Demonetization: A Nightmare for the Common Populace

Demonetization which was termed as a punishment for black money hoarders has now turned into an unforgettable nightmare for the common populace.

When Soviet President Mikhail Gorbachev ordered to remove large-ruble bills from circulation in 1991 to take over the black market the move backfired and resulted into a coup attempt leading to the breakup of Soviet Union.

This reform which was known as Pavlov reform was the last of such in the Soviet Union. The plan was only partially successful and had tremendous negative effect which resulted in a loss of public confidence in the government's actions.

In a similar fashion, the latest initiative by the Indian government to demonetize INR 500 and INR 1,000 rupee note is a form of economic "shock therapy" to drive people towards a cashless society by force. 

This initiative by the Modi government is the most sweeping change in currency policy that has not been witnessed anywhere in the world in decades.

Small and medium-sized merchants who transact mostly in cash have suffered a setback as the business is slow. Many of them are not able to buy even the basic items as they don’t have the required amount.

Black money has been the main cover story for the government to prove demonetization but then those with the largest amount of ill-gotten money rarely hold their wealth in cash but instead prefer converting it into foreign exchange, gold or real-estate.

So far, this move has targeted only the innocent more effectively than the criminals.

According to former US Treasury Secretary Lawrence Summers, “While it might be argued that since India is much poorer than the United States $15 in India is equal to $100 in the United States, the reality is that most Americans in the top 1 percent of the income distribution do not handle $100 bills on even a weekly basis whereas 500 rupee notes are very widely used in India.”

"The ongoing chaos in India and the resulting loss of trust in government fortify us in this judgment," Summers wrote in his blog.

Before India, other countries have tried demonetization as well but the results were not good and few countries rolled back their decision.

ATM transactions in India are worth more than point-of-sale payment transactions. The total value of ATM transactions increased more than five times between 2007 and 2012, from about 3 trillion to about 18 trillion rupees, while the value of card transactions barely doubled in the same period from 1 to 2 trillion rupees.

Though India has a fiercely competitive telecommunications market and is a widely acknowledged technology exporter, fewer than 2 percent of Indians have used a mobile phone to receive a payment, compared to over 60 percent of Kenyans and 11 percent of Nigerians.

A report on 'Cost of Cash in India' commissioned by MasterCard and brought out by the Institute For Business In The Global Context states, “In India households pay differently for access to cash according to their place in society, determined by income, employment, age, and place of residence. They also hold widely differing views on the risks of cash and strategies for risk management.”

The readiness of the regime to tackle economic challenges post demonetization has so far been shoddy. The government has failed to realize that transactions differ across consumer class-based on their geography and income levels.

The idea of a cashless society is a pipe dream of the elites who are completely unaware of the difficulty that a common person faces in obtaining a credit card, or even opening a bank account. Needless to say, this move has failed to promote financial inclusion in India and common people are at the receiving end. 

While writing this piece, I learned that Rs 2,000 notes were found on militants killed in encounter in Kashmir’s Bandipora few hours before. It is still unclear how they came to possess the new banknotes, less than two weeks after they were launched. As usual, the case is under investigation.