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Demonetisation pangs: The lines outside ATMs are not the real problem

The money squeeze is in proportion to one’s position on the income ladder - and one’s level of desperation

analysis Updated: Dec 06, 2016 21:58 IST
People wait for cash outside the Oriental Bank of Commerce ATM in Gurgaon
People wait for cash outside the Oriental Bank of Commerce ATM in Gurgaon (HT File Photo)

Ask most people about the cost of demonetisation, and you’ll be referred to the long lines in banks and ATMs. But the lines are only one small part of the impact of demonetisation. You might never see the bigger parts, but they will cut much more deeply.

Demonetisation is actually two steps rolled into one. One is the invalidation of old notes. The other is the limits on cash withdrawals. The former’s impact will reduce over time. The latter’s will not unless the limits are relaxed or withdrawn (at present they’re being tightened). But both measures have one result - a severe shortage of cash.

All economists talking of demonetisation refer to a “contraction.” This jargon obscures something very real. Government data shows 75% of urban Indians and 85% of rural ones work without written contracts, and 90% work in the informal sector. The vast majority of these people earn much of their income in cash and spend, in turn, in cash. They now find both their incomes and their spending squeezed. The more the spending of one is squeezed, the more others’ earnings are in turn squeezed. Hence the reports of mandis closing, workers laid off, meals missed and businesses shut down.

Read: Demonetisation gains uncertain,says Nobel laureate Paul Krugman

More importantly, the squeeze is in proportion to one’s position on the income ladder - and one’s level of desperation. The poorer the person and the more urgently money is required, the harder the impact. This has been graphically illustrated by the deaths of people in need of hospital care. But there will be many more whose suffering was not reported. For instance, both newspaper reports and our experience confirm that daily wage workers are facing reduced or lost wages. For many that means adjusting their diets or skipping meals for weeks. This impacts literally millions of people, many of whom were hardly in good health in the first place.

The government’s preferred solution to this problem is to go cashless. But the usefulness of this too is in proportion to your position on the income ladder. The further down, the longer it will take and the more irrelevant it is. By pushing it, the government is indirectly benefiting larger businesses, thereby yet again reducing the incomes of those who are lower down.

Read| After demonetisation, 27 public bank officials suspended for ‘irregular’ transactions

There is one more aspect which varies with income. Both media reporting and government statistics become harder and harder to maintain the more remote, the more marginalised and the poorer the person concerned is. For instance, if more people are forced to migrate out of distress, or, alternatively, if the incomes of migrants plummet, it will be years before that is reflected in the data (if it ever does). Even if GDP “bounces back”, GDP figures tell us nothing about the distribution of wealth - assuming those figures themselves are accurate, a matter of some controversy at present.

If we never know the true costs of demonetisation, will we be able to judge its worth? When dazzling figures of “black money caught” are presented, will we be able to weigh them against the invisible losses? If the government says many notes were not returned, will we know what proportion was with people who could not change their notes because of illness, remoteness or lack of an ID? The government would like us to believe that whenever the lines start diminishing, the “temporary inconvenience” will be over. The truth is that no one may ever know the true cost of demonetisation, and the tragedy is that the highest costs are precisely the hardest to see - paid by those who could least afford them.

Trepan Singh Chauhan and Shankar Gopalakrishnan are researchers and organisers with Chetna Andolan based in Uttarakhand.

Views are personal