Skip to main content

Demonetising and Cashless Economy: a difficult alliance rooted in compromise


This is a brief intervention on the aspect of Demonetisation and India likely to go a cashless economy. Though, a lot of oral debates and narratives are being featured around the topic, what saddens is the fact that cashless economy is hardly understood and then used as a tool to pare this whole exercise. The disclaimer from me is to be once again stamped: Demonetisation undertaken is a huge implementation failure, whereas the mechanism itself has pros weighed in favour. Anyways, the pros have been discussed elsewhere and in plenty and thus I feel no need to get to it at the moment, while a post on it could be in the making in the near future. On to cashless economising then....

The thing with cashless economy is it is rarely understood in its complexity. And what really goes missing from discursive narratives about it are what governments do about the loss of seigniorage: the profit the government makes from making money. To a large extent it is thought through as letting gone of, which is what governments would rarely engage in due to fiat currencies. Minting coins and printing money is an expensive affair and is further aggravated with circulation costs. These things are to be carefully thought out:

1. Getting rid of fiat currencies and thereafter bringing on cashless economising means governments ridding themselves of fiscal policy responsibilities and rippling through central bank that would be ridden off setting of monetary policy frameworks. This is extricating the government of its sovereign rights and it is a bit hard to believe minimum government maximum governance would be a realisation of it. Thus going cashless is expensive and hence best avoided.

2. Going cashless is beneficial as a chimerical thought process from tech and now fin-tech companies. Well, chimerical is a strong word here and thus needs moderation. What such industries conceive of, and google wallet is a prime example of it is economising through taking paper (and mint) out of circulation by minimising it evolutionarily. They think success comes through transaction costs and network permeability, which is indeed a revolutionary thought in itself as both networking and permeability are the pillars of such companies. Moving aside from such mundane as-a-matter-of-fact propositions, cashless transactions are built upon security systems enacted through multi-layered secured biometrics (strangely, these are effective as escrow) enabling remote logins and logoffs when threatened securely. They have their logic and it works like a charm, and the best example I can cite here is Blockchain technology, the template behind bitcoins or even diversified into humanistic sciences. Such escrows are secure and breaching them is difficult or impossible precisely due to labour that goes into it and the prospects of technological archiving that is humanly impossible to achieve as it would disturb the entire foundation of going cashless and no one really has the resources to go behind it.




India is a cash-strapped economy and keeping it that way is an expensive affair. Going cashless would in fact mean reducing paper + mint in circulation, which is done or at least imagined to be brought in via demonetisation. Value of volume in circulation remains the same, while the carrying capacity or carriers in the form of paper + metal (mint) is reduced. This would retain the status of fiat currencies and still have governments + central banks decide fiscal + monetary policies respectively.

Would this be achieved through demonetisation in our case is debatable as what is seemingly the case at present is the process has stimulated calling upon orgs like Paytm circumventing a sudden cash shrinkage in the economy. But, with payment banks no more remaining a distant reality, a tie up between such could spell a further cash crunch to be effectuated. That'd be getting us closer still to the ultimate Platonic idea of cashless-ness, which still needs to have its Aristotelian content (Sorry guys, philosophy still is my dying language). Add to that the spice of Aadhar and we would inch closer to cashless-ness, but never into pure digital economy. This is my bold claim and I'd only defend it vehemently.

Himanshu Damle

Comments

Popular posts from this blog

GST – Impact on Small Industry and the Informal Sector

The Goods and Services Tax (GST), that came into effect on 1st July, 2017, has been lauded as the most comprehensive contemporary reform of Indian indirect taxation. Aimed at creating a common, unified and integrated domestic market, allowing the free flow of goods and services across state lines, GST is supposed to deliver Indian industry and thereby the economy the competitive edge apparently lacking till now.
Reality is however a far cry from the picture painted by government. GST by creating platform a conducive to economies of scale and nullifying regional tariffs, is both conceptually and practically advantageous to big business and detrimental to the informal sector and small businesses.
These groupings, informal and small, though quite different have some degree of overlap. Informal business is overwhelmingly small but not all small businesses are informal. GST’s impact on these groups is quite different both with regard to extent of impact or in terms of results sought.
Small Bu…

Why Should Modinomics Be Bestowed With An Ignoble Prize In Economics? Demonetization’s Spectacular Failure.

This lesson from history is quite well known: Muhammad bin Tughlaq thought that may be if he could find an alternative currency, he could save some money. So he replaced the Gold and Silver coins with copper currency. Local goldsmiths started manufacturing these coins and which led to a loss of a huge sum of money to the court. He had to take his orders back and reissue Gold/Silver coins against those copper coins. This counter decision was far more devastating as people exchanged all their fake currency and emptied royal treasure. And nothing seems to have changed ideatically even after close to 800 years since, when another bold and bald move or rather a balderdash move by the Prime Minister of India Narendra Modi launched his version of the lunacy. Throw in Demonetization and flush out black money. Well, that was the reason promulgated along with a host of other nationalistic-sounding derivatives like curbing terror funding, expanding the tax net, open to embracing digital economy an…

Unfolding Crisis: The Case of Rising NPAs and Sinking Public Accountability

Public Finance Public Accountability Collective (PFPAC) released its first publication titled, "Unfolding Crisis: The Case of Rising NPAs and Sinking Public Accountability" on 14th  September, 2016 at Constitution Club, New Delhi. 




Download @ Unfolding Crisis: The Case of Rising NPAs and Sinking Public Accountability
For ordering hard copies of the report, please drop a mail to: Himanshu Damle