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Sunday, 13 November 2016

Demonetisation - Yet Another Point of View

We debate and argue. We do it a lot because we skip a few stages of research, discussion and understanding. Let us try to not to do it here. Let’s assume that we are yet to take a position on the subject.

Demonetisation should not require much technical understanding of economics or monetary economics, I think. Let’s begin with something everyone agrees with. There’s a price everyone is paying for demonetisation. The farmers, the businessmen, the bureaucrats, the Reserve Bank of India, the banks, employees of banks, employees of cash management agencies, foreign tourists in the country, those who’ve hoarded cash by evading taxes and those who’re dealing in cash for illegal businesses. When one thinks of it, cash binds us more than cricket and religion.

We’re paying a price in anticipation of a few benefits. Three benefits to be precise: One, an attack on makers of counterfeit currency, two, an attack on the corrupt and three a movement towards a cashless transaction habit.

Of these, one is a long term benefit – the movement towards a cashless transaction habit. The subject does need deeper understanding, but for this discussion, we can safely say that there would be no dispute that this habit will solve a lot of problems for all – consumers, business community, banks, RBI, government. It is indeed a huge benefit. Cashless transactions are as old as the banking system, but in the recent years, they’ve become far more feasible as an alternative to cash. But the share of cashless transactions is abysmally low. A change in habit of such nature always comes in with a shock treatment like this one. If this demonetisation results in an increase in cashless transactions to even 10 – 15% of the total transactions, it can be said to be worth the trouble only for this reason.

But is it likely to happen? Now, we can debate. The demonetisation in itself supports the movement, but the simultaneous introduction of same value currency (and even higher value) goes very strongly against it. If we were not to replace the entire value of the old currency with new, perhaps the buyers and the sellers would have made an effort to learn and get comfortable with cashless transactions.

The other two benefits are not long term. Demonetisation has dealt a severe blow to the makers of counterfeit notes and also those who’ve hoarded cash. So, rightly, it has been termed as a surgical strike. Whom does one hit to hurt? The enemy, of course! The makers of counterfeit notes, who then circulate these notes to finance terrorism, are obviously enemies of the country and the people at large. They must be dealt with in the severest manner. Is it a hard enough blow to wipe them out? It’s difficult to guess, but most would agree that they may get badly wounded, but not wiped out. A wounded enemy becomes more dangerous, they say. We have to trust the government to take more steps to wipe them out.

Now, let’s move attention to the last category – the hoarders of cash. This is what most people appear very vocal about. On the basis of what one reads on social media, it appears that there is a belief that this move will go a long way in rooting out corruption.

Let's ponder deeper. There cannot be a debate that this move is a one-time blow. It is an attack – an act of violence.

While all of us hate the corrupt, we must agree that we don’t hate them as much as we hate the terrorists. These are people closer, next door. They are not enemies, but people we share an interdependence with. We’d like them amend their ways, get reformed – not get wiped out. In this case, most of us can appreciate the fact that our fight is against corruption – not the corrupt. Corruption is an element, present in people. It is present in every person in some form.

If you seem to appreciate this perspective, we can continue the discussion. Please leave a reply or comment to indicate if you’d like to continue this discussion. From this stage on, it may take some effort.