Demonetization: A Different Theory

Did we underestimate our government with respect to demonetization? 

It has been a little over two and a half weeks since the move to demonetize currency notes of 500s and 1000s was announced. The consensus is that despite noble intentions, the execution was quite abominable.

So why did the government get it so wrong with the implementation of demonetization? How could they even dream of withdrawing 500s and 1000s from circulation without planning for proper replacements of equivalent currency denominations? Why did they introduce 2000s instead of 1000s? Did they not know that over eighty percent of all financial transactions throughout the country occur in cash? Did they not know that eighty six percent of this cash is in denominations of 500s and 1000s? Was it apathy, incompetence or both or was it something worst?

“THIS IS A SCAM! The PM and this government are in collusion with the Big Business House that everybody ‘relies’ on. This was done to compel us to buy their recently launched digital money service. Remember they used the PM’s picture on the front page of every newspaper to promote the launch of their mobile service? It all about making the rich even richer. You got to keep your eyes open and then you see how it works.” bellowed the perpetual cynic with a broad grin.

But the digital money service from the Big Business House was launched back in June, currently there are several players in the market that offer digital money, credit cards, debit cards and other means of digital financial transactions. The public has a wide variety of choices, why would they gravitate to digital money from that Big Business House only?

“The Big Business House has the best deals, that’s why. They have beating the drums about this to the point that nobody can escape it. Logos all over the city, adverts on TV and social media. It is available in every store. I hear the service is good, I suspect they have sought favors from the government to manipulate the waves to their advantage. It is quite insane how they shamelessly promote themselves with the help of our PM.” asserted the cynic.

So the implication is that a seller with the best deals i.e. the best services and prices, the best ‘drum beating skill’ i.e. advertising and easy availability everywhere will secure customers? What a major discovery. This clearly is a conspiracy by the Prime Minister to allow the market to function based on product, pricing, place and promotion. Sorry Mr. E. Jerome McCarthy. Regarding the “manipulate the waves to their advantage” theory, no proof was offered.

“There’s more to this scam” said the cynic after a long pause. “The bottom line is that government doesn’t care about the citizen. They make us stand in a queue in the sun like dogs. They make us beg for our own money. They are also grossly incompetent. They can’t even tie their shoe laces if they wanted to. Horrible” continued the cynic.

Had a paradigm shift occurred? Had the cynic given up his theory of collusion with the Big Business House and had he settled for apathy and incompetence only?

“I believe it is a bit of all, absolute apathy, unmitigated incompetence with a desire to serve the Big Business House. Tragic for our country that we elected them to power!” exclaimed the cynic.

Let’s look at the incompetence theory, the PM all through his tenure as CM of Gujarat and even before that, as a karyakarta of the RSS and the BJP was known to be a splendid planner and prodigious executioner. He is also known to be detail oriented and to personally supervise every major undertaking. The big question is how did this unmitigated disaster escape the attention of the master planner and implementer? Did he delegate it to the wrong individual and not care to follow up?

Now for the corruption and collusion theory, but before that I recalled the cynic’s assertion that the PM was a megalomaniac who was addicted to power.

“Yes that is true, he loves being PM and relishes wielding his power. If he had his way, he would love to remain PM all his life. I know the supporter thinks it is for the betterment of the country, everybody else is corrupt and blah blah blah” said the cynic.

So why would the PM who ‘relishes wielding his power’ toss away his political career and hard earned legacy of decades for the glorification of the Big Business House. Why would the man ‘who would love to remain PM forever’ risk upsetting his supporters such that he will not secure a second term? Does he not know that business houses only salute the position and not the person?  All of this seems inconsistent for a politically experienced and astute individual such as the PM.

“Well I don’t know, but there is something going on here” concluded the cynic sharply as he pulled up a newspaper not intending to proceed with the conversation anymore.

So is there something going on?

Let’s now consider a scenario where the implementation was ‘impeccable’. In this scenario, the government prints an adequate number of new 500s and new 100s to replace the invalidated 1000s and 500s. The government ensures that these currencies are disbursed to various banks all over the country. Each and every old note is exchanged and the deposited. These new notes are accepted by all shops and vendors. Quite soon the market is flooded with these new notes. The transition is seamless and smooth. Life would have been easy for everybody i.e. the buyer, the seller, the daily wage worker and the house wife. But it would also have been easy for the black money hoarder, the bribe taker, the terrorist financier and the drug peddler.

So what did the government do instead? They replace invalidated 500s and 1000s with 2000s. These 2000s are not acceptable in the market place for the lack of smaller currencies. They did not release new 500s into the market during the early phases and they are still scantly available.

“That was another mess. Most black money hoarders had hired a force of people to do their exchange work for them outside multiple banks. They are now sitting comfortably with their 2000s stashed in secret places. This has actually made the lives of black money enthusiasts quite easier. They have replaced their crores of 500s and 1000s with crisp clean new 2000s. They now have more storage space. Just perfect. There will be those who convert their dirty money to gold and real estate. They will stop using currency as a means of storage. Well done Mr. Prime Minister” concluded the cynic at his contemptuous worst.

The gold and real estate purchases are being tracked, if there is no source to support, there will be action taken. But consider this, what if the government invalidates the 2000s later and only allows deposits and no exchanges of these 2000s.

“That would be a pain for everybody.” said the cynic.

Those with legitimate money will be able to deposit their money without concern. But those with black money will have nowhere to go. Their money will not be acceptable anywhere except banks.

“What about those who have used their friends and associates to deposit their ill-gotten wealth. You can’t stop them?” continued the cynic sounding like a deflated balloon

Every bank account can be tracked, for those with large amounts or transfers without a matching income source can be questioned and soon the source will be found out. 

“Well. I need to be going now. But I will explain to you later how this will not work” huffed the cynic as he left in dismay.

It would appear, that unlike what most of us thought, the government has planned this in such a fashion that it will be very difficult for possessors of black money to completely dodge the system. The crooks will always find a way but it will be more difficult for them.

But it is important to remember that this demonetization would only work if it is the first phase of a massive undertaking to drain the swamp, some other steps that must follow are seizure of benami property, investigation of accounts with suspicious activity during the demonization phase, required submission of pan cards for purchases and donations above certain limits and compelling political parties to make their finances transparent must follow. Hopefully the exercise will compel everybody to open bank accounts and modernize their businesses to be competitive.

It is beyond doubt that the common man has suffered greatly through this demonitzation phase. The government will have to show the common man clear and tangible benefits from this exercise within a specific period time. That should make supporters happy and shut down the cynics forever. Judging by the way things are shaping, I think that time may arrive quite soon.