11/09/2017 How India's failed note ban move taught the world what not to do - The Economic Times

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How India's failed note ban move taught the world what not
to do
BY BLOOMBERG | UPDATED: SEP 11, 2017, 10.17 AM IST Post a Comment

Among other things, demonetisation exemplified all that

Almost a year on, India's ban on large-denomination bills has been deemed a "total can go wrong along the way. As cashless society comes
failure." That's not quite fair. True, the primary goal of flushing out tax cheats has been a into view, the rest of the world should take heed.

flop. But a secondary goal -- "to move toward the cashless society," as India's finance Among other things, demonetisation exemplified all
minister put it -- still has real promise. The rest of the world, in fact, could learn a lot from that can go wrong along the way. As cashless
society comes into view, the rest of the world should
this botched experiment.
take heed.

A report last month showed that 99 percent of invalidated bills have now made their way
Big Change:
back to banks, suggesting the government's plan to extinguish illicit cash has foundered. The end of Five-Year Plans: All you need to know
At the same time, though, currency in circulation is down by about 25 percent from where
it would otherwise have been, according to Bloomberg Intelligence, while electronic transactions are up.

If that trend continued, it could be a big deal. India has inefficient banks and lots of corruption. Its cost of cash -- in access fees,
maintenance expenses and so on -- is among the highest in the world.

Eventually going cashless would slash such costs, while also impeding crime and corruption. It would be a big help to the poor, who
could borrow and send money more cheaply. More powerfully, it would give central banks a new tool for boosting aggregate demand
when conventional measures won't work -- significantly negative interest rates. It's no wonder that so many governments are now
thinking through the concept, and its attendant problems.

But an essential precondition for doing away with cash is trust. And on that score, India's experiment provides an example of what not to
do.

For one thing, the note swap was undertaken rashly. The public was given a mere 50 days to exchange their big bills for smaller ones,
and the central bank couldn't print enough new notes to meet demand. Lines lengthened at bank branches, small businesses folded for
lack of capital, supply chains collapsed, and agricultural prices plummeted. Growth and investment stalled. Perhaps 5 million jobs were
lost.
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For other countries, a better approach would be to phase out big bills over a period of years, making it easy to swap them at first, then
progressively more difficult -- say, by exchanging them at fewer locations. That would allow time to publicize the plan, fix inevitable flaws
and help the public adjust. Meanwhile, electronic alternatives would have an incentive to evolve. In time, bills of all denominations would
dwindle of their own accord.

Which suggests a second problem for India. After invalidating 86 percent of the currency in circulation, the government was left
scrambling to encourage digital payments, using subsidies and other gimmicks. Only about half of Indian adults have bank accounts,
and only about a quarter have internet access. Mobile payments remain relatively rare. Even if everyone had wanted to go digital, they
couldn't have.

http://economictimes.indiatimes.com/news/economy/policy/how-indias-failed-note-ban-move-taught-the-world-what-not-to-do/printarticle/60457625.cms 1/2
11/09/2017 How India's failed note ban move taught the world what not to do - The Economic Times

The takeaway for other countries is to ensure reliable alternatives are available first, along with legal protections and privacy safeguards.
One promising approach is digital legal tender, which might combine the advantages of electronic currencies with the stability of a
central bank.

India deserves credit for trying to move its economy into the digital age. Unfortunately, it also exemplified all that can go wrong along the
way. As the cashless society comes into view, the rest of the world should take heed.

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