Who will Lose? Indian Currency Demonetisation v/s Notebandi

(Notebandi is a Hindi hybrid word for stopping circulation of currency notes often used by Hindi media and those against Indian Government’s move at demonetising)

Either way, this Indian winter will go down as one that changed the public narrative and altered the lives of common people in a big way. And it has very little to do with the usual nip in the air or lack of it. Since November 8, when the Indian Prime Minister, Narendra Modi, went on the national television, announcing that at the stroke of midnight, Indian currency notes of rupees 1,000 (USD 15) and 500 will cease to be legal tender, the nation has been in a tizzy.

What has followed includes long queues outside banks and ATMs causing visible inconvenience to people, overworked bank staff, divided (social) media opinions, uproars inside & outside the parliament and a government that has been issuing instructions and changing them by the day. The media reports have been showing winding queues of disappointed people waiting, as cash runs out frequently at the various banks and ATMs. So far, various reports have attributed 47 deaths to this move; with people dying as hospitals unwilling to accept old notes refused treatment or due to gross physical & mental stress faced in the process of exchanging discontinued currency.

The Quantum of Issue

The data released by Reserve Bank of India in 2016 puts the total Indian currency under circulation at around 15 lakh crore Indian rupees (USD 231 billion). 80% of which, 13 lakh crore rupees (USD 185 billion) is in the form of the two discontinued notes. As per noted Economist Arun Kumar, in his interview in Caravan magazine, the estimated quantum of black money lying as immobilised cash is only around 2-3 lakh crores (up to USD 46 billion).

India makes largest number of transactions in the world in cash, making it an economy that is highly dependent on cash. In this milieu to replace the huge value of discontinued notes is no mean exercise and by several estimates may take anywhere between 3-6 months.

At the same time lack of liquidity in the market impacts both the supply and demand side. This will mean that there will not be enough cash available to invest in activities that produce value or consume the value thus created.  

The Differing Narrative

The supporters of the move have described it as the biggest nation building move to flush out black money (undeclared cash often accumulated by illegal ways) and fake currency notes. It is also the narrative pushed by the government as demonetisation makes the black money useless and curbs its use by the groups perpetrating terror on Indian soil. The narrative also acknowledges inconvenience caused to commoners as temporary and bills it as a sacrifice on the way to a nation free of black money and terrorism. The government also does not agree that despite hardships to the people there has been any lack of planning on its behalf. This narrative also dubs demonetisation as an economic master stroke, since huge quantities of black money will not come back to banks and it will leave a surplus of around USD 45 billion that can be invested to grow the economy.

The group that has been opposing the move terms demonetisation as an ill-conceived and badly planned move that has put economy, business, agriculture and lives of poor, especially rural population to crisis. The narrative pushed by the group is that it was an unnecessary exercise which in order to flush out a minuscule amount of black and fake currency has drained 86% of currency notes from a highly cash based economy leading to short and long term damages.

They also doubt the credibility of Prime Minister as his party had allegedly spent around 10,000 crore rupees (USD 1.5 billion) mostly in cash from unknown sources to win office in 2014. Besides, as per them, the move is to polarise people ahead of crucial state elections in Uttar Pradesh, a province with 204 million population. Some also allege that the move is to increase deposits in the Indian banking system which has been reeling under high levels of non-performing assets; and the defaulters are friends of the government whose loans will be squared off by the liquidity generated by this move. Most of the ill-gotten wealth is not stored in cash but either taken out of the country or invested in properties, gold and collector items. So as per them, Notebandi has brought down a mountain to do away a small molehill.

This group also pooh-poohs government’s claim of eliminating black money, since sources of corruption, illegal wealth creation, fake currency and terrorism still exist. The scrupulous will work overtime to quickly bring things back to square one. As per them, the Prime Minister has grossly failed in fulfilling his election promise of bringing back black money stashed abroad and hence has created this theatrical act.

How is it impacting lives of the people?

Those who have loads of black money stashed outside the country in foreign currency are the least impacted. The government already has list of such people but has seen no visible action so far. Time will only tell if they will be next but for now there is no tax man knocking on their doors.

The people that had immobilised cash in the country held in these two discontinued denominations are the ones that have lost out big. However, for obvious reasons they cannot be overt about it. Some of them may even be playing to the lobby and supporting the move. Many of them are already busy using ingenious ways to show higher cash in hand, which is then deposited in a legit fashion with the banks. It is also alleged that some of the people who were close to the government may have got wind of the change and converted cash to gold, properties and other assets.

The 267 million Indian middle class is polarised lot today. Experts, media and social media is awash with posts, articles, videos and statistics to back each claim. The affluent part of the middle class is the one that holds majority of 130 million credit and debit card in India. The inconvenience due to cash crunch has not bothered this subsection much, as they have the option of using electronic money. Possibly the real inconvenience will reach their shores in two weeks when they will have to make cash disbursements to their drivers, maids, cooks and other helpers.

The worst hit are the not so affluent parts of middle class and the people below poverty line. India is house to world’s largest poor population that survives on less than USD 2 per day. For a population of 1.2 billion, there are only 400 million bank accounts. The majority of these two segments don’t have a bank account. These are the ones that are left high and dry. Their paltry savings or the salaries they had days prior to announcement is in the form of discontinued currency. These are the ones that are desperately queuing up outside banks, often returning disappointed for days.

The poor have been hit doubly hard. Not only they are unable to use the money in hand but also they are not receiving wages due to lack of cash with employers. Most of them live on what they earn daily and that has been disrupted.

The farmers don’t have money to sow their next crop and are unable to sell their new harvest. Small vendors and businesses are similarly impacted. It is also the season for weddings. The cash crunch has created difficulties on this front too. It is also having a negative effect on the sick and poor, who are being refused treatment despite instructions by the government.

The industry and business in the formal sector will also get impacted, but how much will be clearer from the macro indices that will be out in the New Year.

How is this likely to end?   

Like any burning issue demonetisation will also drop-off public scrutiny in couple of weeks, but to say that everything will be normal is an overstatement.

It may end with both sides claiming victory by raising decibels in the media and social media. The 270 million middle class will get further polarised, some of who will shortly go on to vote during elections in 7 Indian provinces, including big states of Uttar Pradesh and Gujarat.

Unfortunately, the poor will get poorer as they may not survive this cash crunch very well. But does anybody care?