India is once again making money a plaything

By Andy Mukherjee

When it comes to money, ignorance is bliss. For the second time in recent years, India seems to have disregarded this maxim.

In November 2016, Prime Minister Narendra Modi shocked the world by outlawing the 500 ($6) and 1,000 rupee bills in which the country held 86 per cent of its cash. This time, the coup de grâce has fallen on the 2,000 rupee banknote. Since it accounts for only 11 per cent of the currency in circulation, and people have until Sept. 30 to change them into other denominations, it’s not as big a problem as the draconian ban back then. Besides, in recent years, India’s retail payments have digitized dramatically. People with smartphones have options outside the world of paper money.

But the way the notes are being ferreted out is still frustrating enough for consumers, firms and banks to invite comparisons with the 2016 demonetization experiment.

That misadventure missed its main goal of freezing out ill-gotten wealth. But it did shake the foundation on which any nation’s monetary edifice rests. Sovereign cash should have no room for questions. Its users shouldn’t have to value the bills as long as they’re confident that when it’s time to hand them over to someone else, they wouldn’t have to provide any answers either. Ignorance is bliss.

Bengt Holmstrom, the Massachusetts Institute of Technology economist most commonly associated with that idea, won the Nobel Prize less than a month before Modi’s ill-advised ban drowned people in a quagmire of uncertainty: “Can I deposit my money at the bank, and until when?” “Do ATMs have enough new cash?” “What if I don’t have a bank account?” “How will I pay for groceries, buy medicines, pay the labor contractor?”

The central bank finally replenished the withdrawn currency after putting citizens through months of agonizing hardship. Informal enterprises, which back then had no digital alternatives to make or receive payments, cratered. The poor were badly hit. More than 100 people are believed to have died, waiting in queues to access their own funds; some bank tellers collapsed from exhaustion.

You would think the country would have learned its lesson? Wrong.

Once again, India wants people to look into their wallets and cash tills and do due diligence on their pink 2,000 rupees.

Other monetary authorities, too, periodically refresh their decks. The 10,000 Singapore dollar ($7,400) note was retired a decade ago because of money-laundering and terror-financing concerns. But it remains legal tender, as do S$1,000 bills, which went away in 2021. What it means is that the Monetary Authority of Singapore no longer issues those denominations. But if you discover them in your aunt’s attic, they’re still very much money and not worthless paper.

The Reserve Bank of India’s handling of the 2016 chaos earned it the moniker of “Reverse Bank of India,” as it changed its circulars on what to do with old cash faster than people could obtain new money. This time around, the RBI has been sparse with rulemaking. It has only said that banks will accept up to 20,000 rupees from one customer at a time until Sept. 30. Nobody has said that the currency won’t be legal tender after that date, but the very presence of a deadline is making people nervous. In a Monday press conference, RBI Governor Shaktikanta Das said he would wait to see how many of the notes return. “I can’t give a speculative answer as to what will happen after Sept. 30,” he said.

The result has been predictable. There are reports of small firms and gas stations across the country refusing to take the banknotes. And who can blame them? If they miss one trip to the bank before the deadline, their cash could be either worth its full face value or zero. Money doesn’t work well when its worth becomes a coin toss. As for following China on the road to internationalizing its currency, that dream doesn’t move any closer if shopkeepers in Bhutan, which uses the Indian rupee, don’t know what to do with the pile left behind by Indian tourists.

If tax cheats were hoarding their wealth in 500 and 1,000 rupee denominations, which were the biggest back in 2016, why did India even print the 2,000 rupee bill? The logic was never explained, though everyone knows it was a coping mechanism. To deal with public anger amid an acute shortage of legal tender, the central bank came up with a stopgap solution. Almost 90 per cent of the current stock of 2,000 rupee notes was printed before March 2017. The RBI’s “clean note policy,” the reason being given for the withdrawal, would have been just as easily served by quietly telling banks not to recirculate them. The offending currency would have disappeared over time.

However, in trying to actively flush out the embarrassing debris of a near-seven-year-old disaster, India is clogging the drainpipes again. Some banks have taken it upon themselves to ask for identity proof from walk-in clients. They fear that if they don’t, the RBI might haul them up for ignoring its know-your-customer guidelines.

“No questions asked,” or NQA, is a vital property of money everywhere and at all times, according to MIT's Holmstrom and Yale University’s Gary Gorton. Thanks to India’s latest misstep, sovereign-issued cash, the one thing in a modern economy that should be NQA, is once again surrounded by suspicion. No amount of flirting with next-generation digital currencies can compensate for this basic disrespect of legal tender.

Disclaimer: This views expressed in this article are the author's own. They do not necessarily reflect the views of DH.