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Property transactions came to a halt. People queued up till midnight to empty ATMs 400 rupees at a time. Petrol pumps were full of people trying to replace their soon-to-be demonetised notes with an easy and essential commodity. People with larger appetites found enterprising jewellers who had their stores open till midnight. Large chains like Big Bazaar remained open late, inviting customers to convert their cash into provisions. Agricultural mandi s were hit hard given that all transactions there happen with cash.
Prime Minister Modi’s announcement to demonetise older Rs.500 and Rs.1,000 notes within 3 hours and replace them with new Rs.500 and Rs.2,000 notes has shocked everyone. The government’s argument that this will reduce unaccounted-for money (popularly called black money) cuts no ice since the new notes will only make it easier to store cash. There is no attempt to reduce the generation of black money at all. The best this move can hope for is that people with cash piles of black money will have to lose them. Most chartered accountants have spent the better part of a day trying to find innovative ways for their clients to rotate their cash into the new notes. Intermediaries will have a very profitable two months.
The new intermediary business, however, will not be able to make up for the hit the economy will take in this month and the next. The two biggest sectors to be hit will be real estate and agriculture. Both these sectors have been under significant stress already and a temporary cash crunch will have severe impact. The real estate sector is linked with bank credit. While banks will benefit from large cash deposits for the short term, lower property prices will stress their loan books and fewer new sales will delay payments from debt-ridden builders. The real share of bank credit in a new property sale will also increase if there is no cash component involved, so unless banks quickly change the co-pay norms they will be taking a much larger risk compared to what they were taking earlier.
Many people are also excited about this ushering in a cashless economy. Almost immediately after the announcement, PayTM had a full page advertisement encouraging people to go cashless. Most of them stopped reading the announcement after the demonetisation part and missed the memo on the new notes coming in a few days. None of them also seem to question the coercive tactic from a government to alter consumer behaviour. Most of these same people will (hopefully) oppose a prohibition-like move and advocate that consumers should freely choose to do what they want in a liberal society.
The only sensible argument for this exercise seems to be that counterfeiters have gotten the better of this government. Even that doesn’t explain why a billion people have to be pained, business lost and GDP destroyed merely to change currency notes. A few years ago, RBI had replaced old Rs.500 notes without a year printed on them with no fuss. Most people don’t even remember that it happened. Most people are trying to wrongly equate this move with the 1978 demonetisation, which was a real demonetisation. This is a mere replacement of notes with new notes. Rs.500 for Rs.500 and Rs.1,000 for a much easier means to store bulk cash — Rs.2,000 notes. It seems that the government is aware of the huge problem of replacing 23 billion notes; fortunately, the Rs.2,000 note reduces the cost (printing and transactional) of the exercise. So what could be the reason to conflate an anti-counterfeit measure with the spin of black money and a cashless society? Not just one — there are three.
India must be the only major economy in the world that needs such an emergency measure to tackle counterfeit currency. It only suggests that the counterfeit currency notes can’t be detected as fake even by the banks.
Firstly, the growing disappointment with the government that its promise of bringing black money from offshore havens back to India has not materialised. This move hopes to show people that since they wanted something done, here is something. Secondly, the cashless part comes under the Digital India program that this administration is pushing with full enthusiasm. All initiatives of this administration are tech-savvy and people should be very impressed rather than ask inconvenient questions. A WhatsApp message claiming that the new Rs.2000 note will have a ‘nanoGPS chip’ became so popular that tech entrepreneurs, business heads and many others were duped by it. Lastly, this conflation shifts the attention from where it should really be — how did India’s currency get compromised?
India must be the only major economy in the world that needs such an emergency measure to tackle counterfeit currency. It only suggests that the counterfeit currency notes can’t be detected as fake even by the banks. A proactive assurance by both the RBI governor and Secretary of Economic Affairs that there is no security breach that has led to this drastic step only raises more suspicions. As they say, never trust a rumour till it is denied. If we can’t trust the security of our currency-printing presses, the public needs to know. If terrorist organisations are able to use counterfeit currency to fund their operation then we need to know how this lapse occurred. If it is secret, maybe a parliamentary standing committee can review what happened and what has been done to prevent its recurrence. If a breach has caused a damage of thousands of crores of rupees to the Indian economy, it has been way more effective than any violent terror attack in Indian history in its economic impact. The last thing this administration would want is to lose the narrative of surgical strikes and disclose that it got outflanked in a much more sophisticated attack.
