What is wrong? What should be done?

Is lowering of cash amount in the hands of the people a valid reason for Modi to demonitize Indian currency?

The Modi government has listed out a number of reasons for demonitizing the Indian currency. Lets analyze one one of them.

One of the reasons given by Mr Jaily was that demonotizing the currency was a necessary step towards achieving a digital economy, that is, demonotization will assistin reducing cash percentage out of the banking system thereby leading to growth like in the western developed world.

First, we are already progressing very fast towards digital economy. I am not sure the government needed to disrupt the very economy it wanted to digitize. Mr Jaitley referred to developed economies and gave data as to the “cash percentage outside the banking system” (CPOTBS) in developed economies as compared to India. Is that a factor which affects growth? Did America demonitize its currency to achieve its low CPOTBS. Is low CPOTBS the factor that will drive growth? If this is how is the growth rate of US lower than India? Mr jaitley’s logic suggests that we could resolve all the economic problems of the world by just lowering the CPOTBS. I doubt if this is true or this is what Mr Jaitley meant. Does the government have a right to cause pain and suffering to the whole country just to lower the cash in the hands of the people? Can’t they just withdraw the money after depositing the same? I think they can.

Does the government have any right to demonitize currency just to lower the CPOTBS? Is it even legal? I know RBI has the power to demonitize but I am sure they have to do it in certain circumstances but not to lower the CPOTBS. Can the the government force us to become part of the digital economy? Last I heard we were living in a free country.

It is great that the Modi government wants to use technology but it should first use it to set its house in order. It should first use technology to bring the real culprits who evade sales tax, income tax etc to book. Actually, you do not even need technology. Just ask the respective government departments. They know who is evading taxes.

Even assuming that this reason for demonitizing the currency is valid, do we have the legal infrastructure to handle it? I don’t think so. There is a dire need to upgrade the IT law as well train the law enforcement agencies to handle IT related crimes. Digital dream is OK but we need to proactively provide the environment in which it will thrive. Just today evening, we saw evidence of our government’s capability to handle IT related issues when Mr Jaitley said in an interview that it will take 2/3 weeks to get the ATM modified to accept the new currency.

A counter argument given by some is that one of the main objective of demonitizing the currency was to infuse funds into the banking system by forcing people to deposit money in the banks. Recently, Modi government infused over Rs. 20,000 crores into the PSU banking system and another Rs. 125,000 crores is required. Why are the PSU banks in trouble? Three alphabets NPA or non performing assets. Some NPAs are normal but our PSU banks have abnormal NPAs. Big time industrialists cannot pay the amount. We do not want to put pressure on the banks and the defaulters as that will have an adverse effect on the market sentiments. We do not want to take action bank officials because there will be collateral damage as the loans may have been given not on merit but under pressure from powers to be. However, making the common man stand in line to get money for milk and to feed his family is certainly good for the market sentiments. Once the money of the common man is deposited in the banks the same will be loaned to more industrialist friends of the politicians and the cycle will continue.

As mentioned in my previous post, the government before it causes the common man any inconvenience it should first do its duty. Has the government streamlined the banking system? Has it taken serious action against defaulters and bank officials? Has the government done any analysis as to how many of these defaulting loans were given at the recommendation of the political director appointees on the board? Has it taken any action against the directors for not performing their duties properly? I doubt very much.

The best part is that Mr Jaitley regretted inconvenience to the public and said that they had factored the same while making the decision. I am really happy to hear this because it gives me the confidence that our government is not incompetent but just does not care about the citizens of this great country so long its objectives are met. After all, what is important is what the government wants to do and not whats good for the people of the country.

So the reason for demonitization to reduce cash in the hands of the people makes no sense from any angle and most importantly, it does not make sense logically. Its just hogwash.

So what’s next? Another blog to analyze another reason given by the Modi government for demonitizing the currency. Our search for a good reason to do what was done continues.

Avinash Narula

Be Sociable, Share!

Leave a comment

Your comment