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How Did The Demonetization In India Go

Almost an year ago, India had brought in the decision of banning Rs.500 & Rs.1000 notes. However, the decision has been deemed a total failure. That’s not so justified! Perspectives, you see.

Demonetization

True, the primary goal of flushing out the tax cheats has been a flop. But you cannot overlook this fact that there was a secondary goal as well. The goal was to move towards the cashless economy, as India’s finance minister put it- still has the promise. The rest of the world could, rather, learn something from this spoiled financial experiment.

A report last month showed that 99% of the invalid bills have managed to make their way back to the banks & markets, depicting the government’s plan to extinguish unlawful currency has wrecked.

Demonetization

If that trend continued, it could be a big deal. India has wasteful banks. Its cost of cash — in maintenance expenses, access fees and so on — is among the highest in the world. Eventually going cashless would trim such costs, while also hampering crime and corruption. It would be a big help to the poor, who could borrow and send money more cheaply. More powerfully, it would give central banks a new tool for boosting aggregate demand when conventional measures won’t work — significantly negative interest rates. It’s no wonder that so many governments are now thinking through the concept, and its attendant problems.

Demonetization

But a fundamental precondition for doing away with cash is trust. And on that score, India’s experiment provides an example of what not to do. For one thing, the note swap was undertaken rashly. The public was granted only 50 days to exchange their big bills for smaller ones, and the central bank couldn’t print enough new notes to meet demand. Lines lengthened at bank branches, small businesses folded for lack of capital, supply chains collapsed, and agricultural prices plummeted. Growth and investment stalled.

Perhaps 5 million jobs were lost.

For other countries, a better tactic would be to decline big denominations over a period of years, making it easy to swap them at first, then progressively more difficult — say, by exchanging them at fewer locations. That would publicize the plan, stabilize inevitable flaws and help the public adapt. Meanwhile, electronic alternatives would have an incentive to evolve. After undoing 86 percent of the currency in, the government was left struggling to encourage digital payments, using subsidies and other gimmicks.

About 50% of Indian adults have bank accounts, and only about a quarter have internet access. Mobile payments remain relatively rare. Even if everyone had wanted to go digital, they couldn’t have. The takeaway for other countries is to ensure reliable alternatives prior to the any such rollback, along with legal protections and privacy safeguards. One promising approach is digital legal tender, which might amalgamate the advantages of electronic currencies with the stability of a central bank. India does deserve credit for even trying to shift its economy into the digital age. Unfortunately, it also epitomized all that can go wrong along the way. As the cashless society comes into belief, the rest of the world should take heed! 

Also read demonetisation-anniversary

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