Impact of demonetization

On December 27, 2016, the Liberty Discussion group members discussed on the article ‘India’s Demonetization Disaster’ by Shashi Tharoor.

The author of the article articulates unwanted repercussions of the demonetization move from Indian Prime Minister Narendra Modi. He observes this centrally imposed monetary manipulation to have only made cash holding poor people, small enterprises in farming industry and the larger informal economy to suffer. Meanwhile, the author also observes inability of this non-transparent program in curtailing black money and tax evasion practices for which it was originally instigated. He mainly blames the lack in fundamental research and logical judgment of this program for the huge cost it has created for the economy in exchange of minuscule benefit. Having said, the author praises the public relation strategy of Modi Government to convince people in accepting the program despite the disaster it has aroused.

As the discussion initiated, one of the participants expressed her frustrating experience while trying to withdraw cash in an ATM machine in India. As she required enough money to fund her travel to Kathmandu from Delhi where she studied, the limited cash withdraw system of only IRs 2500 almost tarnished her plan to go home to meet her family on holidays. In acknowledging travel immobility in along with personal discomfort, participants discussed on the effect of this cash withdraw limit in reducing consumption and purchase to cause recessionary implication in Indian economy. As the article also discusses the possibility of economic shrinkage by 2-3% in India due to similar reason, the participants agreed on this forecast while considering the inability of the Government to simultaneously recirculate new currency fit for transaction purposes. As one participant maintained, “it has simply taken an act of contractionary monetary policy”.

Speaking of rather negative repercussion generated by the program, one participant also spoke of state not having necessary information to plan for the best outcome. Given the complete central enforcement involved in the demonetization effort, he says, the program is bound to incur series of disastrous consequences not thought out by the Indian Government.

However, the participants didn’t doubt the potentiality of the demonetization move to battle the use of counterfeit Indian currency to fund terrorist activities. They addressed the opportunity offered by the demonetization move for the government to recirculate sophisticated currency that is at least costlier to counterfeit. However, some of the participants argued the added counterfeiting cost to be reasonable for high denomination currency as IRs 2000 that are recirculated against now defunct smaller IRs 500 and IRs 1000 notes.

Likewise, participants also agreed on the negative repercussion of demonetization discussed by the article on Small Enterprises and employment involved in agriculture, fisheries, and manual labor. Since these sectors were completely dependent on cash transaction, participants could imagine the financial suffering and exploitation to have faced by individuals belonging in these sectors. Moreover, the participants also discussed the harsh financial repercussion to have been dealt by the poorest community in Nepal who often migrate to India for seasonal employment to be paid on cash. On the flip side, participants discussed on the financial advantage that it has created for Indian digital payment and wallet technology like Paytm and Mobikwik. Importantly, participants also discussed the strong check that the demonetization move has created against illegal cash based activities as drug-trafficking, child-trafficking and informal prostitution.

In following the author’s argument, participants believed that India was not yet prepared for cashless system. Given the high illiteracy, financial exclusion, and weak technological absorption ability of micro enterprises in India, participants didn’t buy the radical institutionalization of cashless system. Participants also recognized the cost of setting up secure infrastructure for complete digitization of financial transaction in India to be insurmountable in nature.