Already imperilled by the ‘great divide’ after 2014 Lok Sabha elections, democracy appear even more fragile in our country in the face of the long term impact on economy arising out of the demonetisation. The government has been arguing that this “shock” to the economy was necessary for long-term benefits.
Finance Minister Arun Jaitley has argued that long-term benefits of this exercise would be greater transparency, enhanced tax base, access to formal finance and the like. However, there is a need to take a dispassionate look at the deeper impact of this move.
Arguments in favour
Let us revisit the reasons behind this drive. In a 40 minute, long speech Prime Minister Narnendra Modi announced the demonetisation of existing notes of Rs 500 and Rs 1000 during televised address on 8th November 2016. The main arguments in favour of demonetisation used by the Prime Minister are to tackle black money in the economy, to lower the cash circulation in the country which "is directly related to corruption in our country”, to eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in India and to scoop out the black money. The government suddenly took out more than 80 per cent of the currency in circulation at that time.
The crucial question in the demonetisation debate is how this move would prevent generation of black money in the future, given the immediate issue of fresh notes of Rs 2,000 and re-issuance of Rs 500 notes. This and similar doubts would have evaporated in thin air had the generation of new notes met their demand, if the pain had been short lived, and the public would have gone back to its usual ways of functioning. However, the inconvenience continued for much longer than initially expected, and it continues.
As a result, concerns of collateral damage such as unemployment and underemployment especially for daily wage earners; lack of access to medicare, severe damage to the informal economy, including small and medium enterprises, farmers, construction labourers, migrants and the like, emerged. This resulted in the poor wondering if the pain was worth it.
To counter such growing negative narratives, the government started adopting a digital payments agenda and promoting its benefits of greater transparency, accountability and formalising of businesses. It publicised its already launched initiatives of Jan Dhan Yojana, RuPay cards and avenues offered to go digital. In effect, the government is increasingly emphasising that demonetisation is not an exercise to curb the supply of money in the economy, but a nudge to shift from cash payments to digital payments.
The impact of demonetisation will depend upon the direction of Government expenditures. The impact will be positive if the Government uses the revenues to provide additional facilities to the people who have suffered the loss of purchasing power. The effect will be negative if the revenues are used for increasing salaries of organised sector and government employees. In that case, the unorganised workers, farm labourers, and small farmers will face ‘survival problem’.
The present direction of Government public expenditure does not give much hope. Reports indicate that there has been a reduction in the capital expenditures of the Central Government. Recently, international rating agencies Standard & Poor’s and Fitch had to upgrade India’s rating, citing poor state of public finances. Other agencies have lowered the expected rate of growth in the coming years. Demonetisation and the consequent increase in tax collection are likely to have negative impact on the people in this situation.
In the beginning public was ready to bear “short-term” inconvenience in the hope of long-term benefits. The poor chuckled at the notion of the rich being taken to task. However, when the “short-term” slowly started to border on the medium and, perhaps, long term, government pundits spurred into action and started working towards building a parallel narrative. Consequently, what started as a measure to curb black money is being quickly and intelligently turned into a campaign to promote digital money.
The agenda of a cashless Indian economy and society, which the government has been striving to promote, has two scenarios. First, it takes away the burden on the government to meet the increasing demand for paper currency, and thus hiding the poor planning and inefficiency in the execution of the demonetisation exercise. Second, it shifts the responsibility of pain to the poor and informal workers from the government to informal petty traders and businesses and the like who have been reluctant to shift to the formal economy due to fear of being subject to the tax net and increase in regulatory compliance cost. Blame has also been shifted to financial sector service providers who have been unable to lure the poor to shift to digital payments.
Digital India Programme will not produce equal effect all over the country. Digital divide – a problem of economic and social inequality with regard to access to, use of, or impact of information and excommunication – is already a real and felt problem and it is likely to increase with cashless economy.
The divide will be multidimensional – between rural and urban India, rich and poor, men and women (99 % of Indian women have lost their cash saving carefully hidden from the watchful eye of demanding husbands), educated and uneducated, young and old and so on. It will widen gaps between different sectors and enterprises and cut across different demography.
In this background, the government has been arguing that this “shock” to the economy was necessary for long-term benefits. The perceived inconvenience will last until the time industry and market players remain reluctant to shift to the formal economy. The government has argued that long-term benefits of this exercise would be greater transparency, enhanced tax base, access to formal finance, and the like. This strategy of taking control of the political discourse by a sudden announcement, thereby building a narrative and shifting responsibility has not been a first. The Modi government used this tactic by arousing nationalist emotions.
It will not be surprising if black money comes back to haunt governments of the future, requiring well-planned concrete multi-pronged measures, beginning with greater transparency and accountability in funding of political parties and elections. Already, there are reports of public servants being caught with huge bribes in new currency and black money hoarders using creative ways to hide their wealth or converting the same to white. The relentless push to digital payments has heightened concerns with respect to misuse of personal information, consumer protection and increasing barriers to access formal financial services.
In the end, this unplanned hasty and emotive demonetisation will damage our economy. Poor will bear the highest cost because of going cashless. Business that are running on black income will ‘revisit’ it with new high denomination notes or it will be lent to some in the unorganised sector. Moreover, black money and corruption in the country may be dollarized. This happened in Russia. People lost their lifetime saving when the Soviet Russia collapsed. Since then they have been keeping their staking in euros or dollars. Officials in that country routinely demand bribes in dollars rather than in roubles. We may see a similar tendency in India. The corrupt officials may lose faith in the rupee and start demanding the bribes to be paid in dollars. Kerala may be first to become victims of such practice. Politicians, bureaucrats, and businessmen may start stashing their hidden incomes in foreign countries. After recent demonetisation, the demand for dollars has increased. People are afraid of keeping their savings - white or black - in the country. They are finding ways of sending the money abroad. This tendency will increase and this will further deflate the India's economy.
In a sudden move, the focus has been shifted away from real issues like jobs, agriculture, poverty, health, and education, women’s safety. It will also not be surprising if the government comes up with another gimmick to take control of the political discourse once the debate around demonetisation starts becoming serious and people at grassroots level starts question it. Overall, the demonetisation will only temporary dent on the black economy. Meanwhile, the havoc brought by the demonetisation is likely to result in uncertain future for millions of poor, Dalits, tribals, backwards, womenfolk and particularly young. Just wait and watch.
(The writer is Delhi based senior journalist.)(Published on 26th December 2016, Volume XXVIII, Issue 52)#