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.
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.
- 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.
- 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?
- 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?
One good that comes out of it will be an added chapter with authentic data for economics students. Several PhDs can come out of it.
ReplyDeleteSri Bhatnagar always a pleasure to read your blogs.
ReplyDeleteI guess it is all a question of the common man and his attitude towards getting used to plastic or e-cash instead of paper cash.
In principle most of us will agree that there are several benefits of moving away from paper cash and looks like the current government is bent upon doing so.
You have correctly pointed out the elephant is being made to dance on a thimble. If we have to provide jobs to several millions of our young population and try to catch up with the likes of China it is high time the elephant elephant shed some weight.
Several migrant workers from UP, Bihar, Orissa etc.have seen how Modi transformed Gujarat and it is the images that they carried back home which gave Modi a resounding victory in lok sabha. It was a watershed event when the common man rejected offered fish for learning how to fish.
Modi has taken a huge political gamble with the demonetization
move but how do you get a lethargic society to move?
On a different note I am sure you will agree India needs to desperately reduce the black market proportion of its economy, so where does one make a start? With adhar cards and jan dhan bank accounts the government created avenues for people to move away from cash.Then to shake vested interests and sheer lethargy perhaps a jolt like demonetization was required.
I any case I believe demonetization is the first of many other moves to come and people will be better off getting used to the idea of tech money.
BTW you have always been a strong proponent of India's need for a benign dictator.
Well, we have the beginnings of a dictator benign or not time will tell.
When the scheme was first announced I was delighted. I said so in a Facebook post. However as time has gone on the sheer ineptitude and bad planning has become evident. I have a feeling that the key politicos are already beginning to distance themselves from this fiasco and some convenient babu will be soon found who will take the rap.
DeleteYes I do believe that in our country we need a benevolent dictator. However the key is that he should be benevolent, not malevolent :)
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DeleteA movement in right direction where the leader is ready to resort to course correction is thousand times better than an arm chair intellectual who can only propound theories but do nothing.
DeleteThe implementation is far from ideal but the move is in right direction. The cobweb of all types of corruption through which next few steps will have to be taken may again result into few faltered steps, but if we keep moving in right direction, the cobweb will clear and take us to a clear path towards a much much better India.
Dear BD
ReplyDeleteVery interesting observations as usual
Sitting in New York, the dimensions of this are, well, somewhat foreign, so please humor me and see if my questions below make any sense.
I am not sure I understand exactly what this wonderful tamasha will accomplish
As I uderstand, the richest Indians + politicians stash their black money in Swiss Bank Accounts, Gold and real estate assets. So, their exposure to wads of paper being demonetised is probably not of great concern to them, or is it?
It seems that the demonetisation hits those corrupt folks all the way down to the govt clerk who don't have access to foreign security and/or gold, i.e., the Aam Aadmi, in your narrative. The impacts on the lowest segment extend to inability to get paid or to access funds -- I get that.
(BTW has the gold price skyrocketed in the process ? -- not clear that it should, actually)
Also, will this lead to a collapse of housing prices, since the black money has been the currency for many of those transactions?
Finally, I don't understand why this should work to significantly deflate the black market at all -- if the black market is large enough, then these bills could still be used for transactions in that market -- they just cannot be exchanged for transactions outside that market. In fact, a barter or bitcoin economy could sustain that market, just fine -- at least at the high end, so the corruption targeted is at the Aam Aadmi level?
Consequently, it seems that this measure would primary attack the people who are too simple to be able to avoid the impact and the sophisticated black money dude smiles and watches the fun. Likely I just dont get it.
What am I missing?
Rumours abound that the really fat cats and those close to the powers that be had already been tipped off. You may choose to discount these. However as you rightly observe there is no panic amongst the Swiss Bank holders or even the next rung.
DeleteThe guys who have been hard hit are the small people who don't have black money but depend on cash for survival. The sudden demonitisation has forced them into long queues and I have a feeling that angst will build up soon.
The mid size black marketer who has hoards of cash may well get into the net and good riddance.
Overall a good move but very badly planned and executed.
Sri Bhatnagar,
ReplyDeleteAs always your posts provide food for thought. India has to move away from the (black) cash economy for big transactions like real estate, buying gold, even marriage transactions. Income needs to be accounted for, and all 'legal' taxes need to be paid. This does not mean that cash needs to be disappear. Cash transactions are still a significant payment form factor all over the world and will continue to be for a while. You mentioned that this blog is "to speculate on the far reaching changes in people's psyche that may come about as a result of this experiment".
- I agree it is extremely unsettling to see all the money stored away as currency note saved away become worthless. This is fundamental to commerce and cannot happen frequently - has to be once in a life time event. The banking infrastructure needs to be firm to protect the money and provide access to it any time for all commerce transactions. I believe folks may move more rapidly to opening and operating bank accounts - which is what Modi has been pushing and should happen also.
- There are examples of how business is done without cash and that has to become robust, convenient and available everywhere all the time. I think folks will realize that cash is not really required for transactions and move away from it. Cash is not safe also.
- I think folks may be forced to make high value transactions legal and start thinking that way. No need to carry suitcase full of cash! Income, assets and expenditure needs to be accounted for.
- If this works out well (and I hope that it does), folks may get used more legal transactions
Personally I think a drastic step was needed to address black money, fake currency and funding of terrorism. While there may be gaping holes in the approach and implementation, I am hoping Modi will address the key issues and make things happen. He has the support of people (at least for the time being) as I heard folks standing in line are happy that the rich and corrupt are being impacted more than they are. This is a great opportunity for the country to make financial overhaul and get to the 'right' way of doing business.
I totally agree that drastic steps are needed against black money. In fact when the scheme was announced I was delighted. However the sheer ineptitude of planning and execution has rendered the whole thing farcical
DeleteI see Dad's support for benevolent dictatorship hasn't gone unnoticed :)
ReplyDeleteThe key word being 'benevolent' what's happening right now seems to be the work of a 'malevolent' being.
DeleteTo the point. The poor and poor business men are suffering. Lot of people save cash in home hidden from their husbands who would use that money for drinking. Now they are scared that they will be harassed if they go to bank.
ReplyDeleteVery true
DeleteDo not agree with your post at all. It has got nothing to do with nationalism or patriotism. I am surprised you are saying this.
ReplyDeleteThe BJP and its supporters like Arnab Goswami have made the point several times that if you oppose the Government's actions you are anti national. In this case too, the opposition is being told that they are supporters of black money and so forth. Is is not permitted to oppose the government when they mishandle a situation? When the scheme was first announced I was delighted. Now I am not so sure after seeing the amount of chaos that has been created.
DeleteNone of your points are logical.
ReplyDelete1. Accounted cash is still a friend. One can always exchange demonetized money with new legal currency. Sick persons, housewives, et al will continue to use cash.
2. Inability to withdraw money from own account is a very very short term phenomenon. Perhaps a month or two. Then everyone can withdraw as much cash as they want.
3. It is not important to catch big fish. Even if lakhs of small fish come into the tax net, the job will be done.
Regards
A salaried taxpayer
It is important to make the distinction between cash and black money. Not all money held in cash is unaccounted or black. The second point is that the inability to withdraw your own money especially for a person who does not have a credit or debit card is a tremendous shock. For such people two months is a very long time. I understand that salaried taxpayers like you are able to withstand the problem due to the fact that you probably have a credit or debit card and maybe have some cash lying around at home. What about the daily wage worker or the person who is paid in cash every month? I know many people like this who are in deep distress. The rural areas are going through a severe crunch.
DeleteGovt. has provided all options
Delete1) Those with old denominations can go to any bank and exchange. 2000 at a time. Sufficient for a poor man.
2) With people having bank accounts and even without debit/credit cards they can still withdraw upto 24,000
Where is the question of inability to withdraw your own money?
If the person needs more than 24,000 a week, is he really poor?
Have you tried exchanging your money? Many poor people I know have taken the day off to do so without success. I'm sure you read the newspapers and even if you don't believe in them all you need to do is to stand near a bank and see what is going on.
DeleteToday I went to 4 banks in Gurgaon. Two were HDFC where I have an account. None of the branches had any cash. I met the bank managers in all of the branches and they told me that Gurgaon has not received any cash for the last couple of days.
There is a vast gap between what the government intended to do and what is actually happening. I believe the intention to get rid of black money is great but the planning and implementation is deplorable.
Divyaji
ReplyDeleteExcellent points.
Personally, I think this is a major political strategy to shore up the popularity of the ruling party.
All the sanctimonious talk about eradicating the black economy is directed at keeping alive the myth that Modi perpetuated about himself as being an enemy of corruption.
There will be a dramatic reduction in unaccounted cash, no doubt, and this will be sustained by a public hounding of defaulters and further gimmicks so that the party has something to crow about in 2019 when it is time for the next election.
2019 is a long way off. The BJP has first got to handle the fallout of this move in UP and Punjab. In Punjab where sowing is yet to happen for wheat there is a severe rural crisis. Let's see what happens.
DeleteThat there will be far reaching changes in the common mans' behaviour is an understatement. The question is - who really is a common man?
ReplyDeleteDefinitely not the fat cats and the big fish.
Some of the very small traders, who have little to hide, have adapted. The paanwala in my locality accepts payment through PayTm.
Had hired a taxi to Gurgaon a few days ago. The driver said his bank account is in Punjab & Sind Bank, Khairabad, Rupnagar, Punjab. Through PayTm, the money was sent and he received an acknowledgement immediately.
The local kirana wala refuses to switch over to the digital wallet - he is a strong proponent of the cash-only economy. He also owns two flats in the same colony where I live.
Was in Jabalpur a few days ago. The chaiwallah there was completely supportive of the move. He said hardly anybody pays him with 500 or 1000 Rs. note. And he maintains a "khaatha" for the regulars.
Well heeled friends who shop in DLF Emporio mall received SMS's on Nov. 8 night stating that the shops were open till past midnight for accepting cash purchases. On Nov. 9, gold and the US dollar was being sold at a 40%-50% premium to those with excess cash.
My maid's husband stood in line for four hours at the bank to deposit his "old" money.
I believe that the people have full faith in the banking system, and the safety of their money. They have been terribly inconvenienced for the present.
I am extremely hopeful that the demonetisation, coupled with other initiatives that have been put in, and are being put in in the areas of real estate/property wheeling dealing, the cash splurging on high value items, under invoicing, over invoicing, fraudulent exports, excise evasion mechanisms, zero tax on agricultural income (I.T. notices have been sent to the very large agricultural income people) - will result in a huge decrease in the future generation and consumption of black money.
Will people's behaviour change? For demanding/paying bribes, being disciplined and waiting your turn, taking pride in being "swach",... That's a different topic altogether.
I would exhort all to support the govt. in this extremely difficult and herculean task. And to lend a helping hand, wherever possible, to those who are less privileged than us.
Points well taken. We should also help those who are in distress and need a helping hand. However that does not absolve the government of the responsibility of bad planning. They run the risk of losing the confidence and faith of the common man if this continues.
DeleteThere are two elements as I see it. One is that it is a political move to attract the famous ‘Aam Aadmi’ into the BJP fold as he was never there. The second is that it is the first time that an initiative of this magnitude has been launched in the civilian space by any PM; and since it attacks black money, the eternal economic and ethical scourge of India, it deserves 200% support from all irrespective of the political agenda. If we want to get rid of black money this is our chance. Even if the exercise fails, it would have set a new discourse in the public domain. So go out and do all you can ... for example, a friend has declared on his Facebook page that he has resolved not to make any payments above Rs. 5000 in cash.
ReplyDeleteI completely agree with the basic objective of getting rid of black money. However planning and implementation has let the government down.
DeleteThe article is very interesting and indicating about the Govt further steps in the line of Black Money removal in our circulation. As a matter of fact this has been seen that most of the middle men are penalized who were unprepared for the shock. You would not have seen any statement from any of the rich persons in the episode. There might be two reasons as I think personally 1.They might be having pre-information so were well prepared to face in advance.2. Money is the basic need of a common man to run any type of business or movement in order to earn the bread and butter. My only anxiety is to know the ground reality of those rich people who are not in the line nor crying for anything.
ReplyDeleteThis is a good article indeed. I like it.
Thanks!
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