The year 2016 has been quite eventful for India—right from the vociferous public debates surrounding the GST, constitution of the Monetary Policy Committee, landmark international defence deals and change of the RBI governor to the demonetisation move. It is the last one that has had the maximum and most widespread impact as it has affected each of the over 1.2 billion citizens of the country in one way or another. It was indeed the "most sweeping" policy change in the country, particularly given the size of its economy which had earlier been gaining momentum.
Every big policy measure has its pros and cons, which need to be thoughtfully weighted prior to implementation. Unfortunately, it does not seem like that was done...
Following the government announcement on 8 November, the most commonly used higher denomination notes (₹ 500 and ₹1000) were stripped of all value. What followed this announcement was a nightmare that is unlikely to end soon. Of course the serpentine queues outside banks and ATMs (most of which were closed for paucity of cash or calibrated for the new ₹2000 notes) seem to have reduced now as people learn to deal with the situation. However, just to get urgently needed cash, mothers still have to lock up their infants alone at home, soon-to-be grooms have to forgo planned celebrations, pensioners have to compromise with their health to stand in lines and so on. The common citizen has had to suffer huge inconvenience to access his or her hard-earned money. Even worse is the fate of those small traders, farmers and casual labourers whose livelihood depends on daily cash transactions.
Every big policy measure has its pros and cons, which need to be thoughtfully weighted prior to implementation. Unfortunately, it does not seem like that was done seriously in this case.
First, with the demonetisation exercise dampening domestic demand for goods significantly, small businesses have suffered most. India's domestic demand has always provided it a necessary buffer against any global economic shock. However, the recent demonetisation drive has weakened this safety net. With the ceiling imposed on fresh currency withdrawals and swoon-inducing queues outside banks and ATMs, most people have a serious lack of cash in hand. As cash has become "dearer" to citizens, consumption demand is likely to take a huge hit. In the light of weak exports growth, this leaves limited alternatives for the country's economic growth.
Second, the agriculture sector is hugely significant for India with a 15% contribution to GDP and 58% to livelihoods. As a result of demonetisation, millions of farmers have been left with no cash to buy seeds and fertilisers for their winter crops and to transport their produce to the markets. This has severely hurt India's rural economy, which had barely begun to recover after two years of drought and was optimistic following the Budget 2016's promise of doubling farmer income by 2022. Already there have been several news reports of farmers being compelled to sell their produce at barely ₹1 to ₹2. Sales of vegetables and fruits have reportedly dropped 25-50% across major markets and dumping is also not rare. Debt-ridden farmers can ill-afford to suffer such huge losses that jeopardise their livelihood as well as their existence. It is a serious waste of their rigorous labour and high-interest loans.
A democratic setup does not favour a forceful infliction of digitisation on the people, no matter the gains emanating from it. Going digital must be a choice.
Third, while this measure is seen to positively boost the government's earlier efforts towards digitising India, it should be kept in mind that India continues to suffer from a huge digital divide. According to a 2016 World Bank report, while almost 8 in every 10 Indians owned mobile phone, nearly a billion people were still not connected to the internet. In a country with 74.04% literacy rate, nearly 21% (arguable) poverty rate and a 68% (debatable again) financial inclusion rate, not everyone has knowledge of mobile wallets and internet banking. So, it seems unrealistic to expect India to transform into a cashless economy in a short interval of time. Even one of the most advanced economies, the USA, is not completely cashless. Moreover, a democratic setup does not favour a forceful infliction of digitisation on the people, no matter the gains emanating from it. Going digital must be a choice.
Fourth, no matter the extent to which the government wants India to go cashless, it does not have the supporting cyber-security infrastructure and crucial security policies. This is a very serious issue in the absence of proper procedure and security protocols—unsuspecting innocents who have been forced to shift to digital payment methods may fall victim to all kinds of unscrupulous activities (as has been their wont) with no guarantee of justice. Just in October there was a report of a financial data breach of over 3 million users in India, when several ATMs let hackers secretly access their sensitive login credentials. This is hardly surprising as India is the most targeted country for data breaches according to IBM and the Ponemon Institute's 2015 data breach study. According to market analyst and Vice President of Pratibhuti Viniyog Securities Ltd, Suniil Pachisia, "Security breach is always going to happen and still we are way behind in the stopping of frauds happening in credit/ debit and ATM cards."
While the move shall drive out some black money from the system in the short run, these pros are not worth enduring the cons.
Fifth, employment generation is a very important issue for a labour surplus country such as India. It is a well known fact that the majority of India's labour force (nearly 90%) is engaged in the unorganised sector. Casual labourers form a major chunk of this workforce and are mostly work for daily wages. With businesses (especially in the wedding and agriculture season in India) being hit hard by the demonetisation drive, this segment of population has lost all avenues of employment. Thus the livelihoods of large sections of the population have been severely jeopardised as most of them are either unskilled or semi-skilled.
According to the government, the demonetisation move was aimed at dealing with black money, counterfeit currency and terrorist financing. However, it is a well known fact that most of the black money actually lies at the top of the pyramid, comprising mostly of political and business big-wigs. The marriage between politics and business is also hardly a surprise to anyone. Most of this money also is not in cash but in other convenient alternative forms such as offshore investments. With this segment out, what remain are the small sharks that are being caught. Thus, the "effectiveness" of this much acclaimed policy move is highly doubtful. There have been news reports of people being caught with new currency notes worth lakhs or crores of rupees even as most people struggle to get even ₹2000 in hand. While the move shall drive out some black money from the system in the short run, these pros are not worth enduring the cons. As reiterated by Dr. Lawrence H. Summers and Natasha Sarin, "Without new measures to combat corruption, we doubt that this currency reform will have lasting benefits. Corruption will continue albeit with slightly different arrangements."
Further, the demonetisation death toll, which reportedly crossed 55 within 10 days of the move, continues to rise. With the present cash crunch threatening the food security of several households, it would be unsurprising if the number was much higher today. Yet, the accountability and responsibility seems to lie with no one.
Even if "the inconvenience caused is deeply regretted" by the authorities, the damage has been done and is irreversible.
India's economic infrastructure is admittedly unprepared to implement sudden policy measures such as this one. Moreover, such an exercise cannot be undertaken to solve a recurring problem in a $2 trillion economy with a highly insufficient number of banks serving over 1.2 billion people. Counterfeiting will continue to be a problem, even with the new notes. This has been validated by several news reports of fake new currency being unearthed since demonetisation.
Moreover, the new ₹2000 currency notes pose a challenge of a different sort—how to get change? After spending a day or more in lines outside banks/ ATMs, people withdraw their ₹2000 note and then struggle to use it in the market. Even as the 50 days' deadline promised by the Prime Minister is here, the RBI still does not have enough cash to meet domestic demand. In this situation, the new year is unlikely to bring significant relief to the people and the economy.
To conclude, even if "the inconvenience caused is deeply regretted" by the authorities, the damage has been done and is irreversible. The future path needs to be very well-planned after profound thinking. Already India's growth projections have been revised downwards and several economic sectors have been hit adversely. Caution is crucial for a growing economy. Economist Ben Bernanke's words bear consideration in India today: "In many spheres of human endeavor, from science to business to education to economic policy, good decisions depend on good measurement."