Demonetization and Auroville

On the evening of 8th November, the Government of India announced that Rs 500 and Rs 1,000 banknotes would no longer be legal tender from midnight. New Rs 500 and Rs 2,000 banknotes would be issued to replace them.

It has been described as one of the most radical economic experiments ever made because India is overwhelmingly a cash economy and, at only four hours’ notice, the Government made 86% of the cash in the world’s seventh largest economy virtually worthless.

The stated rationale was to stop the counterfeiting of banknotes and to stop tax evasion by exposing “black money”, money on which no income tax is paid. According to figures published by the government earlier this year, in 2013 only 1% of the population paid any income tax at all. Huge amounts of untaxed cash are stored away or used in India’s shadow economy. The size of this shadow economy is reckoned to be as much as 20% of India’s entire GDP.

The Government also hopes that the present situation will encourage more people to opt for electronic forms of banking, which can be more easily monitored.

The Government allowed people to pay the old banknotes into their bank accounts until the end of December. For a certain period, and up to a certain amount, they could also exchange them for legal tender at banks. Demonetized notes could also be used for a time for specified transactions, like paying municipal taxes or purchasing fuel at petrol stations.

The scarcity of cash due to demonetization led to widespread chaos as 90% of the Indian economy is cash-based. There were huge queues outside banks and ATMs, but many banks and ATMs rapidly ran out of cash because it took time for the new notes to get into circulation. (The new Rs 500 were still not available by the end of November. Lack of these commonly traded notes is a key factor in the present liquidity crisis.) Further complications were that all the ATMs had to be recalibrated to accept the new banknotes, and when the new Rs 2,000 notes finally arrived, many shopkeepers refused to accept them for transactions of less than Rs 1,000 as they only had limited change.

Some banks attempted to ease the situation by offering free card readers to shopkeepers and small traders, so expanding the point of sale options for credit and debit card holders. Also Paytm, India’s largest mobile payment company with 85,000 merchants on its platform, has seen a 700% increase in overall traffic.

However, the sector that has been hardest hit are the small shopkeepers and market traders and those people, particularly in rural areas, who do not have bank accounts. While the Aadhaar drive means that many more people have bank accounts today, the World Bank reports that almost 50% of the population still do not have bank accounts. Small traders have seen their temporarily businesses collapse for want of customers and the poor everywhere have had to radically curb their expenditure.

As to the success of demonetization, opinion is divided. Many economists initially hailed it as a brave move to clean up the Indian economy. However, the economist and former Prime Minister, Manmohan Singh, was critical. He said demonetization would only result in hurting the poor, eroding people’s confidence in the currency system and it would adverse impact the economy, parts of which have already ground to a halt. He estimated that India’s GDP this year would fall by at least 2% as a result of the move. Prime Minister Narendra Modi replied that he had the support of the common people, who are his ‘soldiers’ in the battle against black money and corruption.

As to the figures, the government told the Supreme Court that it expects to unearth 4,000 crores (US $ 583.8 million) of unaccounted cash. On 25th November, The Centre for Monitoring the Indian Economy calculated that the cost of withdrawing high-denomination notes and replacing them with new ones will be about 1.28 lakhs crores (US $ 18.7 billion). The overall cost of the whole exercise, they estimated, could be much higher.

The effect upon Auroville

So how have Aurovilians and the Auroville economy coped with demonetization?

On the first day of demonetization, the Financial Service (FS) accepted old Rs 500 and Rs 1,000 notes if paid into existing FS accounts, and people could draw a maximum of Rs 2,000 in other denominations. On the second day, Auroville units could deposit old notes and draw a limited amount of cash. However, after this the FS announced they would not accept any more old Rs 500 and Rs 1,000 notes. Furthermore, they had no more cash to dispense.

Almost three weeks after demonetization was implemented, the Financial Service has still not received any cash from the banks. In other words, nobody can physically draw money from their account, and there is no indication of when cash will once more be available.

Rathinam who, in the absence of Otto was managing the Financial Service, admits that the first two days were very intense. “People were bringing their old money to us – there was a panic to get rid of the old notes – and there was a new Government directive every day. But after two days, the situation lightened. Although guests leaving Auroville were impacted because we could only disburse a limited amount of cash to them, most residents relaxed. They realized that because so much is paid through accounts in Auroville, they didn’t need much cash except for a few ‘external’ transactions like buying petrol or paying workers. It was a great realisation that we have such an economy.”

It’s a point made by many other Aurovilians. “In my home life I have very few instances of needing cash,” says Isha from the Auroville Board of Services. “All everyday things – household food and sundries, eating out, clothing, transport (electric), repairs and service calls – are done through collective accounting at Financial Service, not cash.

“Auroville can be seen as being very far advanced in having had a substantial cash-free economy in place since many years. As a community, we have pooled our considerable resources and as a result have enjoyed much less stress from the untoward fallout of a shortage of currency notes.”

“I don’t have employees. I don’t have an amma. I don’t employ a gardener. I put petrol in my little TVS about a week ago and don’t go around too much. I mostly don’t “need” cash. I was aware of this already but this “event” brought the knowledge into a whole new light. For me it is a freedom for which I am deeply thankful,” says Amy.

But what about those Auroville commercial units that rely upon Indian customers. How have they been affected?

“Surprisingly little,” says Nicole, who manages the Visitors Centre. “Most visitors to Auroville have credit/debit cards and we have not seen a significant drop in activity at the Cafeteria. Even the teashop kiosk, which is cheap and does not have a credit card machine, has been functioning pretty much normally.”

“The first days were a bit confusing,” says Marc, who manages two coffee shops, “but as the first week passed, we realized that most of our customers have shifted to alternatives to cash. The cafes, anyway, accept the three cashless methods (Financial Service Account, Aurocard, debit/credit cards).”

“The activity I help to run with my partner (Cycle Kiosk) regularly needs some amounts of cash to pay for stock items,” says Isha. “Still, as Indian businesses are used to extending credit, we have not felt undue pressure by not having cash for the 10 days it has taken for the bottleneck at banks / ATMs to begin to clear up.”

Our online retailers, like auroville.com, have also not been significantly impacted yet by demonetization.

On the other hand, Unity Transport Service has definitely been affected. “Taxi bookings are 25% down,” says Krishna, the manager, “and it is difficult to get the money we need. We have an account with the State Bank of India, but at present we can only take out Rs 10,000 a day, which is definitely not enough to keep our cars running. And to get this someone has to queue up for 2-3 hours.

We may have to stop the taxi service for some time if we can’t find a way to pay for fuel.”

The Aurovilians most affected by demonetization are those who have been used to paying their workers in cash. This is particularly true of the farming sector, which relies heavily on manual labour.

“On a farm like Annapurna, cash transactions are 80% of how we spend our money, mostly for wages and fuel,” says Tomas, manager of Annapurna Farm, “so weekly we need lots of cash to make the farm roll on.

“After I dutifully dropped a big bundle of those wonderful old Rs 500 notes at Financial Service, and I was told that next week all would be fine, I told my 25-odd workers to have a bit of patience because I couldn’t pay them immediately.

“Now, almost two weeks later the situation is unchanged and I feel some tension is building up in our workforce. Although for me all this is like another challenge in life to look at and learn from, for the local people it’s their basic income and I feel responsible to give them what they have earned and need.

“Right now we have stock of fuel and feed for the animals but if this delay continues we will get pretty stuck and will need to use all our creativity to make ends meet.”

Bindu adds that other Auroville farmers have similar difficulties. “Murthy hasn’t been able to pay his workers for two weeks now (and this is sad, for the weekly wages allow these people to buy basics) and he can’t buy seeds to sow his peanut fields. Velmurgan stood two hours in a queue but then all he got was 2,000 rupee bills, with which he can’t pay wages.”

In fact, standing in line for hours at ATMs or in the bank is becoming a new routine for those Aurovilians who need cash to buy things like petrol or to pay their employees. One Aurovilian spent four hours in a local bank, only to finally receive Rs 2,000 bills which are almost impossible to change into lower denominations. Another had been standing patiently in an ATM queue, only to have the shutters come down with only three people before him: the ATM had run out of cash. “I was lucky that I passed by another ATM which was just being loaded, so that was just another 30 minutes to get Rs 2,000 in Rs 100 notes, out of which I had to pay Rs 1,750 to my gardener...”

The latest hot news about where cash was available spread like wildfire. When an Aurovilian mentioned on Auronet that a local ATM was dispensing Rs 100 notes with minimum queuing, a long line of Aurovilians soon materialised outside.

One possible solution when it comes to paying workers is to go electronic. “The big increase in our work in Financial Service has been bank transfers,” says Rathinam. “Matrimandir decided to pay wages directly into the bank accounts of its seventy workers by online transfers. Road Service has done the same. In fact, we are advising all Aurovilians that the Financial Service can help by making bank transfers to their workers’ bank accounts.”

Of course, not all workers have bank accounts. And even those with accounts are not overjoyed at the prospect of queuing for hours every week at their local bank to receive their wages.

Preliminary lessons

What are the preliminary lessons that can be drawn from the demonetization exercise in its impact upon Auroville?

Firstly, that we have an alternative economy that can shield us, at least temporarily, from situations like demonetization. Secondly, that Aurovilians are resilient: they preserved their good humour and found ways of helping each other when the cash flow was interrupted. For example, the Visitors Centre lent cash to Aurovilians needing to pay workers on a weekly basis, and Marc’s coffee shops offered credit to regular customers who did not have any cashless options.

However, perhaps the most important lesson is how closely we remain dependent upon an external workforce and the larger Indian economy.

“I sometimes feel that when we live in Auroville we think ourselves quite independent,” says Tomas. “But even when, as in my case, we have a store room full of grains as a buffer, we need people and fuel to be able to process those for consumption. All this shows me how much we function by the grace of the world around us.”

“It is thanks to the strength of our alternate economy that we can continue to function,” says Bindu. “That’s great, that’s what a community-based economy is all about. But I think this will soon peter out, given our dependence on the outside world.”

In other words, if the disruption attendant upon demonetization continues in India – several business sectors have seen a drop of 30% in demand and the transportation of raw materials and finished goods has been delayed, according to industry spokesmen – Auroville will not be unaffected. For example, disruption in the supply of raw materials and reduced customer demand will impact the profits of some of our commercial units, and this is the income upon which much of Auroville’s vaunted alternative economy is based.

No city, not even the city the Earth needs, is an island....