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India’s Currency Issue: Current State of Disruption, Confusion, and Economic Slowdown

Currency in India: Current State of Disruption, Confusion, and Economic Slowdown.Transportfolio

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Two of India’s major currency denominations have been withdrawn since November 8. As of midnight that day, the India Rupee (INR) 500 and INR 1000—which constitute 86% of the currency in circulation in India—are no longer legal tender. This move drove individuals to exchange or deposit the currency back into banks.

By large, India is a cash economy. Therefore, this withdrawal will likely have major impacts on commerce in the country. New currency is being introduced as a result of this disruption, and there will be a long process that will likely take weeks to return to normal or near normal. Because of the slow introduction of the new currency and the surging demand to exchange the old currency, the Indian government has put restrictions in place. For example, there is a restriction around the amount that can be exchanged or withdrawn from the bank. Even ATMs require recalibration, which adds to the cash crunch in the market, as many of the ATMs still remain inoperative throughout the country.

This move by the government has impacted day-to-day business. Many of the small scale and labor intensive industries are heavily cash-based operations and pay workers in cash. The move, therefore, deeply impacts the working sections of society: drivers, maids, cooks, electricians, and plumbers, for example. It also affects anyone else who provides services in the informal sector and depends on upfront, weekly, or bi-monthly cash payments.

The Indian government is reviewing the situation on a daily basis, quickly adapting to challenges, and providing several exceptions where old currency can be used for fuel, medicine, and health care. Additionally, tolls have been abolished temporarily to facilitate the movement of cargo.

The industry is expecting an economic slowdown as trade and businesses struggle to infuse cash. Manufacturing, agriculture, and infrastructure—which are more labor intensive—could see a drop in volumes. Trucking and road transportation are already witnessing an acute financial crunch, as 80% of operational costs are cash driven. The lack of cash is leading to restrictions or disruptions in drivers’ abilities to take care of basics like purchasing food, paying for repairs, or funding overnight stays. Overall, the situation is affecting the flow of both commercial cargo and essential commodities.

Please reach out to your C.H. Robinson representative or Connect with an Expert if you have any questions on how this situation could impact your business operations.

Comments

brett rasmussen

Harpreet Singh, thank you for the article. It has been interesting to me watching the INR (Indian Rupee) fluctuate in comparison to other currencies since their government announced and began implementing this strategy. In my opinion, the devaluation of the INR was expected, but I believe this strategy will economically benefit India long-term.

11.23.16

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