A chaos economy

Demonetisation and the vision for a cashless economy

The decision taken by the Prime Minister to declare the Rs 500 and Rs 1000 denomination notes illegal tender on the night of 8^th November 2016 jolted the Indian economy severely. The announcement by Narendra Modi came without any warning and initially led to a frenzy among people with many shocked by the fact that they had almost no purchasing power for the time being. Pros and cons aside, it was certainly one of the most impactful events in the history of the Indian economy, which people are still coming to terms with in February 2017.

The move was suggested by Anil Bokil, a social activist part of a group which formulates many social and financial reforms for the Government.  The main objective of the move was to regulate cash transactions, eliminate black and unaccounted money, and reduce counterfeit wealth in the country. By volume, 98% of the transactions in the country take place through cash, so on the face of it, the move seemed quite rational. A lot of people hailed the move as ‘genius’ on the part of the Prime Minister, as people would be forced to exchange currency and provide proof of their sources (thus they would have to explain any questionable amount of money).  Well, did it work? Let’s find out.

The cons:

• India is a country that is primarily cash based. The facilities for bank accounts (let alone other digital currency payment portals) are not available to everyone. It is for this reason the informal sector was the worst hit. Day after day grim reports of farmers having to walk absurd distances like 40km just to exchange a few old notes at banks flooded in. The implementation of the move was extremely sub-par. It took over 2 weeks for the Government to calibrate ATMs with new currency and even then, there were thousands across the country with signs on them saying ‘cash nahi hai’ (there is no cash). It is understandable that the Government wanted to keep such a drastic move a secret, but that is their job, isn’t it? To thoroughly formulate a plan and work out its kinks so that its implementation is smooth. From fishermen to small and medium scale enterprises, the use of cash is ubiquitous in the country. Eliminating the purchasing power of millions requires some sort of back-up plan, and the lack of one was evidence that it was an impulsive move.  Around 86% of currency in the economy had been removed from circulation so for a brief while, people did not even have money to purchase food. There is also, the story of the infamous ATM queues. Over 70 people perished while waiting in queues (to exchange old currency) alone, ridiculous as it sounds. Another point to note is that the process was extremely hurried with regards to the denomination of the new notes as well; It would have been more practical to demonetise and replace the 20 rupees or 50 rupee notes. If the last few months proved anything, it was that 2000 rupee notes troubled the public because it meant lower availability of small change. While Narendra Modi’s vision for a cleaner and more regulated economy is admirable, it is debatable whether the costs he has incurred in getting there over the past few months are worth it.
• Initially it seemed like the new notes were going to be impossible to counterfeit, it didn’t take long for different states to come up with reports of large hordes of imitation money. The inordinate amount of new currency was strange too, because only a handful of Government officials knew about the move, so where could so many notes have come from? This suggested quite a bit of corruption was present as well.
• Output in the country took a massive hit. As already mentioned, micro, small, and medium scale enterprises, as well as many start-ups, had to cut down on and even cease production for quite some time due to reduced cash holdings. The GDP growth rate for the financial period 2016-2017 was estimated at around 7.6% by the Government but after the move, new estimates dropped to 7.1%.  This, however, would be a temporary hindrance as industries are gradually recovering.
• When implementing the move, the PM seemed to have forgotten the concept of ‘jugaad’, which is inbuilt in almost every Indian. Within 24 hours of the announcement, middlemen were offering to exchange old notes quickly (for change) for a nominal commission. Furthermore, as the weeks passed, reports came in of people offloading their wealth for legal currency by losing a small part as commission. This was all done in black markets, obviously.
• Counterfeit currency seemed to have been halted for a while, but recent reports indicate crores of imitation currency surfacing in remote parts of India and even Pakistan. The last 2 points also highlight the ineffectiveness of demonetisation as an economic policy. It has been quite ineffective in monitoring shadow economies and black markets.

Pros:

• Terrorism, especially in the Northern states of Jammu and Kashmir, was greatly reduced as terror groups found it difficult to obtain funds for ammunition, etc. Some efforts to forcefully obtain funds were undertaken thus by some militants. However, it is encouraging to see that terrorism took a back step, however brief, because of a Government move. It indicates a step in the right direction.
• E-payment apps and companies who provide e-wallet services had a field day with millions of transactions recorded. Paytm, Freecharge, and other such apps were widely used and bar codes were set up in all retail establishments (down to street grocery wagons) available for customers to scan and debit their bank accounts electronically.
• Tax revenue is expected to rise dramatically as such a move would have shaken up people who ignore their tax liability. Along with this, the amount of
• unaccounted wealth in the economy is also expected to decrease.
• This is one of the few moves that has set the wheels in motion as regards the elimination of a parallel economy.

Cashless and digital economy

Of course, this move was partially directed towards the gradual creation of a cashless and digital based economy. This is an ideal form of economic exchange as it is convenient (relief from use of currency notes), quick, and safe to an extent. However, these merits would be applicable in a country where people have the facilities to do so. In India, the bank account penetration was at a low 53%, and a mere 15% of adults reported regular use of bank accounts for payments. This indicated a relatively traditional mindset, which must be changed to achieve the benefits of a cashless economy. However, there should be a way of easing into the transformation. Millions of people have little access to amenities such as electricity and their way of life is quite primitive, to say the least. Sufficient funds have not been allocated to areas such as education and infrastructure to expect such an idea to quickly reach even the most rural places. Of course, everyone desires an economy which is regulated and corruption free, but which such an uncoordinated informal sector, it may be years away.

Then of course, we have the issue of online safety. In 2016, there were numerous malware attacks on ATMs across the country as well on the Government, indicating cyber safety is an upcoming issue which needs to be addressed quickly. The fraudulent transactions have been originating from both ends; E-wallet giant Paytm registered a complaint against 15 customers which stated that deliveries of goods and services were made so there was no requirement for any sort of refund. Yet, the customers claimed the same, which led to losses for the company worth Rs 6.15 lakh (approx.).

A lot of the companies have admitted the difficulty of promoting cashless payments in an economy such as ours, but have acknowledged the need for better security measures like advanced firewalls, authenticity options on their sites, etc.

I think with adequate infrastructure and public awareness, especially in rural areas, we could make our dream for a cashless economy a reality.