There is so much talk going on about the currency demonetization. Everybody, even with no working knowledge of economics has some view on it – their 10 cents on this topic. But why so much hoopla over it? So much noise?
There is something really attractive about money. Something primal and instinctive. You put a ten bucks note in front of a three-year-old child and see a smile spreading on his face. I remember my kid brother, when he was just a toddler. When asked what does he wants, he would invariably reply ”paise de do” (give me money), in his garbled, gibberish hindi which he had just began to speak.
What is it about money that makes it so important? So pervasive in our lives?
Money by definition should possess these characteristics – durability, portability, acceptability, limited supply, divisibility, and uniformity.
Acceptability – this is the characteristics that make it so important in our eyes. Makes it so useful to us. You have a dozen of apples with you. It has value. But you can’t trade it with everyone. Only with those who have a need for apples at that moment. But money is devoid of such constraints. It is universally accepted.
And this is the trait that currency demonetization has hit hard.
Today, show a person a Rs 500 note, and he will not even look at your face.
This was the characteristics that were targeted by our prime minister – Narendra Singh Modi, a fortnight back when he declared that all the Rs 500 & Rs 1000 currency notes would not be accepted after midnight. That they would become nothing but a piece of paper. And in hours they lost all their value.
Isn’t it wrong? Isn’t it the violation of promise – ‘I promise to pay the bearer a sum of…” that is written on each note from the time they were minted.
It is both right, and wrong.
Wrong because –
- It is causing inconvenience to the lower economic strata of people who live off their days on cash (98% of payments are made in cash in India). Small farmers, sellers, merchants, daily wage laborers, and traders are suffering.
- People have to stand in line to get the money which is wasting the productive time of millions of people in the country.
- Sales have dropped down due to the paucity of cash flow, thus it would easily shave off a few points from our country’s growth in this quarter.
- Another argument given is that the cash is an insignificant component of black assets – the elimination of which is given as the prime reason for demonetization.
All the above are true. Yet they are a short term view of an activity which can really change the face of our country.
We need to have a long term view on this issue of currency demonetization.
One problem that currency demonetization is trying to tackle is the problem of fake currency.
At any moment, Rs 400 crore fake currency notes are under circulation. ISI, the single biggest contributor of fake currency is making an annual profit of Rs 500 crore by circulating them. (cost of printing a note is ~ Rs 40, which they sell for over Rs 300)
Some of the ill-effects that counterfeit money has on society include a reduction in the value of real money; and increase in prices (inflation) – an unauthorized artificial increase in the money supply; a decrease in the acceptability of paper money; and losses, when traders are not reimbursed for counterfeit money detected by banks, even if it is confiscated.- All this hurt our country in long term, and in the process, it hurt us.
The another problem that currency demonetization targets is the menace of black assets.
Tax avoidance is a big problem in our country. Only the middle class (salaried) ends up adhering to the tax laws of the country. A measly 2%. The rest have hoarded the money in cash, gold, property and other assets. The step of currency demonetization is the first step towards tackling this menace.
With the move of currency demonetization, stories have come out of the panic among the cash hoarders.
People who skimmed our economy for years felt the ground slipping beneath their feet the moment they came to know about it. The government had given prior chance, to declare assets, but they didn’t. At last, the day came and all those hoarded stacks of green bill lost their color in a moment.
Many illegal activities have stopped.
The Maoists activities have almost stopped. The riots in Kashmir have disappeared. The prices of real estate has come down significantly in many part of the country.
This step along with making it mandatory to show PAN card for every purchase of gold, the staple diet of black money mongers, is really giving a jolt to such people.
People often say this action is not enough, that it targets only a few percentage. But aren’t we forgetting that every bigger action needs a small start, the first step. We can’t expect that change happens overnight. It is ridiculous to even think of that. There will be a period of turbulence, of inconvenience, and even of pain. And in spite of all this we might not even succeed. But one thing I know, that it is the step in right direction. The intent is right.