India shows its flexibility

India shows its flexibility

December 06, 2016
People queue outside an ATM of State Bank of India (SBI) to withdraw money in Kolkata, India in this file photo. — Reuters
People queue outside an ATM of State Bank of India (SBI) to withdraw money in Kolkata, India in this file photo. — Reuters

People queue outside an ATM of State Bank of India (SBI) to withdraw money in Kolkata, India in this file photo. — ReutersINDIAN premier Narendra Modi’s decision to scrap fully 86 percent of the banknotes in circulation remains as controversial as it was astonishing. Suddenly the widely used Rs500 and Rs1,000 bills became worthless until exchanged at the bank for new notes. At the end of the year, the plan is that no further exchanges will be allowed.

There were many highly risky elements to this clampdown on black money in the economy. Not the least of the challenges is the ability of the Indian tax authorities to work their way through the massive amounts of data that are thrown up by the banks as they credit large sums of cash to individuals.

But what is remarkable about this demonetization is not the outcry that it has caused but the extent to which the operation has actually worked, given that, to be effective, it had to be planned in the utmost secrecy with billions of the new high denomination rupee notes printed and readied for distribution to bank branches around the country.

There are inevitably problem areas where greater foresight would have eased the process. One of these is the shift to cashless transactions. Given the fact that India has been a cash-driven society, the expectation that it could switch overnight to the use of credit and debit cards was never realistic. Nevertheless, there was the hope that the currency change would give a boost to cashless transactions. And so indeed it might, had the card industry been ready.

Problems have occurred on two levels. First, it is simply not possible to create and distribute debit or credit cards by the tens of millions, not just because of the logistics challenges but also because of the need to solicit applications and process them to ensure that the plastic is only distributed to creditworthy customers.

Official statistics claim that there are 700,000 million debt cards that have been issued. However this overlooks the fact that prosperous middle class families are likely to have multiple cards. In addition, there appears to be a not insignificant number of cards that have been sent out unsolicited to customers deemed creditworthy, but which have never been activated.

But at a no less important level, there is the limited ability of traders to accept cards. There are only 700,000 merchant card terminals in India. Card holders who imagined that they would be unaffected by the bank note changeover because they could use their plastic have discovered that they have a limited number of stores where they can shop. Meanwhile traders have been desperately trying to secure card reading machines and connecting them to bank networks so payments can be verified.

Because of the currency changeover, it is being claimed that in some areas, business has collapsed by as much as 60 percent. There are undoubtedly cases of serious hardship not least among small traders who lack the business volumes and higher priced goods and services that justify the cost of adopting card transactions.

Yet, a country that excels in software is seeing a surge in demand for programs that allow payments to be made by mobile phone. In rural areas, a system of promissory notes is reportedly working well. Overall India’s commercial genius is coping because of its flexibility and adaptability. In years to come, Modi’s remarkable ploy may yet be seen as a triumph.


December 06, 2016
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