At the Edge

Commentary on the Big Issues

India’s Demonetization Gamble

The Indian government made news at the announcement at what they declared was “demonetization,” a “revolutionary” move in which 500 and 1000-rupee notes ceased to be legal tender in India after November 9, 2016. It was hailed as the beginning of the war on tax evasion and black money, with the aim of forcibly destroying a substantial amount of black money, requiring proof of the means by which amounts of wealth in five-hundred and thousand rupee notes were acquired at the time of bank exchange. The popular Indian opinion is also  overwhelmingly in favor of the move, and multiple businessmen and capitalists have hailed it. Businessmen Anand Mahindra, Sajjan Jindal, Kunal Bahl, Narayana Murthy, and others all hailed the move. But it also met with vast criticism from reputed figures such as Nobel Prize-winning economist Amartya Sen and former professor of economics at Jawaharlal Nehru University Prabhat Patnaik.

People gathered around ATM of Axis Bank in Mehsana, Gujarat. Credit: Nizil Shah (own work).

The above image is licensed under Creative Commons Attribution-Share Alike 4.0 International license. It has been taken from Wikipedia, which in turn credits the picture to Nizil Shah. 

While I disagree, often, with the foundations of this criticism, and am even willing to accept demonetization as a mechanism to combat black money in theory, I think the implemention of demonetization has left much to be desired, and has been counterproductive to the social welfare of the people, while failing to produce a net greater revenue. I argue that demonetization poses the following harms:

First, the rural poor who lack the infrastructure to set up deposit accounts have now had their money and finances — held in cash — completely devalued. But even the rural poor who do have access to accounts are struggling. As Padmapriya Govindarajan explains: 

Even those who do have access to accounts among them struggle with ill prepared banks and post offices, small and dispersed in number, and the need to take off several crucial hours from work – sometimes in vain.”

Second, socially ostracized communities, such as the transgender community and sex workers, are disproportionately cut off from banking systems. The level of systemic discrimination and marginalization against them has caused them a substantially greater hit from demonetization. The impact of demonetization on sex workers has been analyzed. Bindiya Chari of The Times of India explains by citing an example of a group of sex workers:

Half-a-dozen sex workers, who travel to Panaji from Vasco every day in search of clients . . . said their business has dwindled since the demonetization move.

Third, refugees, who are similarly cut off from banking systems because they lack requisite documents and are still undergoing a lengthy documentation process, see months of their savings go to waste. To quote examples from The Hindustan Times:

“Chetan Achu, a native of Tharparkar in Pakistan, is an engineer who moved to India four years ago [as a refugee]. He works on contract basis. ‘I used to get cash in instalments from my employers but now after this decision of demonetization, my employers say they cannot pay cash.’ Dileep Singh, another refugee, said they approached banks but because they do not have any bank account or identity proof, banks have refused to exchange cash for them. ‘We are shocked how we will be able to change our cash?’”

The reality: they can’t. And driving people who are already suffering to worse conditions lacks in even the thinnest veneer of justice.

Additonally, there are two glaring economic harms from demonetization. First, economic productivity. Workers are stripped of productive hours as they wait for hours in ATMs and banks wanting to exchange money, and failing to meet those very objectives. This has a direct impact both on the human welfare of these workers and on economic productivity. Second, the enforcement costs of demonetization are substantial. The need for ATMs to be filled more often and the burden on banks cannot be ignored. Note that this does not constitute a net harm, but cancels out the positive effect of gaining black money. For now, this is, of course, not quantifiable. But considering the substantial uncertainty here, it is impossible to deny that the effects of demonetization on minorities and marginalized groups is sufficient to justify the notion that the impacts might just be negative.

None of the supposed benefits of demonetization holds up to scrutiny. The benefit from regaining black money?—?government revenue?—?is small because it is substantially mitigated by the amount of money lost by the government in the process, and the definite slow in GDP growth.

In terms of “fighting terrorist networks,” the human cost still outweighs because terrorist networks can still gain money and resources?—?the impact is merely temporary and mild. And since terrorism does not rely way too much on operational costs, it was largely unaffected.

Demonetization has been a blow to the weak: the shameful, staggering human cost ignored by the elitists who proposed it. The certainty among the public following demonetization was mired by truth, and by uncertainty.

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2 Comments

  1. Partha Sarathy

    Good article, and well researched. Keep up the good work, Tejas!

    Fyi, I wrote an article on this topic in Nov 2016, maybe a few days after the scheme was launched, and I was very critical. I don’t expect you to agree or disagree, but just wanted to share another perspective.

    https://drive.google.com/file/d/0B5-syLNr0VqsZ1F0NHliWU5OQzg

  2. Savitha Suri

    Good work… your’s is among the few articles mentioning the impact on marginalized sections like the refugees and transgenders.

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