The Naiveness of Demonetisation

The Merriam-Webster Dictionary defines the word 'naive' as 'having or showing a lack of experience or knowledge & deficient in worldly wisdom or informed judgement'. More than a month after the PM demonetised 86% of the country's currency, I feel that this word is best suited to describe the entire saga. I don't claim any expertise in macroeconomic affairs nor am I a trained economist, hence the five points that I put forth in support of my argument are from a layman's perspective: supplemented by statistics and eminent opinions.

When I first heard the PM on the evening of the 8th of November, the manner in which he enunciated every tiny detail of the scheme, made it seem as if (i) for the next 50 days everything would work in a utopian manner or (ii) there would be unmitigated chaos & disarray. Gradually, as the demonetisation saga began to unfold, it became clear that the latter assumption was true & the best way to describe everything-from the idea to the implementation-was 'naive'.

Firstly, to think that demonetisation will end all black money is completely naive. As Professor Arun Kumar of Jawaharlal Nehru University's Centre for Economic Studies and Planning & author of The Black Economy in India often points out, to assume that the majority of the black money is 'kept under mattresses' as cash is naive. Prof. Kumar argues that demonetisation cannot unearth 'black wealth' which is different from 'black cash'. According to most estimates, illegal cash is just 3-5% of the total black economy in India. A committee formed by the Central Board of Direct Taxes in 2012 had explicitly stated in its report that "Demonetisation may not be a solution to tackle black money in the economy which is largely held in the form of benami properties, bullion and jewellery." To subject the entire country to a rigorous exercise without any guaranteed efficacy of the scheme is criminally naïve.

Secondly, the government underestimated the hoarders of black cash. In his first reaction to the demonetisation exercise, former RBI governor Raghuram Rajan said: '...the clever always find ways around it.' The government naively assumed that black money hoarders will have nowhere to go after demonetisation and all their black money will thus be rendered useless. However, as Rajan had predicted, black money hoarders activated all their connections, called in favours & exploited loopholes to keep their cash afloat. Arguably, the motherboard of all illegal cash in India is the business/politics-real estate-bureaucracy nexus. The government failed to comprehend that this nexus has a strong symbiotic relationship and it won't let demonetisation unfold in an unbiased & utopian manner. The government naively assumed that those with black money are 'societal orphans': with no one to turn to during a crisis like demonetisation; when, in fact, the very black money that they hold makes them the most well-connected individuals in society.

Third, the government naively endowed the not-so-holy banks with 'absolute power' (the one that corrupts absolutely) for the demonetisation exercise. The government naively overlooked the various instances of corruption that have emerged in the banking sector at regular intervals and just assumed that they would set aside their usual malpractices and function in the most idealistic manner while being colossally overworked at the same time. Even a cursory look at the allegations that surfaced against banks & bank employees in the last one year itself should have dissuaded the government from bestowing them with such exclusive powers. In October of 2015, a news channel reported how Bank of Baroda had facilitated hawala transactions to the tune of Rs. 6000 crores. A CBI investigation is underway. In the same month, CBI registered cases against unnamed IDBI Bank officials for sanctioning a loan of Rs. 900 crores to Kingfisher Airlines despite its negative credit rating. One cannot but assume that the piling NPAs across banks are partly due to the collusion of bank employees. In its monthly performance report, the Central Vigilance Commission, in April 2016, stated that it had registered 149 cases of corruption against various bank employees: ranging from part-time sweepers to Chief Manager. Even if one were to argue that these allegations are only against a minuscule minority of bank employees, shouldn't it have made the government think twice before giving them sole ownership of the new currency? Moreover, wasn't it naive on the part of the government to assume that once given such absolute authority, the banks wouldn't misuse it and won't go rogue?

Fourth, the government naively forgot to consider the hardships rural India would face during the entire demonetisation exercise given the poor coverage of the banking system in these areas. According to RBI figures (Aug 2016), only 38% of total bank branches in India are in semi-urban & rural areas. Similarly, only one-sixth of the total 2,01,182 ATMs in India (June 2016) are in rural areas. Due to such low density of the banking system, rural Indians largely depend on banking correspondents & regional co-operative banks for their monetary needs. Though the co-operative banks were rightly denied new currency (they are mostly controlled by regional politicians), shouldn't the government have made special alternate arrangements for rural areas? Moreover, the timing of demonetisation couldn't have been worse for rural India: it came at the beginning of the Rabi sowing season when farmers need cash-in-hand the most. The government added to the woes of rural India when it discontinued exchanging of notes suddenly and before the pre-decided deadline. The government naively overlooked the fact that most of rural India is unbanked and doesn't have bank accounts to deposit cash. A Twitter user very aptly pointed out that the government should have kept in mind 'Gandhiji's Talisman' (found in all NCERT textbooks) to understand rural India's plight before imposing demonetisation.

The government exhibited its fifth naivety when it began propagating cashless payments when the demonetisation-induced cash crunch hit people. The government of a country which lacks even basic economic literacy naively assumed that there is widespread digital literacy and everyone has access to cashless payments. A report commissioned by the World Bank, published in November 2015, stated that only 53% Indians have bank accounts: of which 43% are inactive. The report also stated that only a meagre 15% use bank accounts for making or receiving payments. The Pradhan Mantri Jan Dhan Yojana (PMJDY) added a whopping 22 crore accounts to India's banking system without any visible improvement in banking infrastructure or economic literacy. A majority of these accounts were either lying dormant or had zero or one-rupee balance until demonetisation. Given the above facts, how could the government be so naive as to assume that such an economy would seamlessly shift to cashless modes overnight? As far as access to cashless payments is concerned, only 39% of those who have bank accounts have an ATM/debit card. Even among these cardholders, digital literacy is low: most are unaware about the 'dos and donts' of plastic money and become easy targets for cyber criminals. In October this year 32 lakh SBI ATM-cum-debit cards were compromised due to a malware in a payment network. Awareness about OTPs, CVV, passwords, e-wallets, card skimming & cloning is extremely limited (a few Hindi newspapers use the word 'swap' machines instead of 'swipe'!!). Nothing demonstrates the government's naiveness more than its assumption that cashless India or even less-cash India is just a step away. Let's achieve rural sanitation first!!

In conclusion, one does wonder whether anything was planned or thought out about demonetisation other than the PM's speech! New notifications issued each and every day have made a mockery of the RBI and the Finance Ministry. The government keeps changing the narrative of demonetisation each time it finds itself in a spot. Deadlines are arbitrarily withdrawn, and illogical and varying time-frames are being given for normalisation. The PM revealed his naivety when he announced that it would take only 50 days for currency and liquidity to return to the economy. As per the most optimistic figures, it may take atleast 95 days just to bring the equivalent of the demonetised currency back into the economy. Who knows how long it might take to bring back the pre-demonetisation liquidity? Certainly not fifty days.

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