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Cash remains king for the masses

The moneychangers facilitate a black economy that hides much of India's commerce from taxman.

india Updated: Sep 29, 2005 15:53 IST

Kuldeep, a roadside peanut seller, fishes out a mutilated 20-rupee bill from his frayed pocket and hands it to a man hunched over a desk repairing old and torn currency.

The portly, moustachioed man sitting in a small dingy shop deep in Delhi's old quarter examines the note carefully, and then gives Kuldeep two freshly minted bills worth just 15 rupees (34 US cents).

The moneychangers do such an extraordinarily lucrative trade because they bridge a gap between the electronic banking system and the hard cash economy of the masses, facilitating a black economy that hides much of India's commerce from the taxman.

"It is an art ... and a service to the poor," said Madan Lal Anand, who has been in the business for three decades.

Even though moneychangers do not have official status, the practice is entirely legal. India's central bank has never objected to its existence as the moneychangers offer a service to people outside the banking system and have helped fill the void during shortages of notes in the past.

Nearly 60 per cent of India's billion-plus population has no bank account.

So, in tiny hole-in-the-wall shops across old Delhi, hundreds of men in starched white shirts toil with glue, tape and water to clean old bills before exchanging them for new ones at the bank.

Indians just love cash. Cheques are viewed with suspicion and credit cards a strict no-no, be it the grocery store, milkman or chemist. Many shops display the sign 'Cash today, credit never'.

Credit is frowned upon because it leaves a clear paper trail. The central bank says there are 43 million credit cards in circulation, although commercial banks estimate only 7 million people use them, a number likely to include most of the mere 30-40 million who pay income tax.

Capturing the untaxed

In an attempt to capture some of the untaxed cash, the government decided this year to tax withdrawals of more than 10,000 rupees from bank accounts. The move drew widespread criticism, forcing it to raise the amount to 50,000 rupees.

DH Pai Panandikar, director of private think-tank RPG Foundation, said it would take years for plastic or other banking products to replace cash.

"A large part of our economy still prefers cash. Then there are other considerations like cash transactions may not be entirely legal or formal," Panandikar said.

The central bank wants this to change and has said it will encourage banks which cater for everyone, including the underprivileged, and monitor services to see if ordinary people are being denied basic banking.

Though there are no official estimates, the value of the cash economy is thought to be about $280 billion, and India's heavily indebted government is on a drive to bring some into the tax net.

With a combined state and central budget deficit of 8.3 per cent of its $700 billion gross domestic product, the government struggles to find money to improve an infrastructure that economists say limits its growth potential.

Just one-tenth of the hidden billions would be enough to improve roads, ports and airports and help boost growth in Asia's third-largest economy to 8 per cent from about 7 per cent now.

Unlaundered money

Notes in India are often so grubby because parents decorate grooms with garlands of bills, traders add up the day's profit on them before stuffing them in steel safes, while lovers declare eternal devotion by writing their names and hearts on the bills.

So it is not uncommon for a note to be stapled, graffiti-ed and even greasy after going through a roadside food stall.

The central bank says anyone can exchange damaged bills at a bank, with or without an account, but there are millions in India eking out a living from daily wages without access to one.

Torn and unusable notes end up with the people who can least refuse them: roadside beggars, cigarette sellers and daily wage labourers.

Moneychangers thrive on these millions of poor, who keep their savings in sugar tins or stuffed between sarees, and their association estimates 600 or 700 changers in New Delhi alone handle an annual 400 million rupees ($9 million) in notes.

Nearly 38 billion bills circulate from India's inaccessible mountainous north to the palm-fringed beaches of the south, and making new notes available is a huge task for the central bank.

Hence, the need for a local moneychanger, who offers new bills without long bank queues and free from the taxman's prying eyes.

Back in the heart of Old Delhi, Anand says technology is starting to affect his business as automated teller machines (ATMs) meet some of the demand for new notes and emergency cash.

But he is quietly confident his low-tech system, out of the taxman's reach, will flourish for a while yet.

"ATMs have affected our business. But we offer something they don't ... convenience. No forms, no paperwork," Anand says, chuckling as he turns to a waiting customer.

First Published: Sep 29, 2005 15:53 IST