Waled Adnan on the scorched earth policy of #Demonetisation
“A Lannister always pays his debts.”
This proverb underlies much of the economics in the fictional world of George R.R. Martin’s ‘A Song of Fire and Ice’. Throughout the books, and the successful TV spinoff ‘Game of Thrones’, we see the Lannisters make their way out of sticky situations on the basis of this one powerful line.
It is a useful (and conveniently pop-culture) reference point to think about what money really is. When a stranger ‘lends’ to the Lannisters – in the form of goods or services, at times their lives – what is the basis of the exchange? The Lannisters are a powerful military family who can easily refuse to repay once the favour has been extracted. They choose not to. Because to not repay would tarnish their creditworthiness for all time to come. It’s like a human version of the credit ratings in the financial world of today. And they are the richer for it.
In his excellent anthropological exposition on money as credit, ‘Debt – The First 5,000 Years’, David Graeber says, “…the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other human beings.” In a modern nation-state, this trust is guaranteed by the sovereign government. The guarantee of repayment printed on every currency note is what lends value to mere paper. A government, therefore, must always ‘pay its debts’, or risk losing credit. In India, that trust has been somewhat shaken in the past few days. Sure, the government hasn’t reneged on its obligations but placed tremendous restrictions on the use of currency, almost instantaneously converting assets we had considered as ours into something that must be earned back at personal cost, drip-by-drip. The most fundamental economic social contract has been temporarily suspended.
A social contract almost entirely based on trust, or credit(worthiness) is not easily recoverable once lost. It’s a human quality to be risk averse. Once bitten, twice shy, and all that. I’ll be a good student of economics and assume away the so-called minor inconveniences, the deaths, the starvation this move has caused and fast-forward to a future where ‘normalcy’ has been restored. However, this is a normalcy where you know that the currency notes, the bank account balance that makes you feel secure, may at any point be rendered to be either worthless paper or temporarily unavailable. The spell of security in money is cracked, if not broken. Let’s consider how this may play out:
- A woman, fish-seller by day, homemaker always, has made a habit to hide away some of her earnings in a local community savings scheme to provide for her child’s education instead of her husband’s drinks. She has no formal bank account, and when the currency notes were made worthless, she couldn’t explain to her husband why she needs to stand in the long queue at the bank. Three months later, she is wary of the security her informal savings had previously provided. Credit has been lost.
- A construction worker had been lured by the Prime Minister’s ‘Jan-Dhan Yojana’ to forego informal banking services like the local moneylender and move to a formal bank account. Days after the demonetisation, he finds himself unable to work for a day to withdraw the money he had thought was his from his local bank branch. For a person only learning to trust the formal financial system, it feels like the old days with the moneylender. He manages to withdraw the money and promises himself to stick to more traditional forms of savings, like small trinkets of gold. Credit has been lost.
Demonetisation has placed disproportionate stress on exactly those who are least likely to be source of the problems the move aims to tackle. The ones least likely to hold black money, be involved in financing terrorists or printing fake currency are the hardest hit. Being part of an entirely cash-based economy, the poor are finding the hand-to-mouth cycle abruptly broken. A few hours spent in a bank’s queue may be a minor inconvenience and a patriotic service to the nation to the relatively well-off; to the construction worker, it amounts to a meal unearned, foregone. To the lady in the example, it means precious savings suddenly rendered worthless, and uncertainty about the future. Compound this tale across hundreds of millions in similar situations, this amounts to a hand-brake on the banking revolution that was the latest fad two years back, just as demonetisation is today.
The regressive nature of the costs and benefits of the move do not stop here. By squeezing all liquidity from the system, the government has essentially told the people to find alternative currencies till the nation is rid of the deadly scourge. Noticed the incessant, often-insensitive advertising from mobile wallets like Paytm? Those, and plastic cards are the new currency of India. It makes a nice cover story about a cash-free India. However, the benefits are again skewed just as much as the costs were. Unable to pay in cash, the consumption economy has been forced to drift towards large supermarket chains (think Spencer’s, Grofers, Bigbasket, Amazon, the whole nine yards) and away from the community store and the local market. Does this move sound like a largescale mass redistribution programme? A reverse Robin Hood? It does, because it is.
However, public policy always has losers and winners and must be judged by their social benefits as much as personal costs. In this crucial aspect, the move to demonetise relies on some dodgy, Bollywood-style economics. It is a belief that most black money is in fact held in tightly-packed VIP suitcases or stashed away Escobar-style in large physical vaults. Nothing could be further from the truth. Most money, black or white (forgive the racist distinction) is not held in liquid cash form. It is held as bleeps on some remote bank server. Demonetisation doesn’t hit the large tax evaders because their money is stashed (virtually, not physically) in a distant tax haven. The ones hit by the move are the rich-but-not-that-rich who stashed their money in their basements. Bollywood-style economics has caught Samba with his pants down, while Gabbar is flying in and out of Panama, singing the national anthem all the way. Terrorist financing is hit, so is counterfeit currency, until the new notes are forged, that is. It’s a pessimistic outlook for sure, but if history is to be a teacher, you can’t make forecasts based solely on sunny-day projections.
The Supreme Leader’s tears (and laughter) are therefore hiding the fact that a short-term hit on terrorist financing and the unnerving of some medium-sized crooks are being bought by crippling the cash-based economy of the poor while the urban rich celebrates his service to the nation by taking #2000walaSelfie. This, while Adani is given a Rs 200 crore reprieve, a major tax evasion whistle-blower cannot find the ears of the government and those with their names in the Panama Papers are leading the cheerleading squad.
All Heil the Supreme Leader!