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IASbaba’s Daily Current Affairs – 14th December, 2016

  • December 14, 2016
  • 1
IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs Dec 2016, UPSC
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IASbaba’s Daily Current Affairs – 14th December, 2016

 

ECONOMY

 

TOPIC:

General Studies 3

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

General Studies 2

  • Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

 

A new normal- Being Cashless

  • Though demonetisation was touted as a surgical strike on black money, fake currency and terror funding, it has now become a radical ‘reform’ to transform India into a cashless economy.
  • Government has rolled out a series of measures which are in way of building a national consensus in favour of the transformation.
  • This shows the most significant shift in the legitimising narrative around the note ban. This was significant in PM’s Mann ki baat speech which drew on the equivalence between ‘Swachh’ and ‘purity’, and ‘purity’ and ‘virtue’, to give a moral colouring to the binary of cash/cashless.

Informal is the target

  • In Indian economy, 90% of all transactions are in cash. This is due to the large informal sector, which employs 90% of the workforce.
  • However, this sector doesn’t comprise of majority of black money hoarders.
  • Hence, for India to become a cashless society, it has to transform the mammoth informal sector to digital payments.
  • The PM thus sought to pre-emptively control the resistance to transform India into digital economy by launching it as a campaign against black money.
  • The distinction between legal cash and black money was dissolved and the ground was cleared for the treatment of all cash as potentially black unless proven white.
  • This can be understood in the context that informal sector did not suffer as an unintended casualty of demonetisation but it was the intended target.
  • As RBI has clarified that it was not at all an ill-planned operation as some have suggested. In fact, the government was fully cognisant of the consequences of its move.

 

In name of black money

  • Cash is the most powerful instrument of financial inclusion. Anyone can access it directly, without depending on rent-seeking technological or financial intermediaries.
  • It is non trackable as once a person has cash, it can be spent wherever and whenever without anyone tracing.
  • This freedom was taken as granted and this is what ‘cashless’ society takes away from the person.
  • The ‘phase one’ of demonetisation focused on implanting the idea of black money in public memory to give the ‘cashless’ drive a logical need.
  • The ‘phase two’ kicked in after black money and national pride was inserted into demonetisation discourse where cashless was equal to clean and cash with dirt with suspicion of black money.

Speedy deliveries

  • Traders, small businesses, shopkeepers and consumers routinely use cash as a means to avoid paying service tax, sales tax, VAT and any number of indirect taxes and fees. Hence, a cashless society would result into a sharp rise in indirect taxes compliance.
  • This would be needed when Goods and Services Tax (GST) regime needs to become successful.
  • By sucking out 86% of paper money and enforcing a cashless payments system by letting people flounder for a period in a condition of acute paper money scarcity was perhaps one the quickest means to implement the ‘cashless’ drive.
  • Also, apart from the state, the finance capital of India is another big beneficiary of cashless India.
  • Currently, India’s low-income households access credit through informal systems through broker, money lender or relative with cash savings.
  • This informality was partially dented with the arrival of self-help groups that can access formal credit. But because of India’s growing population, both the debt and the savings of the working classes constitute an enormous market that global finance has so far been unable to access.
  • Hence, when the cashless system was enforced, it instantly formalised informality.
  • Thus when seen in reverse, the Jan Dhan accounts were meant for financial inclusion which channel personal income (wages/cash transfers) to financial markets via insurance and pension schemes such as the Pradhan Mantri Suraksha Bima Yojana and Atal Pension Yojana. And with cashless systems, money in Jan Dhan accounts can serve as a fresh source of liquidity for financial institutions.
  • The digital sector enjoys a symbiotic relationship with finance capital. Post November, there has been surge in digital payment apps and e-wallet companies.

 

The new ‘normal’

  • The citizens of India- from businessmen to farmers to analysts- are waiting for life to return to normal. Here, a general ‘Normal’ means no long queues at ATMs.
  • But the queues are long not only due to too many people and too little cash but also because of limit on withdrawals which forces people to queue up multiple times at different locations.
  • Hence, a proper return to the pre-demonetisation ‘normal’ therefore requires removal of any ceiling on cash withdrawals.
  • But, such a definition of ‘normal’ would be valid if the reason for demonetisation was either destruction of black money or fake currency or even a recapitalisation of banks. But these things have already happened and no longer matter. People have started using new notes for their transactions but it is not available as per demand.
  • Thus, the return to the ‘old normal’ may not be possible as no matter how many currency notes are printed or how many ATMs are recalibrated or how many livelihoods affected in the informal sector, the ceiling on cash withdrawals may not be withdrawn any time soon.
  • Reason: the demonetisation drive is not much about black money as it is about combating cash.
  • Unsurprisingly, the banking sector, IT sector and somewhat corporate sector are supporting this move.
  • Only the targeted informal sector is hit by the demonetisation as it is cash-dependent. It will continue to be so until they switch en masse to digital payment platforms — which is what the government is expecting them to do.

Conclusion

The digital transformation of cash is also a cost savings to the entire financial ecosystem and not just the public purse. From printing to cash management to physical infrastructure to securing and dispensing of currency, cash is very expensive.

Hence, India must use the demonetisation drive to harness its innovation and political capital.

Connecting the dots:

  • Is demonetisation move a planned exercise? Critically analyse

 

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