Why demonetization turned out to be a dud excercise

3:43:00 PM

The much talked about the decision by Prime Minister Modi to demonetize most of our currency will turn out to be dud as it has drastically failed on its key objective.

The goal

The major goal as announced to invalidate the 1000 and 500 currency was to weed out black money and corruption. A minor aim was to work ahead with the noble idea of the Prime Minister to push for a less cash/ cashless society. 

A major failure

However, the idea failed big time. You go to any bank in India today, ask people who are in the know of things and they will tell you the exact commission being charged by bank staff to convert your cash into a new currency. The commission ranges from 25-35% . If you had 50 lakhs under your mattress, you will still have most of it, before November ends and can shove it back under the mattress. 

But this simple idea came later. First came the usual plain boring ideas. Put money in gold. Clear your past dues in old cash. Pay a commission to money laundering experts. Use other clean accounts like Jan Dhan ones to park money. Many people bought electrical items, at inflated prices which guaranteed them backdated bills. But then came the bright idea. Simply pay the bank people and get direct cash. You go after hours, hand over the money and you will get newly printed fresh notes. Anyone else dropping in the branch will be politely told that 'no cash' is available. 

So hoarding continues. Common people, thinking that Mr. Modi has delivered some master stroke continue to suffer. Big people have banks helping them turn the money white. As I am writing this, some bank officer would be entering my name against the 4000 or 2000 I supposedly exchanged last week, even though I never visited any of the banks. They would be using my ID proofs from my KYC records and happily obliging the rich and mighty. 

No points for guessing then, that the idea has failed. Mr. Modi should understand this and concede defeat. It is no secret that the idea to do with the exchange of currency at banks was done when the government realized that they cannot control the bank staff. One of the major reasons why implementation of this scheme has faced issues is that our banking system is hardly efficient on any given day. You can expect them to extend working hours but not to ramp up their management skills in a day.

I really feel that the idea was not bad. Mr. Modi should be given due credit for pro-activeness. All those criticizing his moves have failed to offer one better alternative. While you will find pages full of criticism, no one has come with a better idea. Me neither. That it didn't work should not be a reason enough to bad name our Prime Minister. He had over confidence in our rotting banking structure. He believed them when the bankers said the bad loans was just due to the economic environment and it not their own mess. He should learn from this and move on.

The minor goal, however is looking doable. His idea of less cash society is very logical. Just to say that we are a cash economy and its working just fine is a wrong conception. If we need to grow, we need to reform. And a less cash society is a major reform. But his target is just the middle class and lower middle class. The others have already got fresh cash from the bank. Still, digital currency is gaining ground and with the shortage of cash (an artificial shortage I must say), a rapid awareness is happening regarding the use of digital currency. 

Not all is lost. The government can humbly accept the little gains it has made and accept that most of the black money it wished to target is gone, poof! It has turned into flats, golds, new currency, new television sets etc. The excessive liquidity the banks have gained are also losses as it will help them generate more NPAs or bad loans. I think it has already accepted defeat with the sloppy 50% tax scheme. The income declaration scheme which ended in September had 45% charge for black money. Now they want 50%. Then why the whole circus of banning notes?

Hence,  push towards digital currency will remain the most notable achievement of an otherwise dud activity which might not even recover its return on investment. That and the little bit of fake currency which is being now weeded out.

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