Tuesday, 22 November 2016

Demonetization Policy in Aid of the Economy: Its Adverse Impacts

Last week has seen world-changing decisions take place across the world. The Britons are apparently still concerned about the change in the shape of Toblerone whereas the Americans have chosen a new president. In India, the 500 and 1000 rupees notes have been demonetized. Everything has taken the country by shock and the social media is alive with new mockeries and posts supporting such decisions. I was so shocked at my poverty and the fact that soon the nuclear codes to several catastrophes shall belong to Mr. Trump that it felt unreal. In fact, the entire intolerance debate surrounding Amir Khan earlier this year has been rendered quite useless now considering that the USA will be controlled by Mr. Trump, the UK is tightening its laws on immigration and these two favorites for prospective emigrants are now quite impossible options. Moreover, 500s and 1000s are useless and for general people, idiotic phones do not support Paytm.

When India voted an evidently partisan political party to power, I was astonished. But then I knew that the other option meant non-deterrence of corruption and despite reservations, was not seriously disappointed. Moreover, in India, you evidently take into account illiteracy and population leading to strong radical views and thus cannot help such an undesirable result. The government had performed as expected with a few areas of grave concern. The partisan politics and blame game in international sphere were some matters of concern but things were going quite smoothly until this sudden notification. Some people were overjoyed. This is apparently a big step to curb black money hoarders and catch them red handed. But in taking this step, you are presuming that people having such cash at home are so desperate for their money that they will rather go to jail for stupidity than lead a life in relative poverty for a while.

Let me tell you why I think this would not help much unless it was meant as a decision to send a message for all those black money holders.

Firstly, if you do have a lot of undeclared cash and you are smart enough, you will definitely find ways of investment. The real millionaires in terms of black money either keep theirs in international banks through laundering or invest them in safe investments like gold. They may also invest some in fake companies but generally would not be stupid enough to keep all those cash stashed at home. Those who do keep such cash are not really the key players. They have come across some extra money either through bribe or non-declared assets and they are paranoid enough to keep them in their homes. They will probably be too afraid to declare them anyway.

Moreover, there are people like the small vendors, daily wagers etc. and also people in remote villages who have probably not received the news properly yet. They do not have bank accounts because with their meager earnings it is unfeasible to pay for one. The remote areas will not have enough bank branches to allow for convenient transformation from the old currency to the new. In the pressure, it will also be quite easy at certain places to hand in fake currency notes amongst real ones. The pressure on the bank employees due to the small window of exchange will allow negligence of such details and even though it may be tracked to the depositor, the kingpin will still be on the loose. Also, imagine the amount of loss that small businesses will have faced due to this sudden demonetization over last few days and subsequently the resulting loss to the economy.

Again, the ones who really had black money would at least be wise enough to know their tax liabilities and would limit the disclosure to that amount. They may pass on the rest to their poorer acquaintances and servants and get them replaced under their declarations. This, of course, would be difficult to pull off in face of the mandate for identification. Instead, over the four hours, they will create as many assets as possible with the amount in hand and relinquish the rest, in face of prosecution. The RBI, while issuing those notes that are thereby relinquished, had incurred a lot of expense which thus, consequently goes to waste. Moreover, the government in trying to reissue the money is spending twice as much for new notes. The abandoned currencies will not be accounted for in the State treasury leading to a discrepancy in the amounts issued and the amount returned. This might allow the government to figure out the outstanding black money in the country but it does not make sense as most of those notes are bound to be destroyed, having lost their values, and the cycle of generation of black money will begin with these new currencies. Not to mention, this will definitely lead to a crisis in the maintenance of liquidity ratio in banks thus leading to a lack of liquid money in the market unless the government spends yet some more to avoid that problem.

The government is also asking the people to go digital and is trying to institutionalize all the transactions. While that will be a good step to keep track of the currency in circulation, this disregards the fact that there exist people whose nature of business mandates them to transact in liquid cash. It also disregards the choice of an individual to avoid the complexity of such institutionalization and digitization. A small vendor or a small farmer who are not liable to pay taxes would be more comfortable with easy access to a liquid amount rather than fetching the same through a number of intimidating and complex banking procedures. This has led to the overwhelming discrepancy between the population count and the number of bank accounts.

In a country where illiteracy is a big problem, such mandates are useless and harmful to the poorer section of the society. Though the government may say that it has taken enough safeguards against such eventualities, they are not enough given the small window. It is unrealistic to expect that the entire population, which is still coming to terms with the advancement of technology, will be comfortable with such a thrust on digitization. We are not yet able to provide primary education to the entire country. Mobile phones with women are adjudged reasons for an increase in the number of sexual abuse cases in some states. How can you be so confident that this move can be executed in such a backward society? Most of the women do not have bank accounts. Most of the people in backward areas do not have access to a television. How can you even remotely expect such a move to sit well with these people just for the glorification of the government?

I am sure, after a few days the government will come up with a huge number that will speak for its tremendous success. But at what cost? Is there somebody even surveying the impact of its inconvenience to the common people? Is there even a record that all citizens of India with currency bills have valid identity proofs? In fact, you are not allowed to have voter IDs and bank accounts till you are eighteen. What about those teen-aged destitute orphans on the street who had some consolidated income converted to higher currency notes? Through such mandatory institutional filtering, you are foiling many dreams at least for some time, which will henceforth require a fresh start. Most of these people will fall prey to middlemen charging them for conversion of their notes and paying them lower values for each denomination. Who shall be responsible for creating such a source of earning black money?

The government is basically trying to mine data in a country of a billion discounting those lying on the fringes. The problem is, these people lacking identity proofs, bank accounts and means of protest are more often than not, also not voters. This discounts them from government policies and their welfare is not considered worth their concern. This identity-based coverage has failed many earlier. It shall fail many again. Failing to face real problems like retrieval of black money stored overseas, such drastic moves cause more chaos than harmony. We remember Muhammad Bin Tughluq as the mad king who tried such implementations and failed miserably leading to a downfall of the Tughluq dynasty. While it is certain that his plans were highly inspired, their execution was poor. Let that be a lesson for this government for any such other step that it desires to take. The state coffers are definitely important. But a partly successful end does not justify a wrong move.

The taxpaying middle class might be appeased by such demonstration of power, but the reality is quite different from the veiled comfort of our concrete walls.

Written by Sayantani Saha
Writer, dreamer of world exploration and lover of high fantasy

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