Indians are facing a major shortage of cash, with as many as 90% of ATMs in some regions of the country running completely out of currency. The cash crisis stems from a policy of demonetization the Indian government launched over five months ago.
On Nov. 8, the Indian government declared that 1,000 and 500 rupee notes would no longer be valid. They gave the public just four hours notice. The 1,000 and 500 rupee notes made up 86 % of the currency in circulation in the country. With a single pronouncement, the Indian government made virtually all of the cash in India valueless.
The government is producing new 500 and 2,000 rupee notes to replace the old notes, but the process has caused extreme hardship across the nation. Just as things seem to stabilize, another wave of cash shortages sweep the country. State Bank of India (SBI) deputy general manager Ajoy Kumar Pandit told the Times of India customers are losing confidence in them due to the cash crisis.
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“Nearly 70% of our 648 ATMs in the three districts are out of cash. The rest will also become dry in the next few days as we do not have cash to refill the machines. We are helpless from our side.”
The Indian government’s move was part of the broader war on cash. The goal is to bring “black money” out of the shadows so it can be tracked and taxed. About 90% of all transactions in India are in cash. It is an overwhelmingly cash economy and virtually every Indian has currency stashed away in their home.
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Transactions using black money mean no taxes are collected. Government estimates show that only 1% of the Indian population pays any taxes at all. By making the 1,000 and 500 rupee notes valueless, government officials hope to force the black money into the light so they can get their cut.
A BBC report described the extent of this hoarded cash and it gives you a sense of just how significant the government move was.
“Even the very poorest Indians have some cash savings – maybe just a few thousand rupees stored away for a daughter’s wedding, the kids’ school fees or – heaven forbid – an illness in the family. But lots of Indians have much more than that. It is not unusual for half the value of a property transaction to be paid in cash, with buyers turning up with suitcases full of 1,000 rupee notes. The size of this shadow economy is reckoned to be as much as 20% of India’s entire GDP.”
According to ZeroHedge, even after five months, the demonetization policy continues to create significant hardship across the nation. C.H. Venkatachalam, general secretary of All India Bank Employees Association, was quoted by Free Press Journal saying current problems are directly linked to demonetization.
“Many ATMs are yet to be re-calibrated. Plus, people have started hoarding Rs 2,000 notes. There is still a huge mismatch in the demand and supply of currency notes.”
India.com reports the “common man” has been the hardest hit by the government’s moves.
“The worst hit is the common man, who has been suffering the pinch even as the government has made an effort to make available sufficient cash in ATMs across the nation. The post-demonetization woes continue to haunt the common man in the country, as many ATMs in metro cities seem to be running low on cash for the last week.”
Of course, this isn’t the first time people have faced cash shortages due to government policy. Greeks had their access to cash severely restricted during their country’s recent economic turmoil. It got so bad, a robust barter economy developed out of sheer necessity, as everyday Greeks had to find ways to cope with cash withdrawal limits and currency shortages.
In fact, developing local networks to facilitate barter provides on way to shield yourself from cash shortages like Indians are currently facing.
Reprinted from SchiffGold.com.
