40. ‘Demon’etisation is in the detail

40. ‘Demon’etisation is in the detail

I am scared as a hell to start writing about this topic. Not because I am taking a stand with one side, but because I am taking no stand at all, and hence might ruffle feathers with both supporters & critics of the project. This is just going to be an independent view of a person with medium level knowledge on how the world runs, who is curious about this new idea that has been thrown in.

Internet is a wonderful tool that gives us immense opportunities to fact check ourselves before posting anything, and I will start by correcting my statement in the earlier paragraph. The demonetisation endeavor is not a new idea, but has been in circulation for a while and even tried out in number of countries with different degrees of success / failure. (Not listing them since you can easily google it)

The fact that people still want to try it out even after repeated examples of not so successful attempts means that there is some underlying charm to the entire concept. And since it looks on the outset to be a very effective tool to weed out black money, one is prone to think that it is the execution and not the concept that is to be blamed for.

There are a few key parts to execution and let us see them one by one

1. Time frame for demonetization (why the surgical strike?)

2. Cash exchange mechanism

3. What next ?

Let us try to understand what would have happened if a comfortable time frame had been given before the currency became ineffective (say three months). It could have been possible for the government to stop the cash from going out of the country in physical form. There might be small leakages, but large chunks would still be trapped within the country. However, the three months would have seen a buying spree of large value assets viz. gold and land. This buying spree would result in surge in price of both gold and land. Developers would have had a field day, and most of the unsold flats & properties would have been sold in a jiffy. Allied black activities like incorrect valuation and registration would have been at peak.

A large asset bubble and sudden spike in commodity prices finally resulting in significant spike in inflation of essential goods is very much possible in such conditions. Government could have curbed import of gold in abnormal quantities, avoiding impact to trade balance. People who have other ways of laundering would have had considerable time frame to do the ‘due diligence’, and this is the segment where the surgical strike is definitely effective. What percentage of the black economy this segment has is still a big question.

Cash exchange mechanism

Even hard-line supporters would agree this is where the lapse is very evident. If they had planned printing of 500, 2000 notes well in advance, if they had considered ATM compatibility issues, if they had planned cash logistics in advance, the long queue & chaos could have been avoided. You can’t expect over-night replacement of all the old notes, but when you do not know when/whether you can get cash, and change the exchange norms on a daily basis, it is bound to wreck panic amidst masses.

Another major issue that’s imminent and already started occurring in couple of places is the infrastructure capability of our e-banking system. The mobile banking system is not geared up to handle such surge in online transactions and it’s evident from frequent network issues during peak transaction hours.

And am not clear about the logic behind 2000 notes, but the logic that it’d make hoarding of currency easier is also not sound. Of course it would halve the space required to hold it, but that’s not a major hurdle for black money holders.

What next?

Now comes the big question, what do they do after December 30? Assuming government knows how much 500, 1000 notes are out there, and by end of Dec 30 only x% has been replaced by new notes. What would you do with the balance amount? Can RBI mint them again? And if they mint them, will they give’em back to government for spending or release it through banks for recirculation into economy?

My view is that RBI would give the money to the government as the cash has been generated due to executive action. There are a couple of things government can do with this money, and let us see them one by one below

Not doing anything would mean that the entire exercise is just an act in intimidating black money holders, and that’s such a small benefit which doesn’t justify such a large sacrifice by millions. You definitely can’t just release the money into the system, because it’d just result in drastic inflation. Because you’d then have more cash to buy the same underlying goods.

Government can use it to pay back its loans. This can result in better sovereign ratings, but the implications may not be significantly large enough for our exports to gain competitive edge over other nations.

You might spend’em in beefing up our defence, but it’s more beneficial to Defence companies overseas, unless significant local component is mandated in the deals. But still it may not have desired percolation effects for common man (of course it would make our defence stronger, but the incremental benefits are not comparable to the magnitude of the scheme)

You can invest them in infrastructure projects, like the Tennessee valley authority during the new deal, but it should be based on sound economic logic and not just based on vote bank politics and corporate propaganda. And we don’t want to have huge chunks of unused assets like they have in China. The structures can last long, but the functional requirements change and hence these might become physical impediments to future requirements

Investments in lasting R&D efforts, especially in the much needed agricultural and social sector would give wonderful results. Spending on minimum essentials, like eradicating hunger, basic education & sanitation should be welcomed. Investing in strategic resource blocs overseas or new sources of energy would definitely bear positive results.

Epilogue

Whatever it is, one would like to appreciate the effort taken to change something that’s not right. But the way the aftermath is handled, and genuine concerns being shot down is something which may not go down well with the masses. Comparison of long queues for Jio sim and sacrifices made by Army are not appropriate. They might win the argument, but not the person, who would be want a chance to be heard one way or other. We as a society should realise the difference between choice and coercion. It’s fasting only if you do it while having the ability to get food, else it’s called starvation.

Of course the voices that shoot down queries are not that of the PM, but his silence only implies he’s aiding them. One might have his cards close to his heart, but unless you bring into confidence people you aspire to help, they might move towards a direction which are counter-productive and situations might go way beyond control.

To summarise, my reactions are mixed…. I welcome the bold endeavour, but have doubts/queries about the results, and scared by the way concerns are addressed.