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The real beneficiaries of the shift towards a cashless economy have been large retail stores and the organized sector which were already a part of the digital economy. Photo: Reuters
The real beneficiaries of the shift towards a cashless economy have been large retail stores and the organized sector which were already a part of the digital economy. Photo: Reuters

The rich, poor and demonetisation

The govt's demonetisation move may not only end up hurting the economy for nothing tangible to show in return, but also make the poor poorer and the rich richer

It’s now been over a month that the poor and the middle class have queued up to get the cash that they require for their day-to-day expenses. I am deliberately excluding the rich, at least the ones who have hoarded a large amount of black money. They have not queued up and we now know why.

As is obvious from the string of raids and searches, most of them have managed to convert their ill-gotten wealth through dubious means and in bulk. But it is the poor and the middle class, generally the honest ones, who have showed exemplary patience in queueing up, not so much to show their patriotism, but in the genuine belief that the move to demonetise Rs500 and Rs1,000 currency notes is good for the economy.

This belief stems from two reasons. First, the naked and vulgar display of wealth by the super-rich of this country has not gone unnoticed. A large majority of the poor genuinely believe that corruption levels have gone up and a large part of the wealth of the super wealthy is ill-gotten. They are happy and patient because they see demonetisation as an attack on these individuals. It might seem like schadenfreude, but they are happy that the corrupt have been punished in one stroke. The corrupt may not be standing in line, but as long as they are losing their money, it is good for the system.

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The second reason stems from the fact that demonetisation will genuinely bring more businesses and citizens into the tax net and thereby increase the tax revenues of the government. Most likely, this will also lead to some transfers in the form of subsidy to the poor and middle class. But even if it does not materialize in a direct increase in transfers, it will certainly be spent on creating infrastructure in the economy and thereby help increase employment creation.

In a nutshell, the drive against black money is not just against corruption, it is also against inequality which has been increasing since the 1991 reforms. Demonetisation, in this context, is a decisive attack on inequality.

This belief among a large majority of citizens also shows the extent of dissatisfaction against previous governments, which have turned a blind eye to rising inequality and corruption. Demonetisation has certainly raised their expectations of a transparent, accountable and equitable society.

It is this aspiration from demonetisation which can turn into a nightmare for the government if the expectations are not met. As of now, it appears that the government may be losing the war of perception, given the number of raids and the amount of new currency caught in recent weeks. The message that the government may have wanted to convey was that it is the banking system that is corrupt and responsible for the shortage of cash and not the government. But it is unlikely that the government will be able to deflect responsibility for its inability to stop the corrupt from misusing the system.

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In any case, the numbers on the quantum of old Rs500 and Rs1,000 notes that have come back into the system, although disputed, do suggest that most of the black money hoarders have managed to put their money back into the system. Clearly, the expectations of a penalty on black money hoarders and reduction in corruption have not been met in the weeks after demonetisation.

This also quashed any hope of the government being the beneficiary of windfall gains because only a small fraction of the money that has been demonetised is likely to be extinguished. In any case, there are question marks about whether the government can appropriate all the money that is not going to come back into the system. Further, with a general consensus that the economy may decelerate, the net benefit in the form of government revenues will depend on the losses that the deceleration will trigger. Most certainly, it is not going to benefit honest citizens, at least in the short run.

But there are two other things that are likely to happen. First, the preliminary estimates on earnings and production suggest that the slowdown of the economy is not a figment of some economists’ imagination. It is real and the only question is the extent to which the economy will be hit. This is certainly going to affect the earnings and employment of informal-sector workers, a majority of whom are from the poor and lower middle classes. It will certainly create unemployment in the short run and may also lead to a decline in demand, which may continue much longer than the next two-three months.

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Secondly, the shift towards a cashless economy may not be easy and costless for a majority of the people working in the informal sector. At least in the short run, the real beneficiaries of the shift towards a cashless economy have been large retail stores and the organized sector which were already a part of the digital economy. If this trend continues for some time, it will essentially be a transfer from the informal sector to the formal sector, largely owned and patronized by the same rich who are detested by the poor and the lower middle classes.

Ultimately, it is no longer a matter of whether and how fast we can shift to a digital economy, but also of perception. The patience that the average citizen of this country has shown is an indication of a faith in the government to deliver what it started out to. As of now, it looks like the government may not only end up hurting the economy for nothing tangible to show in return, it may also end up making the poor poorer and the rich richer.

Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

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