The prime minister announced on November 8 that high denomination value notes of Rs 500 and Rs 1,000 would be demonetised with immediate effect. It is a unique experiment with no parallel in the world. The move has already started changing banking habits in the country and has been successful in ushering among the masses an urge to adopt digital banking. More recently, the government has announced a 13-member committee of chief ministers headed by Chandrababu Naidu, chief minister of Andhra Pradesh, to boost the digital payment system in the country. There have been different estimates of the impact of demonetisation on economic growth.
However, social implications of demonetisation need attention. Demonetisation has brought the country together as there is a consensus that this was a step in the right direction, and needed courage to announce and implement. Initially, implementation was slack, probably because of the secrecy clause. But since then, the ground situation has certainly improved significantly.
The challenge is that after some time, if corruption is not eradicated, how would a citizen, having suffered waiting endlessly in queues, behave? Probably, with total frustration. There are indications, from reliable sources, that many officials have upped their standard bribe rates to clear cases and files, to build fresh reserves, given that old reserves had to be liquidated. The officials have to recover the cost of their present posting and ensure that the next posting is equally lucrative. Thus, the menace is not over and will need persistent effort.
While the prime minister has addressed the issue of stocks — be it in the form of currency or benami property — the need now is to consider stalling the flow of unaccounted money. That will need strategic and long-term planning, demonstrative and exemplary punishment to some select errant officials, and most importantly, identifying and loosening bureaucratic controls over issues related to the ease of doing business.
According to the RBI, Rs 8.4 lakh crore in two specific high denomination notes has been received by the banks until November 27.
Further, according to reports, Rs 10 lakh crore is expected to be received by December 31. And the window is still open till March 31, 2017. This large an amount of money in the banking system can have different implications. It could be a temporary deposit, which would be withdrawn once circumstances normalise, sliding back into the economy, leading to inflationary pressure if used to purchase goods and services. On the other hand, if these are medium to long-term deposits, then lending activities can be activated for investment and consumption. Such lending could be inflationary; therefore, the RBI and the government would need to be extra cautious in unleashing these resources into the economy.
The important thing is to retain confidence in the country’s institutions — currency as money is all about trust. Illustratively, in the island of Yap, in the Pacific Ocean, the currency called fei was of large 12-feet diametric stone wheels. Once, a fei of a wealthy man was washed away into the ocean, but the policymakers of Yap decided that as the loss was due to natural calamity, the economy would continue functioning normally. Even today, stone money is valued in Yap. In another example from not too long ago, the Kurdish-dominated area of Iraq used the Swiss Dinar without any support from a government or central bank for more than a decade from 1993 to 2004, simply based on trust and faith. In India’s situation — transitioning by changing 86 per cent of its currency — it is important to maintain restraint
in activities that erode confidence in institutions and currency.
There are still a few issues that need to be considered by policymakers. First, is the Indian population ready for corruption-free economic and financial transactions? How many Indians, for example, would be comfortable in transacting cashless business with jewellers, especially during the wedding season and festivals? Therefore, there is a need to spread financial literacy on the virtues of cashless transactions and the implications for accounted money. In this context, socio-economic factors would need to be considered. For example, changing the mindset of the elderly population in the country — nearly 11 crore people — will need concerted effort. Similarly, the practical implementation of digitising the economy for women, when only about 31 per cent are in the workforce, must be considered. In addition, some more factors like a literacy rate of 71 per cent, a poverty rate of 29.5 per cent, and an informal sector accounting for 90 per cent of economic activities in the country will also need to be examined. The cost of providing equipment in remote parts of the country and ensuring seamless connectivity at affordable cost is another challenge that will need to be addressed.
Therefore, it may be helpful if a long term-plan with cost implications and with a stipulated timeline is prepared to decide on various aspects of building a cashless economy.
The stated objective of demonetisation was to address the issue of counterfeit notes and corruption, both of which negatively impact economic growth. India, with a population of nearly 80 crore people below the age of 34, has to focus on a conducive environment for ease of doing business for the next 50 years in order to avail its demographic dividend. Demonetisation needs to be examined in the context of young India chasing a dream of becoming a global super-power in the next few decades.