There is a run on cash in India and it is creating huge lines at banks along with growing anxiety and hostility among the people. India is primarily a cash based culture. Only the upper classes have credit or debit cards. Foreign cards often don’t work at all. In a bold and unprecedented move, the Prime Minister of India, Narendra Modi, announced late on November 8th that Rs 500 notes and Rs 1,000 notes would be illegal. The idea behind the ruling is to curb crime, corruption and the funding of terrorism that runs deep within India. They are giving everyone until December 30th to deposit or exchange their old bills. In the meantime ATMs have been closed for days and people are only able to withdraw a maximum of 10,000 per day or 20,000 in one week, assuming the bank has the cash to dispense.
I have witnessed the corruption here first hand. It is a common practice to bribe a policeman with a 500 rupee note when pulled over for a traffic violation. Once an ATM swallowed my debit card which left me in a world of hurt with no access to cash. The ATM guard told my assistant it was impossible to get my card back. He changed his story when she bribed him with a 500 note. I then got it back instantly. So you can see how common corruption is. Now imagine all these officials, criminals and terrorists with STACKS of cash that have been rendered useless. It may very well help stop corruption, but in the meantime it is causing sheer chaos on the economy and its people.
The immediate impact has been a shortage of small bills. Imagine a nation of over 1.5 billion people that all need small change. People are selling their 500 rupee notes for three 100s out of sheer desperation so they have money for public transportation to get to work or so they don’t have to miss work to stand in a two hour line to just get inside the bank. People are saving their hundreds for emergencies because they are unsure when they may get access to small bills again. Obviously this is wreaking havoc on small businesses that depend on impulse buys for inexpensive stuff, like tea, soda or chips. If it’s non urgent, the general attitude is to wait to purchase it if the purchase requires cash.
Foreigners like myself are particularly screwed right now, and here is why. My foreign credit cards only work about 20% of the time here. There doesn’t seem to be any pattern to it. Sometimes they work, sometimes they don’t. So that means I have to carry a lot of cash around to buy things like groceries or to tip my driver, buy lunch, whatever. I do not have a bank account in India, so I can’t go withdraw cash from a bank, even if they did have smaller currency available. In order to exchange larger bills for smaller denominations the banks are requiring an Indian ID and a local bank account. So again, too bad foreigners! I have a friend coming to visit me from America this weekend and even at the airport they were only able to give her 500 and 1,000 notes. These are basically useless if no one has change. Even if they do have change, it means if they accept them they have to wait in extraordinarily long lines to deposit them into their bank account. She wants to go shopping this weekend for local handicrafts but unless we can find more change for her large bills she may not be able to purchase much at all.
I was told by an attorney friend of mine who has many wealthy clients that during the few hours between the general announcement and midnight when the notes became illegal, there was a run for gold. People took their huge stacks of cash and ran to jewelers who stayed open until wee hours of the morning for their customers. A few hours later many of those jewelry stores were completely sold out of inventory. As you would expect, the next day gold prices went up considerably.
What to do?
As I write this I am stuck in traffic on my way to Delhi to fetch 4,000 in one hundred notes from Kirti who somehow got lucky with a working ATM early this morning. I tried six different ATMS this morning before 9:30 but had no luck. Since many of our employees are also short on small notes, we are attempting to withdraw funds from our corporate account to make small personal loans to our employees for the weekend. We still aren’t sure if we will be successful because the lines are long and the bank may be out of 100s by the time we actually get to the counter.
The crowds at the banks are growing increasingly more agitated. Most banks have a police presence now to keep the peace and many bank employees are being required to work until midnight and all weekend long in order to resolve the problems. On top of it all, Monday is a holiday in India. I’m not sure if that will be a help or hindrance to the whole issue. Right now I guess all we can do it wait and see but the situation is definitely stressful for everyone, especially those sitting on a pile of worthless money!