India's demonetisation quagmire and its victims

The demonetisation move by the Indian government will not achieve its goals, but it will hurt ordinary people.

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    The currency crisis in India has already claimed several lives [Reuters]
    The currency crisis in India has already claimed several lives [Reuters]

    On November 8, Indian Prime Minister Narendra Modi announced on television that in just four hours' time, 86 percent of the total currency of the country would cease to be legal tender.

    People were asked to either exchange old notes for new, or deposit old notes into bank accounts. Now, even if new notes had been available in adequate quantities to replace old ones, this would still have caused massive inconvenience to people.

    It would have meant standing in long queues in urban areas before bank branches, and trudging long distances and standing in even longer queues in rural areas where one branch often serves thousands of villagers residing over several square miles.

    But it soon transpired that not enough new notes were ready; they will not even be ready for quite some time, so that banks are now rationing cash withdrawals (exchange of new notes for old has even stopped altogether).

    Not only does the saga of long queues continue, but one gets a meagre sum at the end of hours of queuing. The strain of this has already claimed several lives.

    What is more, since the informal sector of the economy, which accounts for an estimated 47 percent of the gross domestic product and more than 80 percent of employment, survives almost exclusively on cash transactions, it is facing a severe recession, with reports of a 50 percent drop in sales being quite common.

    In the agricultural sector, which employs about half the country's working population, the kharif (monsoon) crop has been harvested and the rabi (winter) crop about to be sown. But buyers of the harvested crops, being cash-strapped, are scarce; and peasants saddled with unsold crops cannot buy inputs for the rabi sowing.

    Not surprisingly, it is the poor who are the hardest hit: since neither their money accruals nor their purchases occur through cheques or credit cards, they have had to forego essential needs.

    Unachievable goals

    The government has given three reasons for this bizarre act. One, it would attack the parallel "black economy" which operates illegally and is reportedly very large, well over a quarter of the legal or the "white" economy.

    Two, it would get rid of counterfeit currency which "terrorists" had apparently injected in large amounts into the Indian economy.

    And three, it would hasten India's transition to a cashless economy which is considered a desirable objective per se. Let us examine these arguments in turn.

    READ MORE: India's Narendra Modi defends clampdown on cash economy

    It is generally agreed that the amount of cash-holding (which is a "stock" concept) relative to the total GDP generated in the "black economy" (which is a "flow" concept), is quite minuscule.

    What is more, the government's demonetisation has opened up new "black activities" of converting old notes into new ones for a price, so that only a fraction of the demonetised notes of the "black economy" would at all be "disabled".

    The fraction of disabled notes in the "black economy" to its total income could not possibly exceed 10 percent; and if profits are half the total income of this sector, then they could not exceed 20 percent of profits.

    This once-for-all move therefore means that the disabling of currency notes would bring down the profit rate, if it is conservatively placed at 30 percent to start with, to 24 percent for just one single year (after which it would get back to 30 percent).

    And since "black activity" would remain undeterred, the cash requirement for it would be met by sucking in cash from the "white economy". All this would be to the longer-term detriment of the informal sector.

    In short, those whom the measure purports to attack are precisely the ones who would escape its consequences, while the innocent who are suffering now will continue to suffer even in the longer term when the current hardships are overcome (if and when they are).

    As regards counterfeit currency, even assuming it is sizeable, sudden demonetisation is scarcely the solution to it.

    A process of replacing old notes by new ones over a certain period of time, during which both continue as legal tender, would have removed counterfeit currency from circulation, without causing any hardships or crippling the economy. This has actually happened in India earlier without anyone being particularly aware of it.

    As for the transition to a "cashless economy", a major incentive for the people to make such a transition is missing in India. Most of them are not considered "creditworthy" by banks, who have in fact increasingly withdrawn from providing credit to peasants, as they were constrained to do earlier after the nationalisation of major banks in 1969, because of their new-found "freedom" under the neoliberal regime.

    Ordinary people, therefore, have little to gain from using credit cards rather than cash; and banks too would rather give multiple cards to a middle class urbanite than to a peasant or petty producer or an agricultural labourer.

    If a shift to a cashless society is to be made, adequate incentives must be provided to the people. Currency demonetisation as a means towards this end is like holding a gun to the people's heads to force them into a cashless economy, which is authoritarian and indefensible.

    An authoritarian policy

    A government demonetising 86 percent of currency overnight is unprecedented. The only previous case of demonetisation in post-independence India was in 1978, when only large notes, accounting for just 2 percent of the total value of currency, were demonetised; the bulk of the people were not even aware of the measure.

    The present government's demonetisation is as authoritarian as it is irrational. It brings distress to the people and gratuitously precipitates an economic crisis.

    The patience of the people, who have been putting up with this distress till now without any overt resistance, is cited by government spokesmen as an ex post facto justification of the move. This, however, is a non-sequitur. The lack of overt resistance to an authoritarian act does not justify the act.

    Prabhat Patnaik is Professor Emeritus at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi.

    The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy. 

    SOURCE: Al Jazeera


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