01/11/2017

A Well-Kept Open Secret: Washington Is Behind India’s Brutal Demonetization Project

Norbert Haering, Centre for Research on Globalization

In early November, without warning, the Indian government declared the two largest denomination bills invalid, abolishing over 80 percent of circulating cash by value. Amidst all the commotion and outrage this caused, nobody seems to have taken note of the decisive role that Washington played in this. That is surprising, as Washington’s role has been disguised only very superficially.

US-President Barack Obama has declared the strategic partnership with India a priority of his foreign policy. China needs to be reined in. In the context of this partnership, the US government’s development agency USAID has negotiated cooperation agreements with the Indian ministry of financeOne of these has the declared goal to push back the use of cash in favor of digital payments in India and globally.

On November 8, Indian prime minster Narendra Modi announced that the two largest denominations of banknotes could not be used for payments any more with almost immediate effect. Owners could only recoup their value by putting them into a bank account before the short grace period expired. The amount of cash that banks were allowed to pay out to individual customers was severely restricted. Almost half of Indians have no bank account and many do not even have a bank nearby. The economy is largely cash based. Thus, a severe shortage of cash ensued. Those who suffered the most were the poorest and most vulnerable. They had additional difficulty earning their meager living in the informal sector or paying for essential goods and services like food, medicine or hospitals. Chaos and fraud reigned well into December.

Four weeks earlier

Not even four weeks before this assault on Indians, USAID had announced the establishment of „Catalyst: Inclusive Cashless Payment Partnership“, with the goal of effecting a quantum leap in cashless payment in India. The press statement of October 14 says that Catalyst “marks the next phase of partnership between USAID and Ministry of Finance to facilitate universal financial inclusion”. The statement does not show up in the list of press statements on the website of USAID (anymore?). Not even filtering statements with the word “India” would bring it up. To find it, you seem to have to know it exists, or stumble upon it in a web search. Indeed, this and other statements, which seemed rather boring before, have become a lot more interesting and revealing after November 8.

Reading the statements with hindsight it becomes obvious, that Catalyst and the partnership of USAID and the Indian Ministry of Finance, from which Catalyst originated, are little more than fronts which were used to be able to prepare the assault on all Indians using cash without arousing undue suspicion. Even the name Catalyst sounds a lot more ominous, once you know what happened on November 9.

Catalyst’s Director of Project Incubation is Alok Gupta, who used to be Chief Operating Officer of the World Resources Institute in Washington, which has USAID as one of its main sponsors. He was also an original member of the team that developed Aadhaar, the Big-Brother-like biometric identification system.

According to a report of the Indian Economic Times, USAID has committed to finance Catalyst for three years. Amounts are kept secret.

Badal Malick was Vice President of India’s most important online marketplace Snapdeal, before he was appointed as CEO of Catalyst. He commented:

 Catalyst’s mission is to solve multiple coordination problems that have blocked the penetration of digital payments among merchants and low-income consumers. We look forward to creating a sustainable and replicable model. (…) While there has been (…) a concerted push for digital payments by the government, there is still a last mile gap when it comes to merchant acceptance and coordination issues. We want to bring a holistic ecosystem approach to these problems.

Ten months earlier

The multiple coordination problem and the cash-ecosystem-issue that Malick mentions had been analysed in a report that USAID commissioned in 2015 and presented in January 2016, in the context of the anti-cash partnership with the Indian Ministry of Finance. The press release on this presentation is also not in USAID’s list of press statements (anymore?). The title of the study was “Beyond Cash”.

“Merchants, like consumers, are trapped in cash ecosystems, which inhibits their interest” in digital payment it said in the report. Since few traders accept digital payments, few consumers have an interest in it, and since few consumers use digital payments, few traders have an interest in it. Given that banks and payment providers charge fees for equipment to use or even just try out digital payment, a strong external impulse is needed to achieve a level of card penetration that would create mutual interest of both sides in digital payment options.

It turned out in November that the declared “holistic ecosystem approach” to create this impulse consisted in destroying the cash-ecosystem for a limited time and to slowly dry it up later, by limiting the availability of cash from banks for individual customers. Since the assault had to be a surprise to achieve its full catalyst-results, the published Beyond-Cash-Study and the protagonists of Catalyst could not openly describe their plans. They used a clever trick to disguise them and still be able to openly do the necessary preparations, even including expert hearings. They consistently talked of a regional field experiment that they were ostensibly planning.

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