Why India’s Demonetisation Surgical Strike Won’t Help to Minimise Either ‘Black Money’ or Corruption
Every country has a cash economy and not all of it is underground or ‘unaccounted stuff’. About 12% of the U.S. economy is said to be cash economy. In the case of India, it is estimated to be around 70% or even higher. The reasons for it are several, including the nature of the economy, the rural-urban divide, the infrastructure for banking and financial services and the spread of a cashless financial environment, among others.
India’s cash-to-GDP ratio at 12% is among the highest even among much of the developing world and anywhere between 3 to 4 times that of countries like Brazil, South Africa & Mexico. Check out more details in the article linked below
India’s Love for Cash
Every country has its currency counterfeited and, thanks, to present technology, the time taken to counterfeit any currency, including newly launched ones with enhanced security features, is relatively short. The most counterfeited currency in the world is the U.S. dollar. It is contradictory to speak of cutting down on counterfeit currency when the new currency of Rs. 2000 introduced by India, does not have any additional security feature compared to the recently demonetised Rs. 500 & Rs. 1000 currency notes. Neither is this a plastic-backed currency note, as is increasingly the norm for currencies in many countries. In any case, counterfeit currency for India is estimated at about 2% of the total currency in circulation and it may not be possible to significantly change that percentage in the near future.
It is however a brazen and foolhardy act to take out 86% by value of the cash in circulation in one fell swoop, sucking liquidity out of the market without a well-calibrated and seamless replacement plan and causing untold misery to those who primarily transact or get paid in cash. It is sheer chicanery and an act of fooling the masses to trot out statistics subsequently about how much money is getting deposited in various banks when such deposits are being forced to be done virtually at gunpoint and when outflows have been throttled to a relative trickle almost, owing to ad-hoc regulations & controls imposed, some of which may even be illegal or unconstitutional.
A currency note is a promise that must be kept, whatever the circumstances. Because this trust has been broken in India, queues have formed outside banks and ATMS, with banks closing down mid-way through the business day, saying they have run out of cash.
Pro-establishment die-hards would snigger and argue that the two high value notes have been withdrawn to check black money. It had to be done in total secrecy, they say, to thwart nefarious attempts by hoarders to dump currency. But what is it that these hoarders could have done in a reasonable time frame that they are not doing now?
The real issue is how the common man been affected by the drive. The current demonetisation has adversely affected the poor, wage labourers, small businesses, farmers and other minorities. Often these small income earners save cash for a rainy day. The incidence of bank accounts and bank transactions will be extremely low among these groups. These are the communities who do not engage in the formal banking sector too much. Rather they save their daily or weekly wages in cash, often in large denominations. It is these groups who have been hit the most by the demonetisation drive.
The Orwellian joke about the whole issue is that the Rs. 2000 denomination currency was decided on because given the capacity of the presses printing currency currently, replacement of the currency demonetised, given a 1:1 replacement, would have taken 7–8 months realistically. Some bright spark supposedly came up with the idea that replacing the Rs. 1000 with the Rs. 2000 new currency note would reduce the replacement time needed to restore full liquidity to the system, without figuring out that owing to the difficulties of transacting using the new Rs. 2000 denomination note, it is unwanted currency whose circulation will be severely limited and which may therefore prove to be mainly useful for hoarding cash.
While there are several points of view regarding the effects of this poorly thought-out and disastrously implemented strategy, a deflationary spiral and a recession in the mid-term are possibilities which can’t be discounted. Listen to Prof. Prabhat Patnaik’s talk on the topic by taking the jump to the link below.