High-value insanity

I wrote the rant below that I’m leaving as it is, but now think the real reasons are not black money, at least not as normally described. It could be

1. Fake money (see bottom). This is indeed an effective way to flush that out, provided the new notes are significantly more secure. But that is not being advertised here.

2. Cash flow to the underworld and to insurgent groups. Just as with black money, the impact will be temporary since cash will still be around. But maybe a temporary effect is all they’re looking for.

I certainly hope I’m wrong in what I wrote below and also hope the impact on ordinary people is minimised via efficient exchanging at banks and post offices, but am not optimistic. (Eg, at the post office you will need PAN / Aadhaar cards as proof. What about the millions who don’t have those cards, or bank accounts, and for whom even Rs 5000 in cash at home is a huge amount of money?) We will know in the coming days, though.

I have been sort of inactive on the blog recently, having little to say that couldn’t be shared quickly via facebook. But now I wonder whether Modi is snooping on my posts and respecting me a bit too much. Because recently I argued one someone’s wall for outlawing high-value currency notes (and more specifically high-value cash transactions), and now the government has done it — except not quite.

What I had in mind (though, that being facebook, I did not spell it out) was:

  • Increase penetration of bank accounts among common Indians
  • Increase prevalence of debit cards, credit cards, netbanking and mobile banking
  • Increase acceptability and security of cheques, rapid validation of cheques, and enforceability of penalising bad cheques.
  • Ensure cybersecurity for all of the above
  • Then, and only then, crack down on high-value cash transactions, possibly by removing high-value currency notes!

What Modi has done is, not lifted a finger about any of the necessary infrastructure, and instead taken his typical kneejerk reaction to fulfil some ill-defined election promise. And has been reading some international chatter about abolishing high-value notes, by which the international media meant, for example, the €200 and €500 notes. So he has targeted notes whose value is equivalent to less than €10 and €20 respectively!

This will affect huge numbers of Indians who never used the banking system very much. It will affect dailywagers who will get paid with bundles of Rs 100 notes (assuming their employers have them handy) and will have to move around with pockets stuffed with cash. It will not affect the vast majority of black money, which is in the form of gold, real estate, and other assets, or stashed abroad (remember Modi’s promises about that?)

And even that is temporary. The RBI is introducing new notes, Rs 500 and 2000, to replace the old ones. Not a word about cashless infrastructure or cash transactions. So after major temporary inconvenience to literally a billion law-abiding people, it will be business as usual

Achchhe din, indeed.

PS: I strongly suspect that the currency thing is not about black money at all. It is only about weeding out counterfeit money (apparently a significant problem for many years now) and I also suspect the idea was pushed by the RBI. And from that point of view it makes some sense, provided the new notes are significantly harder to counterfeit. But of course Modi has to make it about something else, because of election promises about black money and all…