Trying to make sense...

 

I cannot pretend to be an economist.  I know a few basic rules about how economies function, having learned this on the job as a journalist. But when you are faced with Narendra Modi's "nuclear" strike, as someone termed the announcement of November 8 withdrawing Rs 1000 and Rs 500 notes, all of us are left with no option but to try and understand something about economics and how these things work.

Over the last month, dozens of "experts" have held forth in the media about "demonetisation", although government babus do not use that term.  Some insist it's a good thing; others say it's a disaster.  Modi promised that this will end the era of black money; economist argue that will barely make a dent.  Modi also said it will be a blow to terror financing; others point out that this might be a temporary hurdle. Modi and some bankers say that this will end counterfeiting of currency notes; others point out that nothing will stop the new notes from being counterfeited. Modi tells us that the rich are spending sleepless nights; others will tell you that the richest are sleeping well knowing that their wealth has already been invested or sent outside India.

The messaging about why the Modi government chose to do this has changed every few days -- from black money to terror financing to counterfeiting and finally to the idea that this will push India into a "cashless" economy. No such economy exists anywhere in the world.  How will India, where most people still deal in cash, suddenly make this transition?

And what about the troubles that people have faced over the last months to access their own money?  Well, there can be no gain without pain, we are told, even if the people suffering are not those involved either in the black economy, or in terror financing. 

I am putting together some of the articles that have helped me to make some sense of all the nonsense that is welling around.  This is a very useful compendium of the views of several economists.

In the early days after the November 8 announcement, several columnists and economists said that all the black money would not return to the banks, hence the Reserve Bank of India (RBI) would have a surplus.  This could then be used to finance welfare schemes and even to divide the amount amongst the millions who have opened zero balance accounts under the Jan Dhan Yojana. We are now told that nothing of the kind is going to happen, that most of the notes in circulation have already come back to the banks.

As for a cashless economy, which country is Modi talking about?  To be cashless you need not just a bank account but banks within reach, or at least ATMs, you need Internet connectivity, you need electricity to make the ATMs and the Internet work and so on.  In 2009, while I was researching governance in small towns, I went to Madhubani in Bihar.  I noticed a long line near the railway station and presumed people were waiting to buy tickets.  It turned out that they were waiting at one of two ATMs in the town.  By 4 pm each day, the money would run out.  Sometimes there was no electricity for hours, rendering this modern machine useless. 

According to the Indian Express, even places where there is Internet connectivity, there are times when it is switched off.  Since 2014, Internet access has been denied for a total of 250 days to different parts of the country. In Kashmir, between April 14 and September 12 this year, the Internet was blocked six times. The article carries this telling sub-headline: "3 yrs, 12 States, 39 Internet Blackouts: How Hurdle to Govt's Cashless Push is Govt Itself."

In any case, with 1.25 billion people, India has only 343 million Internet users. Compared to China's 50.3% Internet penetration, in India it is only 27%.  And even though there are over 900 million mobile phone connections, there are only 240 million smartphones.  You need one to access Internet, and also online banking and payment systems.  So talk of a "cashless" economy and digital payment platforms addresses the needs of only a small section of our vast population.

Meanwhile, a month after the great pronouncement, there are places in India, like Lakhpat in Kutch, where the old money is doing just fine, but those who live on the margins, like the scrap merchants and the rag pickers in Mumbai, will not recover for a while.  And even those with jobs in factories are getting their salaries in old notes or not at all, according to this report in Indian Express.  Or in Bastar, where the absence of money makes little difference.

No one in government has explained clearly that even after the deadline of December 30, which the RBI hinted at its meeting yesterday could be shifted forwards or backwards, the old notes can still be exchanged.  Most people assume that after December 30, these notes will be nothing more than pieces of paper.

But, as a reader wrote to me in an email: "I am holding British Pounds which are out of circulation. I do not have to worry about it. Even if I go to England after 10 years, and go to Bank of England, they will exchange it anytime. A promise is a promise. You can check the same on Bank of England website which is still open to accepting notes which were printed in 1725!"

And he asks: "Today, I was holding a Rs 1000 note in my hand in USA and it reads: 'I promise to pay to the bearer the sum of Rs. 1000'. RBI governor has signed it. If a person issues a check to anyone and it bounces back, the person issuing the check can be in jail. In the RBI governor's promise, there is no date mentioned in the note. What value is of that promise?"

The confusion, according to Usha Thorat, a former deputy governor of the RBI, arises "because the GOI (government of India) have not notified the last date beyond which it (old currency) cannot be exchanged at RBI counter - neither in the notification issued under Section 26(2) nor in any of RBI circulars
The date found a mention only in PM's speech of Nov 8.  Hence technically notes continue to be a liability - unless an ordinance is brought in or a legislation withdrawing the promise to pay - which according to me is different from the withdrawal of legal tender - in 1978 there was an ordinance followed by an Act of Parliament. There is a legal view that last date for exchange at RBI can be notified under Sec 26(2) itself without new legislation." For more detail on these issues, read this.

Given the rate at which this government is moving the goalposts, no one will be surprised if some excuse is found to change the last date for depositing old notes in scheduled banks.  As Usha Thorat clarified, the RBI has to continue accepting them unless there is a specific law. 

Meanwhile, while the fisherfolk of Lakhpat in Kutch couldn't care less about old or new money, millions of people wait patiently in line to withdraw their own money.  Most of them have still not understood what exactly has happened.  Many think it will finally lead to something good if the rich and the corrupt are taught a lesson.  Sadly, they fail to see that it is the poor who are paying the price while the rich are laughing all the way to the bank, literally.