Demonitisation

November 8,2016; The day when in a 45 minutes of speech The Prime Minister's announcement of the withdrawal of ₹1000 and ₹500 notes ranks among the most significant economic measures taken by his government. The audacious move has given birth to wild hopes of a decisive blow to the black economy, counterfeit currency & terrorism funding. It is also being lauded for its potential to convert India into a cashless economy. However, the disruptive impact of this decision is only now becoming clearer and dampening the celebratory mood that followed the announcement.

As far as I can gather
"The Government has rushed into a decision that is poor economics and may result in poor politics too."
While many are still hopeful that this "landmark initiative" will reap dividends eventually, upon deeper analysis I have come to the conclusion that it is nothing less than an unmitigated disaster and that’s because I can see what sort of consequences that’s going to come and here are the few reasons:

#Cash is an insignificant component of black assets. Opening foreign accounts anonymously is child's play today and given the anonymity it provides, it is a widely preferred option for those holding black money. Investments in gold and property are also preferred for a variety of reasons. Firstly, wealth stored as cash decreases in value with inflation while other types of assets appreciate with inflation. Secondly, storing large sums of cash is much more problematic (occupies more space, vulnerable to hazards) than storing the same value in gold. Finally, security problems with cash are much greater. Thus, "illegitimate cash is just the tip of the iceberg and dealing with it does not mean taking down the mammoth black economy."

#Counterfeit currency is more molehill than mountain. Much has been made of the "fact" that taking out higher denomination notes will render worthless the bulk of counterfeit currency in circulation today. But contrary to popular perception, the value of counterfeit currency is quite insignificant. at any given point of time ₹400 crore worth of fake notes were in circulation in the economy. This is merely 0.025% of the total budget outlay of ₹19.7 lakh crore as announced this fiscal. In comparison, just the printing cost of notes being taken out of circulation is approximately ₹12,000 crore. And just let me say this

"Is it sensible public policy to flush ₹12,000 crore down the drain to purportedly remove about ₹400 crore of fake currency?"

#Root for black money generation is untouched. The annual black economy is conservatively over 20% of our GDP. This means that the annual generation of black money is over ₹30 lakh crore which is greater than the entire amount of ₹17.77 lakh crore of cash in circulation. So, even if half the value of the withdrawn notes was black wealth and none of it was whitewashed, the black money destroyed would still be much less than the amount of black wealth generated yearly. It is clear from this that demonetization cannot do any long-lasting damage to the black economy since the roots of it remain untouched. EX-RBI Governor Raghuram Rajan words on this goes like "It (demonetization) if often cited as a solution. Unfortunately my sense is to find clever ways around it. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch. I would focus more on the incentives to generate and retain black money. A lot of incentives are on taxes. More focus should be on tracking data and better tax administration to get at where money is not being declared. I think it is not very hard to hide your money that easily." 

#More than an Economic reform it’s a Political Motivated move and it will only going to create panic among the people (as we are seeing it already). This panic is leading to untold miseries with ATM's reporting long lines and various establishments refusing to offer change; some hospitals are even denying treatment. Had the BJP been more somber and pragmatic in its narrative and execution, rumor mongers would not have had such a field day and the move's implementation would have been less painful for the people. What about the “Labour” group of our country which earns their money on per day basis? Also, it’s November, a month where many marriages happen over the country, god knows how that family is going to manage everything so this move is all about "Wrong Timing" as well.

#Unprepared Government Move: Before making any move which probably going to affect the major population it’s the duty of gov. to be ready for every countermeasures and the gov. in this regard is visibly unprepared. Firstly, the RBI didn't have enough supply of smaller denomination notes and is supplying soiled 100 notes to meet the demand. Secondly, the new ₹2000 notes being released are smaller in size than the old notes and ATM's have not been modified to dispense them. Thus, ATM's are storing less cash and thus running out faster as they can only dispense ₹100 notes.

#Where is the infrastructure for a cashless economy? The argument that the move will spur a cashless economy is flawed.
First,
"How does replacing ₹1000 notes with ₹2000 ones help make the economy cashless?"

Secondly, merely depriving people of cash doesn't make an economy cashless. With only 46% banking penetration, only 22% internet connectivity, 19% of population without electricity connection (and others with unreliable connection) and only 1.2 million of 14 million merchants having point of sale devices, India simply doesn't have the infrastructure for a cashless economy. Another problem is the low level of digital literacy in India. Unless these real challenges are addressed, withdrawing the bulk of cash only creates chaos as we can now see.

#Some more reasons. Firstly, the people are desperate for cash, so much of the workforce that should be productively working is wasting long hours in unending queues at the banks and ATMs. Secondly, the abrupt call-back of 86% of cash, has brought the informal economy to a standstill—this sector is the worst affected, with the most marginalized suffering the most. Thirdly, the wide speculation on property and gold pricing will also undermine economic stability and reduce investors' confidence in India.

This move by Modi is Historic, no doubt in that but it’s hard for me to see anything positive in it (yet), maybe the whole situation & market gets stabilized after couple of months, no more long queues in banks or ATM but since this move is not just about short-term goals so I guess we all have to wait to see whether long-term goals will going to meet or not.