Hard News

Demonetisation - The long and short impact

On November 8th, government announced the decision to discontinue the legal tender status of Rs. 500 and Rs. 1000 notes. The original objectives were stated as: eliminating fake currency; inflicting losses on those with black money; and disrupting terror and criminal activities. Later, new objectives were tacked on: enabling growth in bank credit, turning India into a cashless economy.

This time folks, at my fortnightly blog I am going to put a flash on some issues that common man went through during "NoteBandi".

                              

When the act of demonetization flared up, the citizens of India adapted this change very swiftly. The cards were swiped more rather than exchange of notes. Observations in our day-to-day lives was spread out all over social media.

With almost no cash in hand available, the general public had to resort to ways and means to avoid using their left over legal tender and use them only sparingly. People started doing day today shopping of veggies/fruits in super markets instead of the neighbourhood vendor though he sold stuff fresh. People avoided auto rides by hailing on the roads and resorted to “Ola Autos/Ola Cabs” where they could pay by mobile wallets. Within few days as banks resembled Ration shops of the 80’s India with serpentine lines right from sunrise, vegetable and other vendors started accepting cheques for payment in fear of losing their customers. Most food establishments who had a minimum limit for accepting credit cards removed such limits. In the hinterland of India is where the impact was colossal. Though a big population was banked under Jan Dhan Yojana, till then they were not banking. The overnight shortage of currency, helplessness in otherwise carrying out day to today lives and finally the threat of losing business permanently pushed many to figure out alternate ways for making and accepting payments and they did. There was utter chaos for few days as the country came to terms with the move but ultimately in the long run, change did happen. In India normally change is slow. But under stress change is different!

As people across the entire nation queue up to exchange notes of Rs.500 and Rs.1000 there are still few people in the society who find this as a big task. Then, online payments comes to rescue. The impact on the life of a woman who handles her household chores deals with such chaotic economic structure of the country.

 
In a historic turn of events, Indian PM Mr. Narendra Modi in his speech, in an attempt to curb the curruption in the country, dramatically and yet thoughtfully, demonetized the 2 currency denomination. Logic? Well, the simplest rationale is to create accountability for the “recoverable” black money, fake currency and bring more transparency in to the cash transactions in the country.The announcement came heavy and totally taxing to a majority of unassuming viewers. I mean, you cannot make one oops two of the most valuable notes redundant just like that! Especially after Diwali and wedding festival when every one is smelling the valuable green currency for their upcoming shopping needs.


 

I fear that a broader understanding of the financial and economic lives of the poor yields an understanding of the impact of de-monetisation that is quite harsh.

Think of a middle class household with one salaried person earning Rs. 600,000 a year, with total financial investments worth Rs. 10,00,000. From the bank account, money is withdrawn and spent, or drawn down through card/online payments, or transferred into an investment instrument. If this person has a credit card, each purchase on the card would create two financial transactions of equal value - drawing credit, and repaying credit. Other than this, there may not be much "push and pull" in the person's financial life; only simple drawing down or investing up. She may occasionally take loans or switch across investment instruments. Financial turnover during a year is likely to be much lower than the total value of the financial assets owned. The cash portion of the transaction value may be smaller yet.

The sudden and swift move has caught all hoarders of black money unawares providing no major loophole to protect their holdings. Their opposition to the Government’s deft move is understandable. However PC is no ordinary person. He is a Harvard alumnus, top Supreme Court lawyer, former distinguished Finance Minister whose views and advice are sought by top business houses. He has an impressive following. His criticism of the Government’s demonetization move is surprising, in view of his intimate knowledge and hands on experience. He says he is perplexed. It is not clear why he has chosen to echo the seemingly inane arguments of his fellow politicians on this occasion. It is necessary to examine the arguments and assertions of this legal luminary.

With every change in the current scenario, we the citizens of India also need to do our bit. After all, this is done for the benefit of us citizens. Our duty is to fulfill all the requisites and be calm and patient.The key here is patience. When 86 per cent of a country’s legal tender becomes illegal, it is but expected that finding ‘a new level of equilibrium’ would require time. If the smaller short-term risks, especially those emanating from the demand side are addressed carefully, if we undertake a holistic net cost benefit analysis, the expected results seem to be promising.

For the evolution to be successful, we the people of India need to indulge in all required practices for a better tomorrow.