Demonetization: A great escape for the rich or a trap for the poor?

What happened on November 8th 2016 was unprecedented and will go down in history as the day that changed the lives of the people in India. For the better or worse? Let us see.

Narendra Modi announced on National television that from the midnight of that very date, five hundred and thousand rupee notes would cease to have any value, i.e to be legal tender. The reason given for this absolutely outlandish move was that ‘black money’ would be targeted, and all efforts would be singularly directed to reduce its numbers. The other argument given, was that counterfeit notes coming from “terrorists” would cease to have any value and that this was a ‘surgical strike against terrorism’.

The understanding that ‘black money’ refers to hoards of cash which one can store in boxes is rather skewed and frankly, rather doltish. It is with such a perspective on black money that it was suggested that with demonetization of five hundred and thousand rupee notes, the people who would go to banks to exchange enormous amounts of their old notes for new ones would fall into the bank’s radar. This information was then to be passed on to the tax authorities who would uncover the truth, i.e black money. Thus this move was also expected to demoralize further such misdemeanors in the future.

Now let us consider the present government’s definition of ‘black money’ which is essentially hoarding cash. Even with this definition, the move of demonetization makes little sense. If one were to hold large amounts of money in five and thousand rupee notes, they would most certainly not deposit the entire money in exchange for the new legal tender. They would rather send several of their ‘assistants’ carrying small amounts to deposit the same over a period of time, given that 30th December is the deadline. This method of depositing small amounts of money in banks won’t continue for very long as there will inevitably emerge a whole range of new businesses which specialize in the exchange of old to new currency. To explain, people will start new businesses which cater to people who want huge sums of money to be deposited in banks. They will charge a small amount in return for transferring these large amounts to the bank. This is what Schumpeter called innovation which happens all the time in capitalism. This clearly shows the flaws and the lack of understanding of the concept of ‘black money’ by the government.

The  concept of ‘black money’ needs to be understood in its holistic sense.  ‘Black money’  refers not only to a stock of money which has been unaccounted and held in currency notes buried somewhere in one’s backyard. It refers to a whole range of activities which are partially or completely illegal such as smuggling or being associated with terrorist organization by providing them with arms or not entirely declaring stocks and/or other incomes for not paying any taxes on them. It refers to a whole bunch of undeclared activities.

In fact, ‘black money’ is a flow concept. In a way it can be thought to have the same end goal as the so called ‘white’ activities – to make a profit. If this is true, then simply keeping cash locked up, or rather hoarding currency notes isn’t going to generate  any profits.  Karl Marx pointed out that the moment the idle money gets into  circulation, it becomes capital.  Hence, what is `black’ and `white’ money is a dynamic and not a static concept.

It is important to keep in mind that the person or the firm engaged in transacting ‘black money’ in the market does so by reinvesting it all the time to generate the surplus.  Though there may be times when there are brief periods where the circulation of money gets paused, both ‘black’ and ‘white’, it is important to question how black money gets into the market circuit through flows. Let us consider a businessman, who has a certain amount of undisclosed money. Even if this is ‘black money’, the moment it is put into use, say, paying wages to factors of production, this turns into ‘white money’.  This money is then further put into circulation when the factor of production uses it to purchase goods and services.  Therefore, the central question here is whether demonetization helps track down  ‘black money’ at all?

In an interview given by Arun Kumar, author of The Black Economy in India, talks about how only 3% of the total domestic black money is held in cash. If that indeed is the case, then how is the move of demonetization going to help? A substantial amount of ‘black activities’ are operated through banks located abroad and it is reported that money in foreign banks constitutes a large proportion. Narendra Modi, before elections said that he would bring back the big bulk of ‘black money’ stashed abroad, which eventually turned out to be an empty promise if one were to go by his two and half years ruling the government. .

Now, let us consider the argument of counterfeit notes. Looking at the RBI’s data, it can be seen that only  0.0007% of the total money in circulation is ‘fake’. With this,the question of why such importance is being given to making such an argument comes up.

If one closely scrutinizes the motives of Indian Government’s  demonetization scheme,  one thing becomes clear It intends to shift to a cashless economy. While this idea represents the reverie of the elite, it is totally ignorant of the impediments faced by the common people even in acquiring a bank account, although Modi talks widely about establishing Jan Dhan accounts and other such features to help. This entire move will ultimately result in the common people getting stripped of their money.

About 90 per cent of the Indian economy’s transactions take place in cash. This is due to the fact that 90 percent of the workforce is employed in the informal sector. With this, one can understand how tedious it is for  India to  become a cashless society unless of course its vast informal sector gets transformed into a digital one. Narendra Modi dissolved all distinctions between black money and legal cash; his move ensured that all cash would be treated as ‘potentially black unless proven white’.  

To put it in another way, the fact that the informal sector was hit the hardest was not unintended, rather it was made a target. Cash is the most powerful tool for anyone who owns it. It is completely costless and is at the disposal of the person who wants to use it. With the shift from such an economy, i.e the one which runs entirely on cash, to a cashless one we would be going from costless transactions to costly transactions.

A cashless economy would not only imply paying an additional cost to undertake the same transactions as before,with cash, it would also lead to the loss of freedom. Now let us look at why this Utopian idea of a cashless society which India has set for itself and its various implications.

The three beneficiaries of this idea would be:

  • The State
  • The financial sector
  • The digital sector

The State would benefit from the large amounts of money which would be collected as indirect tax. A lot of traders avoid paying service and sales tax with the use of cash. The financial sector would benefit as well because, most of the poor income groups in India would rely on pawn brokers for informal credit. A cashless economy would force a shift of such people from obtaining informal to formal credit. The digital sector which works very closely with the financial sector would benefit substantially as digital payment apps such as e-wallet companies would start to thrive; as they are right now.  In a nutshell, the corporates will have a field day in the post-demonetization scenario.

Everything that the prime minister has done so far has only suggested that the current situation may not ever revert back to how it was before. No matter how many ‘new’ notes are printed and no matter how many new cash dispensing ; Automated Teller machines are brought in, the number of lives in the informal sector this decision has affected is too big a number to recover from. With the banking and the IT sector behind the Prime minister’s move,  the motive of the demonetization drive is clear.  The only way  to address  ‘black money’ is through structural changes and  political pressure. The cash dependent informal sector will  continue to be hit hard and the lives of millions of workers will change for ever from bad to worse.  In the meantime, the rich will have escaped the rhetoric of black money while the poor continue to heavily pay transition costs of demonetization.  



Author: Meghana Prasad

18.Bangalore. Economics.

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