The Demonisation of Cash

The Indian Government, either under the influence of homespun economists or perhaps marijuana is attempting the most radical economic transformation in the history of India. The elephant is being made to dance upon a thimble.

Enough has been said both for and against the scheme by far more erudite thinkers than this blogger. The purpose of this blog is to speculate on the far reaching changes in people's psyche that may come about as a result of this experiment. To clarify, 'people' in this blog are not the fat cats, multi billionaires or even the upper middle class. My concern is for the much reviled Aam Aadmi.

1. People's attitude towards cash will change dramatically. So far it was a friend, someone (or something) that you needed for your daily life. It was the most needed when you were sick or for joyous occasions like your daughter's wedding. Indian housewives squirreled away part of their household budgets every month to save for a rainy day. Now a lot of people will view cash with some trepidation. It might become worthless paper at any time. Some overzealous bureaucrats are already talking of periodic demonitisation almost like an enema that a constipated person needs to cleanse his colon. What is the consequence of this change in attitude? Will it foster a greater propensity to spend? Will it bring down India's famed savings rate - one of the highest in the world? Will it fuel movement towards more faithful friends - property or gold? Being bitten by a faithful dog is not a pleasant experience. India is collectively going through that experience.
   
2. After the incredible exercise of opening millions of new 'Jan Dhan' bank accounts, the Aam Aadmi is suddenly faced with the bewildering feeling that he cannot withdraw his own money! In that case will he not wonder whether the money was his in the first place or whether the State has first right to it. In the old days in some parts of rural India, Brahmins or Kshatriyas had the first right over a lower caste women on her wedding night. In the same way, if you will pardon the dubious analogy, the State seems to have the first right over your hard earned money and can regulate how you can access it and eventually dictate how you can spend it. Will it result in a decreased faith in the banking system? Will the Aam Aadmi believe in future that his money is secure?
   
3. The whole exercise of demonitisation is being touted as an act of patriotism and nationalistic spirit with the eventual objective of ferreting out black money that is really being held by a few people. This sounds good to start with but is rapidly losing it's sheen as people's patience wears thin in endless lines. As an aside it's fortunate that the Government did this in November. In June there would have been a revolution within a week. It will not take long for the Aam Aadmi to figure out that while he may feel patriotic and nationalistic, none of the 'fat cats' are being impacted. There is not a single case of a rich person being arrested for possessing black money. In the end even if the exercise works, how will the Aam Aadmi be impacted? Will prices come down? Will bribe taking end? Will counterfeiting end? Will he stop being harassed by constables demanding hafta? The victory, at best, will be an intellectual one. In real terms there is nothing for the common man to hang onto. Will this result is an unwillingness to participate in further social experimentation? Will he lose faith in democratic norms and a leadership that pushes him into impossible situations?
   

Success or failure of such extreme economic experiments may be measurable in monetary terms. The psychological and social impact will be much more far reaching. I really wonder whether the Government has thought through such issues before jumping into implementation of such a complex scheme.