India’s Prime Minister, Narendra Modi, announced the demonetization of 500 and 1000 rupee notes in the country from after midnight of 9th November, a surprising move that has left billions scrambling to exchange bigger denominations to legal notes. What are some of the possible reasons and effects of such an announcement?
There is no reason to believe the Modi Government did not tip off the big bad boys and his own Sanghis before this announcement — therefore effectively ending up with a ploy to hurt the likes of Congress, AAP and every other opposition of BJP ahead of the next election. Smaller fish like traders, small businessmen, and workers in the informal sector are just collateral damage. It is also imperative to realise such a move will effectively delist counterfeit currency in circulation but not ‘black money.’
The demonetization in the name of corruption and, laughable enough, combating terrorism financing will get Modi a lot of political mileage given how most people will look at the suggested cosmetic changes. Add to that a rousing speech necessitating the troubles a common man must undertake (invoking on the idea of ‘Demons run when a good man goes to war’) for the grand scheme of things. This is a beautiful ploy in the guise of smart economics. (Not to mention it’s not very smart given the money it will cost RBI to mint smaller denominations in larger numbers that are costlier than bigger denominations. Add to that the wastage in destroying 86% of our currency in circulation that incurred monetary value to be printed, to start with. Not even starting with the opportunity costs in things like collection of nullified denominations from every ATM, collection at petrol pumps, hospitals and crematoriums and burial grounds, overtime work at banks and related expenses, et al.)
Most ‘black money’ is frozen in foreign banks; the rest is more usually converted in purchases in the form of real estate, gold, investments, etc. The fish we need catching will never be caught this way — such counterfeit measures may only end up hurting our economy more, weakening further the situation of lower classes, creating a bigger divide in lower and middle classes. Arun Kumar in The Black Economy in India (2002) provides a helpful clarification on the current situation when it comes to understanding and combating counterfeit currency: ‘In the wake of the demonetization, it is an imperative that we distinguish between the two concepts, black money and black economy. Black money is a stock concept measured at a particular point of time like, bank deposits, or, supply of money measured as on 31st March. Black economy thrives on black income generation. Black incomes are generated mainly by the self-employed and the business’.
The fish we need catching will never be caught this way
The timing of the announcement — rather the abrupt nature of the announcement — has been the bone of contention across the country. It has to be said that such an endeavour is defeated if people are informed in advance and given a buffer period of a certain amount of time. Having mentioned that, the timing of the announcement is out-of-sync with the introduction of the Unified Payment Interface which only starts to operate by the first month of 2017.
Importantly, and this has both pros and cons to it, this should push us towards a mature, cashless (almost cashless; a pure credit system is a monetary fiction still) economy. However, at the moment, it will only ensure possible alienation in the classes (we do not have the infrastructure to support a cashless economy yet. If the government worked on the same for a few years, it would have made an equitable situation and eventual improvement of our economy: printing money has a price after all), possible weakening of the middle class (especially the younger generations of the same) with debt traps among other issues. Also, the critique of a cashless economy in the current sociohistorical situation, would be a critique of a consumerist society with individuals with a credit history to their name as units in a capitalist system, a worth intrinsically attached to one’s transactions (where such a participation is the primary kind of socially accepted behaviour.)
A cashless society is not without its demerits; in fact it embodies an extreme imbalance in the power structure where all monetary value converges and lies to be operated by the government. According to Scott Shay, this enables ‘’A “visible hand” monitoring every single transaction we make could be one of the greatest — and least expected — threats to freedom we have ever encountered in human history. This is the threat of econgularity’. Handing over such power to a war-mongering, fascist government is not just irresponsible, it is likely suicidal.
In terms of responses, P. Chandrashekhar, Professor of Economics at Jawaharlal Nehru University in New Delhi, had this to say: ‘What this would do is freeze the payments and settlements system for some time, freezing trade and the functioning of an exchange economy. The prime minister has declared war on the ordinary citizen in his misplaced belief that this can defeat a host of other real and imagined enemies.’
Handing over such power to a war-mongering, fascist government is not just irresponsible, it is likely suicidal.
Economist Prabhat Patnaik, writing for The Citizen, stated, ‘Actually when we talk of “black money” we have in mind a whole set of activities which are either entirely illegal, such as smuggling, or drug-running, or procuring arms for terrorist organizations, or are undertaken in excess of what is legally permitted, or are not declared at all so that taxes are not paid on them.’
While taking out currencies (counterfeit or not) from circulation might sound like a logical way to reverse inflation, this situation is more complicated since RBI proposes to not just take in the denominations but also mint out fresh 500 and 2000 notes. There is no realistic understanding of how many such notes should be printed by RBI for circulation so as to not cause an inflation since no one had an estimate of the money previously in circulation in the first place. There will be assumptions involved that is potentially dangerous for it may end up devaluing our currency instead.
While undoubtedly a brazen move on the part of the PM, the efficacy of it in combating counterfeit currency and money laundering in circulation is yet to be established. A multitude of questions have been raised from various quarters regarding the ensuing effect of delisting the denominations on our economy. I’ve put my money on time for the answers.
Featured image © Amit Dave/Reuters