Two weeks of cashless in the country

Two weeks after the sudden death of a bulk of Indian currency notes, the most obvious panic seems to be over but the elephant of demonetisation is yet to work its way through the system. The entire process will take months before the python digests the elephant.

Arguments, edits, opeds, conversations, debates and social media are sharply divided on what the currency replacement will achieve. I remain in the ‘it’s good for the country’ side of the debate and want to address some of the arguments against demonetisation.

One, with black money in currency notes just a small fraction of the total stock of non-tax paid money—what demonetisation will achieve is debatable.

True, the stock of cash held in currency notes is a fraction of the undeclared income, but, as Vijay Kelkar and Ajay Shah write in this must-read piece in Mint (http://bit.ly/2fw5Gi0): “There is a game of musical chairs being played. One day, the music stopped playing and the persons who were holding the cash were penalized by 25-50%.”

Remember that currency is the way undeclared income or profit is stored till it can be sunk into assets or spent. The suitcases full of cash wait for deployment—the person who just sold his Rs2 crore apartment in a 60-40 deal, now has to find a way to make Rs80 lakh in cash legit. He got ‘out’ in this game of musical chairs.

Real estate, gold, diamonds and silver are the sumps of currency. The usual demand-supply rules apply here as well. When the level of black money is very high, it drives up prices of all sumps of illegal money.

Notice the price escalation in luxury goods, luxury real estate projects, luxury cars, gadgets and other high-value stuff.

The sudden death of old notes means that those wanting to sell, say, a flat, will now need to find a buyer willing to turn his white money into black.

We may see deals where gold or diamonds are exchanged instead of currency. But the currency kill makes the deal just that much tougher to do.

Two, the government has done nothing to stop graft. You can deal with the stock of black money but what about the flow?

I agree that demonetisation does not make India an overnight zero-corruption paradise, but it will simply raise the cost of not declaring your income.

There were reports of jewellers taking a 30% cut to turn currency into gold. Of ‘friends’ charging 20-30% to lend their bank accounts for the whitewash.

Anecdotes say that the migrant labour currency converter was charging Rs100 in Ahmedabad to exchange Rs4,000, Rs400 in Mumbai and Rs500 in Delhi.

The fear that the government can hit the refresh button at some point in the future will make the die-hard tax evaders move to gold, dollars or other stores of value, but it does put pressure to go legit on a large number of people who were simply playing the game—because this is the game that everybody who was smart played in India.

A sudden shock was needed to alert everybody that the government is serious about its fight against corruption. The government will have to follow up with strict measures to come down on future generation of black money, else this entire exercise will be in vain.

With government employees being some of the biggest causes of graft, how the Modi government will curb its own employees is yet to be seen.

Three, the economy will freeze and India will go into a recession. It is a real worry that consumption will get hit, and therefore production, in an economy that was just about regaining its health.

We will just have to wait and see the impact of this as the currency elephant gets digested over the next few months.

This nudge, no, let’s call it a push, to go cashless may just work.

Already there are plenty of examples of very tiny payments now happening through e-wallets.

For years intellectuals and the opinion makers have celebrated Indian ingenuity and given it the term ‘jugaad’. Will we see some of that on the ground when faced with no currency? We will just have to wait and see over the next few months.

Four, it was badly executed. I’ll agree with this one.

The ball was dropped by the Ministry of Finance as it underestimated the use of the Rs500 note as the principal medium of exchange in India.

Not just that, it caused even more confusion in an already messy situation with its flip-flops on currency limits.

But for a country waiting for big bang reforms, the way we are reacting to what is a big bang reform tells us that we like reform as long as it does not touch our lives.

Bold reform is going to hurt.

Usually it hurts a certain section of people. This time it has hit everybody—for not just those with the cash stash are hurting, the people with legit money too are cashless.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, and on the board of FPSB India. She can be reached at monika.h@livemint.com