Demonetization: The Rough Side of the Happy Shine

Most of the black-monied would prefer to burn, drown or bury the paper currency gone bad instead of declaring it because of the fear of prosecution combined with the fear of being on the government’s radar for the foreseeable future. So, a great deal of black money is just dead. Not spent, not taxed, just plain dead. The filthy rich are no longer filthy and no longer rich. So what? And now what?

They would get back to work and start earning and flourishing again in some time. Would they start paying their taxes for the fear of demonetization then? Unlikely, for the thieves don’t abandon stealing; they just find better ways. Black Money would start piling again and might return with a vengeance, immune to demonetization.

Those who call it a ‘bold decision’ do not understand — or are in denial — that demonetization is always a desperate measure and not some cool-headed, matter-of-course policy decision, much less a ‘masterstroke’ that it is being touted as, the flamboyance of the announcement notwithstanding. It’s not such a happy thing to admit that your currency notes are not good enough because of black market and counterfeiting, for it’s, in part, an admission of failure. It’s more like wiping the chessboard clean and starting afresh when you realize that you can’t win the ongoing game.

moneySo, what would this extremely inconvenient move do for us? Nothing significant really. Counterfeit currency will go out for a while and return because the notes are out, not the printing presses. If they can print this, they can print that. You say “let’s redesign” to your press; they say the same to theirs.

Black money will come back soon enough for the obvious reason that those who really have an awful lot of it would simply dump it and start over.

What it has actually done is this:

  1. You have no black money, but you are standing in front of the bank for hours to get your notes exchanged. You withdrew a large amount, say Rs 2 lac from the same bank branch yesterday for your daughter’s marriage, and now you are back here and the marriage has to be postponed because you can’t get sufficient amount of currency in time.
  2. The poor and the very poor are also standing with you. Black money? What black money? They make less than Rs 70,000 a year and now whatever little savings they had in cash has to be brought to the bank for exchange.
  3. The banks and their employees are under enormous pressure and the system is creaking under the weight. They are badly overworked, and exchanging currency is not exactly what they are trained for.
  4. Long queues in front of the banks across the country means that a large number of people are standing uncomfortably for hours for no fault of theirs. It can make them angry and there can be clashes and instances of violence.
  5. The markets have nearly shut for the past two days across the country, which has already caused a loss of many hundred, if not several thousand, crores in business, and loss of business is also loss of taxes. So, the government has already lost hundreds of crores in taxes, if not more, and the loss would continue to accumulate.
  6. The estimated cost of replacing all the demonetized currency with the new currency is around Rupees 12000 crore.
  7. Almost every person in the country is inconvenienced to some degree, and a great number of work hours have been lost causing loss of productivity across the nation. That’s also a loss though harder to quantify. This loss, however, is also in hundreds of crore, given that we are a country of 125 million people.

So, in this adventure we have spent or lost, one way or the other, somewhere close to Rs 18,000 crore already. One might estimate the total cost to the Indian exchequer, including the loss of taxes from the temporary slump in the market, at a minimum of Rs 15,000 crore by conservative assessment.

Demonetization is an economic move primarily. So the losses and gains from the exercise are not completely incalculable in monetary terms, even if the immense hardship to the common people across the country is ignored for the purposes of cold calculations.

The government should ideally gain at least Rs 15,000 crore in taxes from this move. Else, this would be an exercise in vain because demonetization cannot really affect future black money a great deal. Also, it can take the fake currency out of the system temporarily, but cannot affect its future inflow either. So, like in chess, your cleaning the board and starting afresh does not really improve your chances of winning the next game; it only prevents a complete defeat in the previous one. But this also means you gave in for the fear of losing, having already conceded defeat in your own mind. Masterstroke? We’ll see.

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