V. Sridhar, Deputy Editor, Frontline, presented a seminar titled “The Impact of Demonetisation on the Indian Economy” on December 20, 2016 at the office of the Foundation for Agrarian Studies. The talk was based on his research for the articles he had written for the recent two issues of Frontline.
He began by noting that this was the first time in the history of the magazine that two consecutive issues had been published on one subject. He stated the different figures given by various official sources on the number of currency notes and the total value that was needed to be produced to compensate for the value that had been taken out of the economy due to demonetisation, thus underlining the lack of transparency in the process. This secrecy, he asserted, prevented a realistic estimation of the impact of demonetisation on the economy and gave the impression that the decision lacked any economic rationale.
The uncertainty also raises the issue of estimating the time that the economy will take to return to normalcy. A similar lack of transparency can be seen in the distribution of the new currency notes by the RBI. He cited the example of some banking circles where the new money has been disproportionately supplied to a few private banks, despite these banks having a low consumer base.
The logic that follows any decision involving different currency denominations in an economy was discussed. The (now phased out) Rs 500 and Rs 1000 denomination notes were part of a hierarchy, in which the Rs 500 note functioned as the currency for regular transactions and the Rs 1000 note for high value ones. The logic behind this hierarchy has now been abolished. As a consequence, we witness a huge gap in value between the currency that has the highest value, i.e. Rs 2000, and the next highest in the hierarchy, i.e. Rs 500. This gap has had a severe impact on all financial transactions, to the extent that “nobody wants the new Rs 2000.”
The speaker went on to explain the transfer of wealth from the poor to the rich that this step has led to. The scale and pace of such a transfer is unprecedented. While on the one hand, agricultural prices have plummeted, severely hitting the farming community; on the other, big traders and politicians have invested their black money in all kinds of commodities, ranging from rice to tender coconut. The move has almost wiped out the informal sector, which in turn has hurt production and employment. He added that the transfer of wealth from the informal to the formal would further worsen the levels of inequality in the country. He also underscored the fact that the immediate visible effects are due to a sudden compression of demand, but the impact on production and employment would be evident at a later stage.
Finally, he discussed the objective of promoting a cashless economy, countering the notion that a cashless transaction has no costs involved. Apart from issues of security and privacy, which require careful preparation, such transactions carry significant monetary costs for the recipient. These costs, he argued, are not trivial for the poor. He discussed the cash-GDP ratio of some developed and developing economies to assert that “no economy is cashless.” Moreover, envisioning cashlessness requires structural changes in the economy, which are yet to take place.
Notwithstanding the opacity, it is clear by now that a significant portion of the value in old currency notes has already returned to the banks. The speaker claimed that had the implementation been better and the process of putting the new currencies back into the economy been smoother, the move might have been counted as a success by the masses. However, after the inconvenience caused to the common man, it is unsure how they perceive the policy.
The seminar concluded with an interesting discussion on the possible motives behind this decision. It was a difficult question to answer, given the complete lack of transparency and apparent absence of any economic logic. The move perhaps was about creating a spectacle by making a grand decision. A decision which largely appealed, and perhaps still does, to a “techno-utopian” mindset.
