Demonetization: It came, it saw and it has already conquered India

If you don’t know what you are looking for, you will never know when you have found it. And that’s the state most so-called experts sit it today. A prominent Lebanese-American essayist has a name for such experts – Intellectual yet Idiots (IYI’s).

Now that India has recently moved past the 50 day grace (for normalcy) sought by the Prime Minister post announcing demonetization, these IYI’s are currently warming up the airwaves (good for the country where winters can get quite chilly), reviewing whether PM Modi’s words have indeed ringed true. Alas, if only they knew that to measure something like the impact of demonetization and the fact that its outcomes will not be linear (non-linearity as a concept is not something statisticians and economists understand very well), it is near to impossible to even lay down criteria’s of success.

Before going any further, let’s get the elephant out of the room. Did demonetization cause pains & hardships for the country at large? Yes, what’s to debate here? And debating something thing like the “extent of pain versus gain” with incomplete and ambiguous information at hand is something I will leave to studio intellectuals. I would rather look beyond the noise to understand the real impact since the 50 days of demonetization which leads me to believe that Demonetization Came, Saw and Conquered India while experts play peekaboo!

I mentioned earlier that the impact of something like demonetization is non-linear. Without over complicating this, let’s just say some events in a field (economics here) don’t have a direct/linear impact in the area (economy here). Some events such as this have a psychological and social impact leading to attitudinal and behavioral change which may then circle back (or not) to economic impact. Not a straight line, if you get what I mean. With that, allow me to argue this via two angles in brief (one bottom-up and one top-down) without even claiming to cover all arguments within each. The aim is only to tickle the readers mind around the subject of impact and encourage holistic thinking (and debate).

Let’s start with the bottom-up angle of behavioral change as one impact. For that, jog your memory to the Pradhan Mantri Jan Dhan Yojana (PMJDY), an initiative launched by the Indian government in August of 2014. Against the original target of opening bank accounts for 7.5 crore households in the country by 26th January, 2015, banks had opened 12.54 crore accounts as on 31st January 2015. Many would call that successful based on statistics alone. But then ask: if everyone in the country did indeed have a bank account then why should there have been any challenges in salary/wage payments after demonetization? Note: Points around withdrawal limits, loss of man-time etc are part of the “pains versus gains” argument referred to earlier and is not worthy of debate here.

Getting back to the point, the fact is that for reasons including a general sense of inertia, there remained many unbanked even after the PMJDY window. Employers (especially mid/small ones) largely continued to pay wages/salaries in cash (some for sinister reasons as well). Even in the so-called upper class, most continued paying their domestic staff in cash (at least till the time of demonetization if not after that). Back then, nothing triggered employer to insist/assist their employees with account opening and moving to electronics payments (i.e. starting a social change movement).

One can even argue, that this lack of trigger which leads to social change, was absent even in context of trade/small businesses. The small/mid-sized pop & mom grocery store or chemist even if not your vegetable vendor (I concede there was little scope of this in villages though), never saw a compelling reason to move towards electronic money (despite Jan Dhan accounts coming with RuPay cards). And even the everyday consumer happily continued paying for most purchases in cash. Status Quo. And as always, the blame for status quo rests with the opposite party! Right?

A government attempted financial inclusion and literacy but saw no on-ground change. Had there been recognition of the same, the beginnings of behavioral change (around usage of digital payment) would have started sooner with potentially lesser pain at the time of demonetization. Cut to today. Now with demonetization, an attitudinal and behavioral shift has been kick started (pun intended, appears as if Indians needed a kick) which is the beginning of a social change that cannot be reversed. The larger psychological impact (of currency suddenly being worthless even tomorrow or other radical steps) would permeate the business of graft, on personal hoarding (even if clean money) and even trigger higher compliance around disclosures.

Will everyone suddenly become a responsible citizen? No, but the world didn’t move from landline to mobiles overnight and many people still continue to drive manual cars even after technology moved first to automatic transmission and now to pilotless cars. Shifts are always gradual and once habits start change, things change bottom-up.

This brings me to be my second and top-down angle around impact on governance on the back of new data/information. The data/information I refer to is different from the data/information that comes up on subjects that the IYI’s debate endlessly. Let me first cross them starting with the crowd favorite that there is limited black money recovery since most part of the demonetized currency (15.44 Lac Crores: 86% of demonetized currency) is back with banks. For starters, there is no/was never any “definitive” knowledge of the quantum of black money in the economy, leave aside how much of it is in cash and stored at home/in country. But some estimates started being thrown around from the initial days (backed by incomplete statistics tailored to suit one’s own argument) even when the Government of India or RBI stayed clear of the extent of cash expected back.

Rhetoric aside, will you concede that even if 90% of the money comes back in, the unreturned portion would be around 1.5L Crore which is on the higher side of the entire food subsidy budget of India? By what standard is that not a sizeable or relevant number and shouldn’t that be counted as a positive impact? And lest we forget, do you see any expert accounting the higher percentage of deposits back in the system to the new Income Disclosure Scheme (post demonetization) i.e. more compliance?

That there is still a withdrawal limit (of Rs 24000/week for savings; Rs 50000/week for current accounts) may be infuriating for its violation of the democratic mandated freedom to bank as one pleases. But as a matter of practicality and impact on lives, with only 24.4 Lac having income of over 10 Lac a year, how many would really need to withdraw more than the permitted 1 Lac per month in cash for personal use? Likewise, which small/marginalized farmer needs more than that much cash every month considering the role of loans for special needs? And if all small businesses overcame inertia and moved to electronic payments including for salaries and wages, the 2 Lac a month permitted withdrawal in cash is fairly adequate for the typical profile of small/mid-sized businesses in the country. Clearly, it’s only a few that any further embargo will really hurt, just that these few may have greater political and economic clout (and resultant share of voice) to color others opinions.

Some other inane discussions will continue to do the rounds from questioning the timing (whether a decision to demonetize when the economy was picking up) but these are pointless arguments since both sides have its own risks and rewards, with never a clear answer. And if one does not drive forward by looking at their rear view mirror, it is time economist stop looking at past examples to counter a move like that of demonetization in India which has no parallels in the first place. And on a parting note, while the media did have stories of people dying in queues, personally did not hear any stories of people not getting their two square meals a day despite stories of transportation business being impacted (perhaps India resorted back to the pigeon as carriers for transportation to move food supplies at low cost!)

In reading the impact beyond the noise, what is clear is that even if all 100% of the demonetized currency comes back in, whether because of new IDS or otherwise, as declared income or suspect income, whatever may be the case, apart from India being flushed with liquidity (and its resultant opportunities for everyone, details which I won’t get into here), more importantly what India has ended up is with a mine-field of information around individual wealth and transactions. Yes, that’s the critical piece. And it is as accurate as it can get. Such information is priceless. Anyone underestimating how this information can aid in further offensives & top-down strategies to improve tax compliance and to improve governance should take a step and enter the world of the opportunities around Big Data. That’s a huge one.

In summary, with due acknowledgment to a certain element of pain in the last 50 days especially to the daily wagers, the pensioners, those with illness and others with occasion driven currency requirement, change cannot be seen as a rapid move from darkness to light, for there is a dawn in-between. Knowingly or otherwise, demonetization has already changed the trajectory of India – behavioral change at individual level around use of banking and new payment interfaces, social change in terms of greater financial responsibility, even disclosure/compliance and creating the greatest asset of all – information. All of which point in the direction of cleaner & more transparent financial system which has to ( non-linearly ) end up benefiting the economics of the country. Not at once, not even over a year but this road post demonetization leads to an outcome different and better that the road India was on before.

Answers to questions like how much better and how fast, will be subject to both execution and momentum till it reaches tipping point, best to leave that for time to reveal.

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