SPECIAL REPORT

The rupee squeeze: Rural Indians feel the pinch of move to remove high-denomination banknotes

Anxieties mount as rural Indians feel the pinch of Modi's move to take large-denomination notes out of circulation

For the past month, Ms Shakuntala Devi and her family of five survived by borrowing, bartering or even foraging in their fields for food.

Ms Shakuntala, 44, has money - but it is in a bank and she has not been able to withdraw any after 500-rupee and 1,000-rupee notes (roughly S$10 and S$20, respectively) were made defunct by the Indian government last month in a bid to clamp down on corruption and the shadow economy. This has led to long queues to exchange old notes at banks which are themselves struggling to meet demand.

To sow wheat on her half acre of land, Ms Shakuntala, who lives in Mahr Majra village in the northern state of Uttar Pradesh, took seeds from a rich farmer in return for working in his fields in future.

"I don't know what rate he will give me. I have never done this before," she told The Straits Times.

She cobbled together 80 rupees in loose change to buy 25kg of wheat and rice at a subsidised rate for the poor. But she reckons this will run out in less than a month.

She has not bought dal, the dried, split lentils, peas or beans that are a staple in these parts, for some time and the only vegetable her family members are eating is a type of spinach they grow in the field.

Tens of thousands of people protested in nationwide rallies last month against India's controversial move on high-value banknotes. A bank teller counting notes as people wait to deposit and exchange 500-rupee and 1,000-rupee notes in Amritsar. The la
A bank teller counting notes as people wait to deposit and exchange 500-rupee and 1,000-rupee notes in Amritsar. The large-denomination notes were taken out of circulation by the Indian government last month. PHOTO: AFP

  • 86%

    The government has struggled to replace 500-rupee and 1,000-rupee notes, which make up 86 per cent of cash in circulation.

    90%

    More than 90 per cent of India's workforce are paid in cash.

    600m

    More than 600 million Indians live in a town or village with no bank.

"They say it (demonetisation) will be good for the country.  I don't know. For poor people, life is always difficult," she said.

More than a month after Prime Minister Narendra Modi  made the controversial decision to take out of circulation the highest-denomination banknotes, rural India is starting to feel the pinch.

The government has struggled to replace these 500-rupee and 1,000-rupee notes - which make up 86 per cent of cash in circulation- throwing life out of gear, particularly in rural areas where all transactions are in cash.

Factories in rural and urban India have also been hit by the cash crunch, struggling to pay workers, who in turn cut back on spending.

More than 90 per cent of the workforce is paid in cash, including millions of agriculture workers, former prime minister Manmohan Singh noted in The Hindu newspaper.

More than 600 million Indians live in a town or village with no bank, he added. Many villages share one bank, with credit and debit cards almost non-existent.

  • Follow the money

    •Nov 8: Prime Minister Narendra Modi announces ban on 500- and 1,000-rupee notes and that deposit of old notes is allowed till Dec 31.

    •Nov 9: Banks shut in preparation, including emptying ATMs of old notes.

    •Nov 10: Banks reopen to massive queues as people rush to deposit notes and get smaller currency. ATMs remain out of operation.

    •Nov 11: ATMs working but many still out of order as banks tweak them to dispense new 500- and 2,000-rupee notes.

    •Nov 13: Limit on exchange of old to new currency and ATM withdrawals raised, but people continue to queue to get cash.

    •Nov 15: The government asks banks to use indelible ink to mark the right index finger of those exchanging money, after reports that those with unaccounted cash were using others to deposit their money.

    •Nov 16: Winter session of Parliament begins with opposition parties slamming the government for the demonetisation.

    •Nov 21: The government lets farmers use old 500-rupee notes for buying seeds.

    •Nov 23: Goldman Sachs pegs gross domestic product (GDP) growth for India at 6.8 per cent this 2016-2017 fiscal year, down from 7.6 per cent in the last financial year .

    •Nov 24: Former premier Manmohan Singh, a respected economist, calls the demonetisation a "monumental mismanagement"; predicts GDP growth will slow by at least 2 per cent. 

    •Dec 7: Governor Urjit Patel of the Reserve Bank of India, the central bank, says 19 billion new currency notes have been issued since demonetisation. About 76 per cent of the old notes have been handed in.

    •Dec 8: Mr Modi marks one month of demonetisation by thanking people for taking part in the "yagna", or fire ritual, to cleanse India of black money, corruption and terrorism. Queues to get cash continue. 

    Nirmala Ganapathy

The disruption is evident in Uttar Pradesh, India's most populous state with more than 200 million people and home to 6 per cent of the world's poor.

Delays are expected in the harvesting of the kharif, or monsoon crops such as cotton and sugarcane, as well as the preparing of the land for rabi, or crops sown in winter such as maize, as farmers have no cash to pay daily-wage labourers, who get around 250 rupees a day.

In Shamli district, farmers complain that the cutting of sugarcane this month is affected as they have no cash to pay farmhands.

On Mr Harinder Singh Tomar's  farm,  work is going on at half the usual pace. He and his two longtime household workers  are cutting the sugarcane to sell to the local sugar mill. He would usually hire at least three more labourers.

While he said demonetisation is "good", the 54-year-old also pointed out that it has caused problems.

"I don't have cash to give daily-wage labourers. We are using seeds and fertiliser from our old stock. Right now I just pray my children, family and my animals are okay. God help us if someone falls ill during this time Then we are done for," he lamented.

For Mr Modi, bringing normalcy back quickly is particularly important in Uttar Pradesh, which has 80 MPs in the Upper House of Parliament - the largest representation among all states.

State elections, due in Uttar Pradesh early next year, promise to be the first political test of Mr Modi's demonetisation drive, which some have warned could lead to a 2 per cent drop in growth.

Agriculture, expected to grow at 4 per cent in the current fiscal year, will be the worst hit if the cash crunch continues, said economists.

"The rural economy has been hit the worst. Farmers are unable to get input for the next season, as a result of which productivity of crops may suffer. Farmers don't have cash so employment of landless labourers has come down," said economics professor Arun Kumar, who is also author of The Black Economy In India.

Frustration is creeping in.

One recent morning, women, some with their faces covered, stood in one queue outside a Punjab National Bank branch with shuttered windows in a village in Shamli. Men stood in another line.

There were more than 200 people waiting, some since 4am on a foggy cold morning.  Some women started banging on the bank's cream-coloured windows. "Give us our money," yelled one. The chant was soon taken up by the others.

The bank, which serves 20 villages in the area, has had little cash to distribute in the past three weeks.

Queues are starting at 6am and continue till 4pm as farmers, field labourers and village women hope to get their hands on some cash.

"I just want to tell Mr Modi I am okay with doing away with old notes but at least give us new ones," said Ms Monica Sharma, 27, who travelled 7km from her village to the nearest bank. The mother of two went home empty-handed, failing to get cash to pay her child's school fees.

Tens of thousands of people protested in nationwide rallies last month against India's controversial move on high-value banknotes. A bank teller counting notes as people wait to deposit and exchange 500-rupee and 1,000-rupee notes in Amritsar. The la
Tens of thousands of people protested in nationwide rallies last month against India’s controversial move on high-value banknotes.  PHOTO: AFP

Behind the bank's locked gates, its manager Kripal Singh said: "It's not my fault. What can we do, there is very little money coming. But (the villagers) don't believe me."

Manufacturing has been hit too.

In the city of Indore in the central state of Madhya Pradesh, Mr Amit Sancheti has shut down nearly 50 per cent of production at his footwear factory, Kalpana Industries.

"There is a cash crunch so people are not having money and they are not coming to retailers," he said.

"I don't know how many factories can survive this blow. Most are running on 20 to 35 per cent production... I think it will take another month. We are expecting things to go back to normal," said Mr Sancheti, 36, who has been forced to lay off more than a dozen workers.

Tens of thousands of people protested in nationwide rallies last month against India's controversial move on high-value banknotes. A bank teller counting notes as people wait to deposit and exchange 500-rupee and 1,000-rupee notes in Amritsar. The la
A shop supplying traditional wedding dresses and suits in New Delhi. Business has been hit by the demonetisation move. PHOTO: AFP

In India, small and medium-sized enterprises are seen as key drivers of manufacturing growth and there are concerns that the cash crunch may erode this.

Mr Manesh Agarwal, 43, managing director of Uttar Pradesh-based B.B. Foods, which produces and supplies frozen food items such as french fries, has been having problems paying workers.

But he thinks the pains are worth bearing with for long-term gains.

"India is a cash-based economy. The card payment system will come in, there will be greater transparency with dishonesty reduced, and that will be a push for the economy," he said.

A version of this article appeared in the print edition of The Straits Times on December 13, 2016, with the headline 'The rupee squeeze'. Print Edition | Subscribe