India’s Currency Swap aka Demonetization

“Money has never made man happy, nor will it, there is nothing in its nature to produce happiness. The more of it one has the more one wants,” said Benjamin Franklin.

Couple of centuries later, this holds true and therein lies the nature of humans to acquire more wealth, some legitimately and some illegitimately.  It has been couple of weeks since India had announced its currency swap – old for new – scheme. This is certainly not a time to know about the impact of this move, which many of its proponents claim, are beneficial for the ‘nation’ in the long run.

NUMBER GAMES

Four Indias:

What we generally hear and what comes to as common knowledge are three strata of classifications of based on income – poor, middle class and rich. However, there is another class who are neither poor, nor middle class. To borrow the term used by NCAER-CMCR in their publications, this group is called as “Aspirers.” This aspirers class have a household income of less than Rupee 2,00,000 per annum. That’s right, per annum. The combined aspirers and poor in this country is close to one billion, considering our population is 1.2 billion. When someone tells you that the middle class is so big, please take it with a bucket full of salt.

There is another class of India, which now owns close to 60% of nation’s wealth. This class is just 1% of our total population.

Some pedantic economists may find fault with comparing income and wealth. These are not comparisons, but statements of fact to set the background, the reality of money in India, a country which is nothing but collection of people.

Black Money:

There is no authoritative figure to state what is the actual amount of black money in India. In a common sense question, if you can count it, its not black, is it?

But, it is also common sense that there exist black money in India.

How many civil servants have been caught with ‘cash’ which cannot be accounted? Countless.

That and that alone, must suffice us to convince that black money is hoarded in cash, however low the percent maybe. (Google keywords: cash seized IAS).

State of the economy:

In the Economic Survey 2015-2016, presented by Arun Jaitley, it is clearly stated that our growth story has been predominantly consumption driven. That means, you and I, spend on something that we want. A rupee in my pocket goes to another person for a product or a service. The Investment has not picked up due to many reasons – predominant being banking crisis, private sector’s lack of confidence and the general global climate of less growth.  (Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=136853 )

Banking penetration:

As per the RBI’s report of the committee on the Medium term path on Financial Inclusion, the proportion of households availing banking service stands at 59%. That means, 41% do not avail banking service in India. In a country with 1.2 billion population, this is a large number.  (Source: https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=836 )

1 and 2 vs 3 and 4:

So what this new swap does? It takes away close to 85% of cash in circulation. Read it with “India being a consumption driven economy” and “low banking penetration” this sounds counter intuitive to choke majority people (aspirers and poor) with no access to banking system and who may not hoard black money.

It is true that our consumption will greatly suffer. For what we call consumption, it is also someone’s income. The people who are gravely affected are the exact people who may not have black money – the poor and the aspirers.

In spite of known contradictions, the government has boldly moved to withdraw existing high denomination notes.

This is always a question of intended benefits (future) vs imminent consequences (present). How it will pan out has no answers, atleast not any with great probability. Some are quoted frequently.

  1. Counterfeit will be gone. True. It has resurfaced. So strike that.
  2. Terrorist funding will be gone. Maybe. But it has resurfaced with terrorists. Strike that.
  3. Black money will be wiped off completely. We do not know, yet.
  4. Move to a cashless economy.

So out of the four major intended benefits, two are already disproved, factually. The third one is a chimera in India. But still, we have made an attempt by genuinely making the cost of holding cash in black higher. So why do it?

Herein comes our psychology.

The theme of rich versus poor has been used by many kings and leaders throughout the history. It is no different in our country and in our times. We all perceive others (read ‘Rich’) to be corrupt and not us. That is the only reason why we do not find any riot or any major violence on the street, even after people are deprived of their own money, by a dikkat. People who kill their own children for not marrying according to their wish are silent and standing in queue.

Majority of people, genuinely believe that this is a move to counter black money. And hence, support the government move. What we are currently witnessing is the silent majority’s approval of the government move, even under hardships and duress (not inconvenience as many idiots put it), which is present and real for hope of a better tomorrow, still, just a hope. Some may call it as people’s inability to do anything because the policy has been implemented. It may also be true.

Imagine a daily labourer losing his wage and his family going hungry. Imagine a farmer unable to cultivate at a right time. Imagine someone’s wedding being messed up. Imagine losing someone in the queue or it’s consequence.

For all the disruptions, which is present and visible, this better be worth it.

P.S: More on Cashless economy in the next post.

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