Currency compression

Rajeev Kumar Nagotra
PM Modi’s proclivity for honesty, transparency, effectiveness and accountability has been and continues to be widely advertised on various platforms of the media. The common man is waiting with tremendous hope, and now, anxiety to see a concrete effect of these qualities of the prime minister. One thing that the PM, however, has already made sufficiently clear to us is that he has an equally strong penchant for grandeur, fanfare and optics too. Be it the way he first entered the Parliament, his choice of outfits or the alleged twin surgical strikes, on terrorists and corruption, Mr. Modi has made sure that every act should have a heavy dose of suspense, drama, emotions, monologues, excitement, a great deal of aftertaste and zero injury to the players on stage, i.e., his colleagues and the party.  He also makes sure that his next item is ready to be presented even before the aftertaste of the last one has died out. As a prime minister, he has been very entertaining and engaging so far and has kept the common man and the media, both national and international, talking and busy.
His latest stunt regarding demonetization or currency compression as Anil Bokil, the man who gave him this idea, calls it has also been conducted in the typical Modi style. Firstly, it was introduced when the common man had just begun to settle down after a brisk and exhausting Diwali season. Had it happened before Diwali, the corporate houses, the traders, shopkeepers as well as the consumers (especially women and children) would have been very furious. The timing of this act, thus, ensured zero injury to Modi and Co. Secondly, 8 P.M is the time when most business owners have closed their day, lowered the shutters and are on the way home if not already there. The 4 hour timeline to protect their decades old earnings and accounts simply left them tied up and baffled. Thirdly, the aftertaste of the surgical strikes on the terrorist camps in POK had just begun to fade when the demonetization was announced. The entire nation erupted in response and practically stayed awake the entire night weighing the pros and cons of this drive. Finally, while the awestruck media, the political parties, the industrialists and the common man got busy in damage-analysis and damage-control, PM Modi in a typical Rajnikath style, withdrew himself from the scene and took a smooth flight to Japan leaving behind a finance minister and a secretary economic affairs to do the explaining.
Now let us see how good or bad the move has so far been. Demonetization, in principle, is an excellent step. More so at this point of time when India’s aspiration to be reckoned with the global players is stronger than ever before. However, we must have our house in order, books up to date, institutions functional and systems in control before we can go and negotiate a niche for ourselves amongst the world leaders. Our archaic cash-based economy, in which 250 out of every 10 lakh currency notes of the currency are minted in Karachi or Peshawar and are fake, is inherently ill-suited for a transparent and healthy economy. This has erected a parallel economy that is beyond the control of our financial institutions and is outside the purview of our policies. This economy is insulated from the national or international economic ups and downs  and is, therefore, an impediment in the formulation of a clear and responsive economic policy for our country. A black economy keeps any government from offering bold welfare schemes, such as old-age pension or unemployment insurance or healthcare insurance, for the government never knows for sure how rich or poor a beneficiary of the scheme actually is. The first world countries can afford such support programmes because their transactions are well documented and dollars duly accounted for. The governments have a highly accurate idea of the money at hand and know with at least 95% confidence level as to what the actual worth of a citizen is. Thus the right amount of social support can be earmarked for the right person. The current demonetization drive has brought 86% of the cash in circulation into the account books of the banks. Between 10th and 18th of November, the banks received 5.5 trillion rupees in Rs 500 and Rs 1000 denomination alone. This is the first step in preparing a reliable data on the financial status of Indians.
The blow inflicted upon the terror networks in Kashmir, Naxal heartland and the north east is the most perceptible impact of demonetization and needs no elaboration. The new currency is going to keep the terror-economy strangulated for quite some time. Naxallites had stashed more than 7000 crore rupees in the Bastar belt. All that money is garbage now. As per IB and RAW reports, ISI had been making an average of 500 crore rupees profit per year by selling a fake 1000 rupee note, produced at Rs 39, for 350 to 400 rupees. Transition to the new currency would not come cheap to them. In fact, we must try to keep the cost of minting counterfeit currency high for Pakistan. This can be accomplished by going for high quality plastic notes instead of paper notes or by moving towards  a cashless economy.
A third ostensible impact of demonetization is going to be on the inflation rate. If a person is aware that the unaccounted for cash is hard to come by, he will spend the cash at hand very wisely and sparingly. In fact social media is already abuzz with the changed spending habits of the Indians. They are spending less and consuming judiciously. The sellers need to compete much harder to attract the buck in his wallet now. This can result in more value for money and thus a control over inflation. The rupee, rendered weak by fake currency, will grow stronger in both domestic as well as international markets in due course of time.
The fourth and the most important expectation from demonetization is a reduction in corruption. As such, the drive will only bring out the cash accumulated so far by different means, fair or unfair. At any point of time only 6% of the illegal assets are kept as cash. The big players of the game usually keep their assets in real estate, gold and in foreign banks. Hopefully, steps would be taken to target those assets too after the current operation of replacing the old currency is over. The PM has already issued an open warning regarding the “benami” property. So, the nation might see more fireworks after December 30th deadline. Also, demonetization per se cannot stop a babu from demanding kickbacks and commissions in the new currency. Detailed regulations regarding the way a rupee is earned and spent will have to be laid down to track its flow from one hand to another. The PM claims that he has “more projects on his mind” and we hope there is one for the corrupt babu too. India, for sure, will take his “mann ki baat” more seriously now.
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