Dire Straits’ famous song has some very politically incorrect lyrics but the refrain, ‘Money for nothing and the chicks for free’ sums up the situation of black marketeers and owners before the demonetization and the name of the songsters – Dire Straits – sums up their situation in India today. But what are the implications of demonetization? We have seen many theories; conspiracy and otherwise. One of the best articles that I have read is by former Finance and Economic Affairs Secretary, Arvind Mayaram, which is here:
Let’s see what the real, on-the-street effects of demonetization are and what their implications can be.
We are a cash economy and that is not because we have a huge number of people with black money but because we have a huge number of poor people who don’t have bank accounts and don’t deal with anything other than cash. For anyone who has lived or travelled in rural India this needs no explaining. So, I will not waste your time trying to describe what we have seen and experienced all our lives in our country without any problem or complaint. Those who need convincing can try to buy vegetables, fish, eggs, meat or chicken and pay for them with a credit card or cheque. Both buyers and sellers are not evil hoarders and black marketeers but ordinary, garden variety men and women trying to live their lives. This money that is earned by the sellers in never enough to be deposited in a bank. It is used to buy food and necessities for their families, goods to sell the next day and a little bit to set aside for a rainy day. This may accumulate over the years to some thousands. Do these people have documentary evidence about where they got this money from? Can they show that they paid tax on it? Can they show accounts of what they earn daily? Does the vegetable seller, the meat, fish or egg seller have a P&L account and a Balance Sheet? Does she have a PAN card? Does that therefore make them criminals?
Another situation is that of the middle-class housewife. Her husband gives her money to run the home, every month. She may only have completed primary school (in many cases she may not even be literate) but is a master economist. She manages to run a very good home, cook great meals, ensure that everyone has what they need and still she is able to save some money which she keeps hidden in the house. She doesn’t have a bank account. She doesn’t even want a bank account because it involves documentation that she can’t manage on her own and if she asks anyone in the family to help, her secret will be revealed.She doesn’t tell her husband or anyone about this but some day when one of her family needs something urgently she digs into her stock and surprises everyone by saving their skins. Is she a criminal because she does all this secretly? She is not an evil schemer. She is my and your mother.
I can give you many more examples but will let this suffice for the present.
Now comes demonetization and whatever it did to the illegal funds of political parties and black-market wizards, it also wiped out the savings of these people. That is what I am trying to interpret and find the bright side of.
The demonetization did wipe out the value of cash sitting in warehouses and suitcases of political parties and businessmen. And it did and will bring in cash into the vaults of banks who seem to have emptied those vaults lending to the same (or similar) businessmen who reneged on those loans. Those loans are still outstanding, post demonetization. The one who didn’t repay the loan continues to enjoy his ill-gotten gains. But the middle class and poor of the country paid the bank on his behalf. That is a very neat arrangement, if you ask me.
How and why does black money get generated? The main driver is the fact that political parties are not compelled to show their sources of funds. This is the strangest of phenomena where every individual is compelled to show where he earned his money from and must pay tax on it. Even charities in this country must apply for and get tax exemption failing which they have to pay tax on donations which they collect and disburse in charity. But a political party which gets a million times more, need not show how it got that money or from whom. I am sure I don’t need to explain the implications of that on the black-market economy, corruption and hoarding. That situation remains as it is. So though the funds of those political parties and politicians who were not in the know reverted to their original value or less (Rs. 1000 = Rs. 5; in this case Rs. 0) the doors to accumulate such funds once again, no questions asked, remain open. As for those in the know; the originators of this idea, their associates, families and friends, mint employees and managers, drivers, secretaries, servants and others of power brokers and of course the usual suspects (friends in need); all had ample time to save their hoards.
As for all the talk about reducing fiscal expense and so on, Arvind Mayaram has spoken about that in the article above, so I won’t repeat it. It must be obvious to anyone who knows what the word ‘fiscal’ means. What I want to repeat however is what Arvind Mayaram said which goes to the core of the issue in terms of the future and that is the issue of faith. Not faith in god but faith in paper.
People save money and keep those savings in paper currency because they believe that the value of their savings will not be nullified. They have faith in the currency though they know that the actual paper has no intrinsic value. Even though inflation erodes the value of their savings people don’t convert their savings to gold or immovable property because liquidity is more important for them than whatever loss of value that may take place over time. This is what ensures that money remains in circulation and is not taken out of the market and parked in gold. Paper money exists because people have faith.
That is the reason also why in Islam, Zakat (@2.5%) is liable every year on gold and silver even if you have to sell some of the gold and silver to pay what you are liable to pay in that year. Obviously, this reduces your stock of gold and hypothetically speaking it can reduce over time to a level where you are no longer liable to pay Zakat. Despite that Islam decreed that you must sell a part of the gold and give that money in charity because Islam recognized the importance of keeping money in circulation.
It doesn’t take great imagination to see what will happen if people lose faith in the currency. That is the reason, as Mayaram says and we all know, the US dollar has never been demonetized though it is the most counterfeited currency and the most trusted currency in all black-market deals.Faith in the currency must be balanced against whatever negative effects that may happen because of unaccounted currency. Those negative effects must be neutralized in other ways; for example by making political parties account for their cash inflows, state funding for elections and eliminating Income Tax.
Demonetizing currency destroys faith in the currency, discourages people from keeping their savings in paper money, encourages them to take their savings out of circulation because it pits importance of liquidity against saving the capital amount. It places huge hardship on the weakest and least influential people in society. It further disempowers those who are already the weakest; women (housewives, mothers), illiterate daily wage earners (headload workers, porters, construction workers, beggars), small business owners (you must understand this in the Indian context to know what I mean by ‘small’), small service providers (rickshaw pullers, thelawalas etc.).
It is easy for the powers that be to talk about accepting the inconvenience because they don’t have to face it themselves and can easily turn a blind eye to the fact that a daily wage earner standing in a queue at a bank to exchange his life savings for the snazzy new currency is also losing his wage for that day. For many that is a very significant loss. For some it may mean that when they return the next day to their job, they find that the job has gone because someone else has been employed in their place. I won’t list the kinds of suffering that housewives, the old and sick and so on are undergoing standing for hours in serpentine queues. Those who are interested can go and talk to people standing in those queues. Or even better, go and stand in such a queue yourself to see how it feels to stand for six hours without food or water or shade or anywhere to rest your tired legs. People are doing more than that.
It is clear that the move to demonetize currency was taken without sufficient thought about all its intended and unintended consequences and without adequate preparation for its seamless and painless implementation.If that had been done, there would have been no reason for the tearful histrionics and theatrics that we are witnessing which are probably good for TRP ratings but not for anything else.
Whatever the effects of demonetization may prove to be on black money, what is clear is that faith in paper currency has taken a very big hit. I am not sure if this loss of faith can ever be restored. The thought that is uppermost in the minds of people is that if the government can do this once, it can do it again. And if one government can do it, then so can another government. Try to think of what conclusion the average man and woman standing in long queues to exchange old notes for new; who may even lose a part of his savings in this process, will come to.
Sadly, our media won’t show us the truth as it is not viable for them. But ignoring the truth won’t change it. Reality, unrecognized has a nasty way of biting very hard when you are not looking. That is perhaps something that those who demonetized currency didn’t think of. That is also something that may show its effect in the elections; the only place where politicians and political parties are held to account. Jai Hind.
Mirza Yawar Baig is based in Hyderabad, India and is the founder and President of Yawar Baig & Associates; an international leadership consulting organization. He can be reached at firstname.lastname@example.org