For the last 12 days, India has been turned into the world’s biggest open-air laboratory for extreme financial experimentation, after the Modi government decided, at the drop of a hat and apparently without warning even the banks, that the two biggest denomination notes were all of a sudden worthless, to be replaced by new notes.
Before Modi’s fateful decision, on Nov. 9, the 1,000 rupee ($14.67) and 500 rupee ($7.33) notes accounted for 86% of India’s cash economy, which itself represented well over 90% of the country’s retail transactions. The result has been widespread financial and economic chaos. Consumption in the cities dropped considerably. In the countryside, where bank branches are few and understaffed, the economy has ground to a shuddering halt. As the WSJ reports, for many the last remaining lifeline has been the barter economy:
Rice, abundant after the autumn harvest, has become a common medium of exchange. Rice for lentils, rice for potatoes, rice for cooking oil, rice for salt.
As is now abundantly clear, the government did not do all its homework before unleashing this demonetization drive. It completely overestimated the country’s readiness for such a radical move. The newly designed cash bills don’t even fit in the ATMs. “You needed to have almost a military-style remonetization effort” to get the new bank notes out, says Partha Mukhopadhyay, an economist at the Centre for Policy Research in New Delhi. “That hasn’t happened.”
Even Kenneth Rogoff, the Pinceton economist who advocates the abolition of physical currency in advanced economies, has expressed reservations about the government’s methods, arguing that a more gradual phase out of the large denomination bills would have had a much less disruptive impact on an economy in which well over half of the population is unbanked.
But in India, a large cross-section of the professional classes supports the government’s anti-corruption drive, in spite of the disruption it has caused. How long they remain supportive will entirely depend on the legislation’s impact on corruption at the top of Indian society as well as the government’s ability to restore some semblance of order.
Another person who has come out strongly in favor of the government’s actions, for very different reasons, is the world’s richest (official) billionaire, Bill Gates, who just happened to be in India on business a few days after the government’s decree.
“The world as a whole will go cashless, but predicting for any country when that will happen is very hard,” he told the Indian prime minister. In Gates’ opinion, India’s latest move should put it at the forefront of the fintech revolution: “All of the pieces are coming together,” he said. “I think in the next several years India will become the most digitized economy, not just by size but by percentage as well.”
Gates has good reason to be excited at such a prospect. After all, both, Microsoft and the Bill and Melinda Gates Foundation stand to benefit enormously from a more digitized Indian economy. As the Indian financial daily Business Standard notes, Gates wants to partner with the Indian government on a whole raft of major initiatives, including cyber crime, digital health, digital literacy, e-agriculture and, of course, e-payments.
During his stay in India, Gates had a meeting with the government’s Minister of Information Technology, Law and Justice Ravi Shankar Prasad to discuss those collaborative opportunities. Industry experts say that Microsoft is already providing back-end support to a number of payment banks in India, which are set to launch in the next few months. According to Business Standard, the Ministry has requested the Bill and Melinda Gates Foundation to be part of the digitizing process.
“It’s a very exciting time in India and some of these digital platform opportunities are really quite amazing,” Gates gushed after the meeting. “The government has invested manpower and the payments banks and payment infrastructure. It is now a case of building the applications on top of those. We need to work on health issues, health applications. Our Foundation is committed to working on those areas – our relationship with this Ministry will be very critical for us,” Gates said.
That the Bill and Melinda Gates Foundation should emerge as an important advocate and beneficiary of India’s demonetization drive should come as little surprise. The foundation has carved out an important role for itself in India since launching operations there in the early 2000s. It is also one of the most vocal proponents of a cashless economy. As Gates himself wrote in the Bill and Melinda Gates’ Foundation’s 2015 annual letter, poor communities in emerging economies — in particular Africa — represent a wonderful untapped potential for e-payments providers (emphasis added):
“(B)ecause there is strong demand for banking among the poor, and because the poor can in fact be a profitable customer base, entrepreneurs in developing countries are doing exciting work – some of which will “trickle up” to developed countries over time.”
In 2012, the BMG Foundation helped launch the Better Than Cash Alliance (BTCA), a UN-hosted partnership of governments, companies and international organizations whose stated mission is to “accelerate the transition from cash to digital payments globally through excellence in advocacy, knowledge and services to members.”
As we’ve pointed out before, in light of the inexorable advance of electronic payment systems, cash’s days may well be numbered. But there is a whole world of difference between a slow natural death and euthanasia. It is now clear that an extremely powerful, albeit loose, alliance of governments, banks, central banks, start-ups, large corporations, and NGOs are determined to pull the plug on cash — and their vehicle of choice is the BTCA.
The BTCA’s membership list reads like a Who’s Who of some of the world’s most influential corporations and institutions. They include Coca Coca, Visa and Mastercard, the Citi Foundation, the US Agency for International Development (USAID), the World Saving Banks Institute, which represents 7,000 retail and savings banks worldwide, the Ford Foundation, the Clinton Development Initiative, and a bewildering alphabet soup of UN organizations.
But as we warned in October, it’s BTCA’s member governments that matter the most, for it is they who will ultimately be shaping or even bending the laws and traditional practices of their respective lands to “accelerate the transition from cash to digital payments.”
BTCA currently has 18 member governments among its ranks, all of them representing emerging and developing economies, the most important testing grounds for cashless economics. They include India, which joined the organization on September 1, 2015, exactly a year after the launch of Modi’s flagship financial inclusion program Pradhan Mantri Jan-Dhan Yojana, which saw 175 million new bank accounts created. In BTCA’s own words, its new partnership with India is an “extension of the Indian Government’s commitment to reduce cash in its economy.”
It’s a commitment that the government has now more than honored. And amidst all the chaos and impoverishment that its actions have unleashed, Bill Gates hopes to reap the benefits. By Don Quijones, Raging Bull-Shit.
This is how “Economic Shock & Awe” turned into “Nightmare without End.” Read… India Launches War on Corruption, Hits Cash, Chaos Ensues