Depending on who is talking, the demonetisation of higher value currency notes by Prime Minister Narendra Modi’s government has either been described by commentators as a ‘bold move’, ‘landmark policy’, ‘game-changer’ and even a ‘political masterstroke’ or labelled the single most high-risk political gamble undertaken since the economic reforms of the 1990s. The short-term effects of this move are already visible and public frustration is growing, given the limited availability of cash and the chaotic disruption of routine economic transactions. The long-term effects are less clear.
How might the experience of demonetisation impact economic behavior and practices? While it is too early to completely predict the long-term implications, some trends are readily emerging.
The sudden annulment of high value currency has unsettled public confidence in the cash economy, which is very widespread, especially in rural areas and small towns. In 1978, when Rs 1000 notes were annulled, the impact was limited as only a few people possessed currency of such high value at the time. In 2016, the story is different. The annulled legal tender of Rs 500 and Rs 1000 accounts for more than 85% of the available money in the market. The disruptive effect, thus, is keenly felt in everyday life across urban and rural areas, albeit in different ways – from the derailment of wedding preparations to the difficulties experienced in purchasing seeds and manure at the beginning of the crop-sowing season. Or consider the widely told tales of thrifty women who routinely, and secretly, saved small amounts of cash for a rainy day, and who now find their small fortunes have turned into mere valueless paper in a matter of few hours. Paper money therefore now appears to be an unreliable instrument of saving and accumulating wealth.
A possible outcome of this loss of trust in paper money could theoretically mean a boom for the cashless economy. Yet this possibility is hindered by the fact that banking facilities are neither widely nor evenly available throughout India. According to RBI data, there is one bank per 9500 persons within a 5 km range, and this covers less than 30% of the total population. While Indian cities are lined with banks, ATMs and mobile payment options, these facilities are only sparsely available in rural areas and small towns. The ambitious Jana Dhana Yojana – a financial inclusion scheme, launched in 2014 to bring the poor within the orbit of cashless transactions via low cost banking facilities – is yet to yield results. Under this scheme, more than 22 crore accounts have been opened. However, a vast numbers of these are said to be either duplicates or dormant accounts that generate no economic activity. The cashless economy, at this moment, seems to be a distant prospect unless mobile and affordable banking infrastructure is made available to the wider population.
A more likely possibility, then, is that those mistrustful of cash might turn to the most trusted form of asset: gold. The Indian household’s preference for accumulating wealth in the form of gold jewellery is well known. It is hardly surprising, then, that the past three days have witnessed a surge in the purchase of gold, in what is being called a new ‘gold rush’ that has nearly emptied jewellery shops. In economic parlance, gold held as jewellery is considered a dead asset that contributes little to the economy, and actually takes wealth out of economic circulation for long periods. In 2012-13, about two-thirds of household savings in India were reported to be in the form of gold and property. In the current situation, even if the property trade slows down, gold remains a more secure asset given the rising global demand.
In many ways, this turn to gold reverses previous government efforts to get Indians to invest in financial markets rather than park their savings in gold. Remember the ‘India Shining’ campaign? While the campaign is popularly remembered as a BJP poll gimmick, it was originally commissioned by the Ministry of Finance, led first by Yashwant Sinha, and then Jaswant Singh, to get Indians to invest their wealth in financial markets. As Prathap Suthan, the campaign director had once told me, the idea was to launch a mass communication programme to tell traditionally risk-averse Indians that the state of the Indian economy was “conducive for financial growth and will actually help you multiply your wealth.” Here, the ‘investor-citizens’ could do their bit by investing in the economy while ‘doing well for themselves.’ In that sense, the highly publicised failure of India Shining was a failure only in a limited sense – it was the defeat of the BJP in the electoral battle, but not of neoliberal reforms as such. In fact, the India Shining controversy made words like ‘market’ and ‘money’, ‘prosperity’ and ‘aspirations’, ‘investments’ and ‘returns’ a part of everyday language that ordinary people were otherwise unfamiliar with. The demonetisation, even if momentarily, seems to have unsettled this faith in markets given their experiences of personal hardship and losses.
At the heart of the new demonetisation policy is the political desire to do something about corruption and the large amounts of unaccounted wealth that has emerged as a major public grievance in the past five years. To that extent, the new policy serves the immediate purpose: it shows that the government is taking some action to control the illegal economy and the customers lining up in long queues, bank clerks and ATM technicians who participate in this then actually become part of this public spectacle – of ‘fixing’ the economy. The act of standing in queues is even being compared to the soldier-like duty of standing in the line of fire in conflict zones. “If soldiers can stand for days and months in front of the enemy, why can’t you stand for a few hours in the bank queue?”, are the kind of messages that have been going around on the social media. In short, one can fulfill one’s civic duty by stoically suffering personal inconvenience for the greater common good.
This call for civic duty stands in sharp contrast to the previous NDA government’s attitude. The Vajpayee government was focused on leveraging private savings in the form of gold into financial markets and to turning ordinary Indians into risk-takers with a personal investment in the national economy. The idea was not only to invite foreign capital, but to move dormant domestic wealth into active circulation. The Modi government’s ill-prepared move may just do the opposite. It may result in the retreat of risk-averse small investors from financial markets in the long run. This outcome would be extremely ironical given that Brand Modi desires to be known for market growth.
In which case, if the long queues of poor workers, petty traders, students and ‘desperate housewives’ are any indication, this economic ‘surgical strike’ seems to have hit the wrong targets.
Ravinder Kaur is a historian based in Copenhagen. She is currently engaged in a book-length project on India’s transformation from a postcolonial economy to emerging market in the global political economy. She is on Twitter as @rkadelhi