and in China are credible or not, as as you're very familiar with US issues, will India continue to grow at a faster

pace than China or is China going to take that back? Well, India has all the potential to grow much faster. And if you think about the relative sizes of the economy, is China is now an eleven and a half trillion

dollar economy, India has barely to trillion dollars. So India could certainly grow much much faster given that it has a much lower base to again with but in India growth does remain fragile to some extent because of the age old problems making it hard for the manufacturing sector to gain traction, although it has done somewhat better in recent months. The services sector again has been doing reasonably well, although there are concerns about whether it has enough momentum um.

But I think getting beyond the short term issues unless India can tackle the big long term problems that where the list has not changed over time, having to deal with infrastructure, improving the banking system, getting the labor market fixed. Unless those big changes are made, I think India's growth, even if it does pick up a little about China's growth, is going to remain fragile for a while. Could there be any consequences in India besides the economic impact of

this move? There are some important state elections coming up in the next few weeks or a few months um and how Mr Modi's party does in those legs could um end up determining whether he starts taking a more populous turn or rides the wave of some support that he has received from this reason to move and pushes forward using the political capitalism he has gained to get some economic reforms under way and that will have a big impact on India's growth again, both in the shot

and long terms. All right, well, char thank you so much for being with us today. This is a really fascinating conversation. My pleasure, Scott, thanks for having me on and good talking to you to show and show. Thank you too. Thanks. Alright, well, Benchmark will be back next week and until then you can find us on the Bloomberg terminal and Bloomberg dot Com are newly revamped Bloomberg app,

as well as on iTunes, pocket casts, and Stitcher. While you're there, take a minute to rate and review the show so more listeners can find us and let us know what you thought of the show. You can find me on Twitter at at Scott Landman is at at E s W A R S P R A s A D and show is at at show s H O Chandra c h A N D R A and Eshwar. Your recent book on China's Redmond B is called Gaining Curtency that I said that in min B. Benchmark is produced by Sarah Patterson. The head of Bloomberg Podcast is

Alec McCabe. Thanks for listening. See you next time