Last week on 8 November at 8pm (wonder if this use of number 8 was just a coincidence), Prime Minister Narendra Modi in a televised address to the nation (rarely deployed unless of dramatic import) announced partial demonetization—from midnight, Rs1,000 and Rs500 notes ceased to be legal tender.
Indeed, it was a dramatic step, like hitting the reset button on the economy. Understandably so, given that these two denominations accounted for almost 90% of the value of the currency in circulation—as on March this year, Rs500 notes accounted for 47.8% and Rs1,000 notes 38.6%. The transition, as we have already seen, is going to cause considerable dislocation.
The overt agenda, as the prime minister laid out in his address, is to tackle the lifeline of corruption: black money. Corruption by definition is anonymous, bereft of any audit trails, and black money is the enabler. This is exactly the political economy of the move to partially demonetize the rupee. It severely dents the flow of black money; the bid to tackle the stock of black money was the voluntary disclosure scheme which closed on 30 September.
To be sure, this is no magic switch to stop the generation of black money (as some commentators have claimed), because eventually it is linked to the desire to be corrupt. Nonetheless, it is indeed a politically courageous and daring economic move to detox a country of 70 years of addiction to black money and uproot the despicable values that promote and celebrate dishonesty.
Here are my five reasons as to why this move will, if followed through, be a game-changer for India.
First, it restores the premium on honesty. I have always believed that only a section of Indians are corrupt and the rest of us have had to bear this cost—the premium on dishonesty. It has (like surely it has for the rest of us) always bothered me when one has seen (even among friends and relatives) people gaming the system. Lately, we had begun to become cynical.
It is a feel-good moment; anecdotal stories suggest that relief is most for those at the bottom of the pyramid—the poor. They have a sense of empowerment at the comeuppance doled out to the corrupt. More importantly, their legitimate aspirations now have greater hope of fructification than before.
Second, it attacks the unholy nexus between corruption, black money, terrorism (particularly true given the impact on counterfeit currency pumped in from across the border) and politics. Ideally, this should be broken to ensure a level playing field, but even a dent matters. Like surgical strikes raised the cost to Pakistan-sponsored cross-border terrorism, partial demonetization has, at the least, significantly pushed up the cost of corruption.
Third, this has set the cat among the pigeons as it were. Most political parties thrive and survive on the anonymity provided by cash transactions. Hopefully, this is the beginning of the long-awaited reform of poll funding. Several models have been proposed and some systems have even been put in place, but politicians have been able to get around these with impunity. Now, it is in their interest to bat for a transparent and accountable poll-funding model.
Fourth, this is undoubtedly a big step forward for a less-cash economy; interestingly, the enabling ecosystem has just been put in place—for e-wallets, this is a terrific jump-start moment. Not only does it augur well for greater economic efficiency, it also entails an audit trail—which will naturally discourage corruption.
Fifth, the move is creating an entirely new set of stakeholders in the growth process. This is terrific news for the economy. And with growing tools of access to public information like the Right to Information, it also puts public policy under constant scrutiny, which should logically only discourage infractions.
In the final analysis, it is clear that status quo is dying on us, a necessary condition for the country to realize its inherent potential.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus
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