Demonetization....Is It Worth

Indian have a penchant to stand in queue…any queue. And with time, we break it to our advantage!

Our PM, Narendra Modi just gave us an opportunity to form huge queues! Or did he?? For some, this is a horrible, horrible step in the wrong direction which shall bring untold misery. Yes, for those used to handling only cash, this is indeed a very, very tough situation. And then there are those who do use other means but got stuck because ATMs wouldn’t throw-up cash and what you need is only cash!

Seen in the right perspective, this is one step whose time had come. When 86% of your currency notes are at the misery of just two denominations, it is obviously time to set things in order! Firstly, these gave rise to an unaccounted economy which could according to experts even over-shadow the accounted brethren! Add to that the fact that a substantial percentage of these currency notes were actually fakes pumped in through various sources, with maximum being smuggled across a rather porous though heavily guarded border making the whole argument against the move seem rather tame and lame.

A surprisingly strong argument in favor of this exercise could be that an economy which is the 3rd largest (on PPP basis) ranks 76th on the corruption index! It clearly shows how deep unaccounted cash and corruption have spread their tentacles! Very deep indeed!

We discuss here the relative merits and demerits of the move leaving the final conclusion to our readers!

Merits of demonetization:

1. Fiscal measures and cash pump priming which includes timely infusion of currency notes shall henceforth be in check! This in itself results in controlling inflation and foreign currency stability.
2. If it cannot be accounted, it does not exist! In the short run the size of the economy may take a hit but with time with everything coming out into the open, the economy grows and with it, the Govt’s tax kitty! The figure of un-accounted cash yet to enter the system is likely to be to the tune of USD 3 trillion….not small be any measure despite which what we go remains substantial!
3. Banks flush with funds so loans likely to be cheaper! Rate of interest on loans of most kinds is likely to come down. Economy shall have more purchasing power which if the supply side can keep up with, shall lead to growth. Also, interest on FDs is also likely to come down forcing more money into the markets and investment avenues like stocks, mutual funds etc. This shall help in increasing GDP figures.
4. Trans-border movement of cash almost dries up! Our not-so-friendly neighbor is sore! His sole aim and perspective have been met with a rude jolt! Now they make have to re-jig the whole thing which invariably takes time! What they now have on their hands is worse than toilet paper (unused thankfully)! Same goes for smugglers, terrorists, stone-throwing crowds, Naxalites and all those who use fake currency to further their nefarious ends. For the moment, their game is OVER…and OUT!
5. In-evitable shift towards plastic money and online deals! Ideally money should only be a unit of exchange. Currency notes just makes the act easier. That is all there is to currencies. If that is so, why not move towards a conceptual idea of money i.e., something which is obviously there but cannot be seen in terms of actual currency. Once in place such an idea does not take much to implement and upkeep. On the other hand, currency being a physical reality needs all manner of storage and transport mediums to get to the point of exchange. From production to its eventual destruction, it needs assistance which is a cost! To make up for the currencies taken out, RBI may have to pump in new currencies which may cost the exchequer a whopping INR 12 to 15 thousand crores! Money to create money….how sad!
6. Money guzzlers beware! Finally the big, big fish who inadvertently did not convert their ill-gotten cash into anything more illiquid and want to do so need to explain! THIS DID NOT HAPPEN EARLIER! With the new dispensation, you explain, pay tax + penalty and get just a sliver of your own hard-earned stuff. And this is very evident in trades such as precious metals and realty which due to this reason are likely to see severe downturns in the near future with prices falling sharply. Hoarders and Blackmarketers, your days might just be numbered!
7. Our elections irrespective of levels, will be a less meaner and lot cleaner! With less money to pour on buying votes, leaders might just have to work harder and smarter and find ways to keep his junta very happy. Genuine leaders will now find their voices now that the din of money and resultant muscle power is on the wane!

Coming to the nay-sayers, this is what they say:

1. Small firms running on cash shall lose immediately. Small grocers, vegetable sellers, small tailors, saloons, eateries etc shall lose in the immediate to average term given that most are run by individuals and their extensions and are mostly semi-literate with out-right aversion to anything techy! The argument against this point could be that time is a great leveler! With time, everyone learns everything, including small shop-owners. And yes, how can we ever forget technology? Technology in times to come shall making things so easy, you would wonder if you really need to lug this thing called a brain!
2. Move won’t affect money stashed abroad. Yes, tax havens and the Swiss Banks shall remain and remain outside of the purview of the Government. Hoarders who at the nick of time took their money out using hawala and other means may for the time being, be safe from scrutiny. But then what stops the government from passing a law to nationalize all Swiss Bank and Tax Haven accounts? It has happened in the past and can happen again. And IF it does, expect another wind fall and further fall in interests!
3. Won’t affect immovable properties, gold etc purchased using black money! As of now the GOI CANNOT question how you got what you got! But if sources are to be believed, the GOI is girdling its loins for a long, long fight under which precious metals beyond a certain quantum and benami land shall henceforth be the property of the Govt! Laws to this effect are likely to be passed and if so, things just might change fast and for the better. Till then, your gold and realty numbers are safe!
4. Rural economy and the unorganized sector: It is here that all efforts to speak about the merits of demonetization fall flat on its face. With a higher penetration of mobile phones than bank accounts, most transactions in rural areas and in the unorganized sector are done in cash. With the semi-literate to illiterate nature of populace in these parts and sector, introducing tech-heavy products may be a losing battle in the short to medium turn. One redeeming aspect of this argument could that in the recent past, the GOI gave limited banking license to the likes of Airtel, otherwise a mobile phone service provider who are gung-ho about first approaching their existing client base for telephony to open accounts in the new venture. No cards, no cheques; Only a phone! If your farmer or tea seller can operate a smartphone, he is likely to operate an attached bank account! But then, it may take time!
5. Sectors which respond very well to cash. Transport for one. Small farmers growing vegetables etc would still want to use cash given its relative ease to conclude a deal! But then as mentioned before, the day technology catches up, note might as well start counting their days!

A humongous development this is with far, far reaching consequences.

We hope the end result is worth all the pains India is going through at the moment.

We hope you find this article interesting! Do let us know your views and ideas.