Demonetisation; or The Confusions of a Failed Economist

I’m no economist, despite an undergrad degree that claims the contrary. So, to be honest, I fail to understand the rationale behind the demonetization move. I mean, I’m sure (and hopeful) that someone somewhere has thought this through and that somewhere in the longterm cost-benefit analysis, the pains of poor people going without meals and real middle class people (Not my friends on social media – all of us must now admit that our origins may have been middle class but we are firmly in the fatcats class) dying while queueing up to withdraw money for their daughter’s weddings will all prove to have been worth it. Hopefully the epitaph will read ‘Never before have so few sacrificed so much (55 lives at present count) for so many’ and not the other way around (Never before have so many sacrificed so much for so little)!

But as of now, I’m honestly stumped. Can someone explain to me how this scheme is supposed to benefit the country? There were a few rationalisations given:

1        1. Root out black money

2       2. Prevent corruption

3       3. Curb terrorism by weeding out fake notes

4       4. Make the unbanked into banked citizens

On 1: Most people with serious amounts of black money have long ago ceased to stash it under their mattresses – for the simple reason that it pokes, I imagine, if nothing else – and converted the bulk of their holdings into other assets – land, apartments, foreign currency accounts, gold, designer loot etc. The relatively small percentage that they hold in cash must have left them distressed but it probably accounts for very little. While the nation anticipated the Schadenfreude from Mr. Ambani or the like sweating and lining up to pay in his hoard, all we have gotten to see is salwar-kameez-clad aunties, grey-haired uncles and other assorted neighbours bonding at the bank. Much as this move seems to have roused a patriotic spirit of sacrifice, I'm unconvinced that this is the Dandi March. If rooting out black money is a serious objective, what are we doing about the Panama papers? If the government is investigating it, I haven’t heard anything so far. What about the huge amounts reportedly stashed overseas which will yield Rs. 15 lac into the bank accounts of every Indian? I’ll take mine in Rs. 100 notes, please.

On 2: How exactly will this prevent corruption? Is it harder to bribe someone using Rs. 2000 notes or new Rs. 500 notes than the old ones? Corruption is caused by a system of draconian and opaque regulations that allow petty bureaucrats to hold up basic services to citizens unless palms are greased. Or by unpetty bureaucrats holding up permissions for larger commercial undertakings unless said axle grease is applied. So far, it has helped to keep the creaky wheels of this economy turning. If one actually wants to prevent corruption, the rules need to be made less draconian, more transparent and easily available and comprehensible to the average citizen. Further, strong and immediate, public punitive action must be meted out to anyone caught being corrupt. Moreover, it must be made simpler to lodge a complaint against a corrupt official than to get one’s work done by greasing palms. Bizarrely, what we have seen recently in Maharashtra is regulation stating that no FIRs can be filed against bureaucrats or MLAs without the permission of the Chief Secretary or the Speaker of the Assembly.  Qui Custodiet Ipsos Custodes? Hopefully other states will not follow suit.

On 3: It is possible that many fake notes of Rs. 500 and Rs. 1000 are currently the white elephants of terrorist groups financing their activities in India. The withdrawal of the old notes and issue of new ones may curb terrorism for some time. But isn’t it a matter of time before the new notes are copied and circulated, unless there is some fundoo technology hack that makes them uncopiable? Same with the new Rs. 2000 note, about which I have seen a story on fb (so may well be faking news) that some teenagers in Bhopal or somewhere photocopied and passed these off as real notes. So there may be a temporary lull in the supply of fake notes but it is a temporary one at best – like the boy who plugged the hole in the dike with his finger.

On 4: Yes, people must have bank accounts. (Though, why, when the nearest bank for many villages is anywhere between 10-15 kms away?). Most people in India, especially the large mass of poor and rural ( not necessarily the same thing) prefer to keep cash because they can access it at a moment’s notice. They are yet to reach a state of financial wellbeing in which they feel that their cash should be earning money for them rather than be a measure of how much they have managed to amass, and comforting simply by its presence and their ability to easily lay their hands on it in an emergency. The daily wage labourers do not have the luxury of time in which they can queue up at a bank or an ATM and withdraw or deposit money; most of the time their home runs on the money they have made that day, with a scant few rupees left over, on occasion.

Anyhow, admitting that people still need bank accounts and that we must move to a “cashless economy”, is this the best way to railroad people into doing so? Weren’t there easier and gentler options available – like effectively advising and educating them on the benefits, incentivising them by paying a day’s wages or mandating an official holiday by all businesses, like on Election Day, to make it more convenient for them to go and deposit their money? Like giving even small businesses a minor incentive by asking them to open accounts for their employees and making payments via the banks?

If there is a plan and a longterm one with multiple initiatives and policies that come together to defeat the politician-bureaucrat-industrialist nexus and genuinely break the back of black money, one is yet to hear of it. Campaign finances remain shrouded in mystery. 

While admittedly not a bhakt, I’m happy to applaud the government for a good move. Can someone convince me that this is one?