Question

Write an essay on the topic demonetization :boon or bane

Answer 1

Last November the Indian prime Minister announced that 500 and 1000 denominated rupee notes were to be eliminated in favor of digital transfers, giving holders less than two months to exchange their cash denominations for smaller notes. It goes without question that this approach to fighting black market crime, terrorism and tax evasion is a complete and utter catastrophe, both in terms of the underlying rationale of actually banning cash to prevent crime and in terms of how the “war” is actually being implemented.

But before we explore those two lets' examine the practicalities of eliminating cash, which is where the world seems to be heading, as India is the latest in a series of countries who seem set on going fully digital. First off it would leave us at the mercy of the banks, who have already been imposing steeper and steeper interest rates and giving less and less value to it's customers, with the bizarre situation occurring where people now pay banks for the privilege of keeping their own money in accounts. It would leave us at the mercy of the governments, who have had an ever increasing role in the money supply. The more authority the government have in printing money and raising or lowering interest rates, the less power is in the hands of individual citizens. The government could make decisions which would result in the value of your property going up or down, an effective confiscation of wealth. And then there are the obvious concerns of Cyber-security. A total of $81 million was stolen from the Central Bank of Bangladesh in March, if a currency is purely digital we are more affected by these types of attack. Physical assets like Cash and Gold can be used to offset these types of risks, but the ban on gold will quickly follow the ban on cash to leave us purely at the mercy of digital attacks and government policies, with no individual freedom to mitigate against either the ruthless hackers or the general incompetence of government officials. Aside from Cyber-security there is the matter of Cyber- privacy, with every transaction recorded people will be at the mercy of both hackers and government officials.

Aside from the practical pitfalls of the war on cash the speed with which it was passed seems more of a surprise attack than a sensible economic policy. India's economy is heavily cash orientated, meaning it needs more time to adapt to changes which affect the supply of physical cash. 90% of all transactions in India are in Cash. What the Indian Government actually did was commit an insane maneuver to take 86% of cash out of an economy in a society that is 90% cash reliant, giving consumers little time and no prior warning, not to mention the merchants.

The key question which is never asked is cost. Surely there comes a point a trade off point where the criminals can't steal as much money as the government lose. In the U.S.A the implementation of Dodd Frank has been a complete and utter disaster, with banks scrambling to make sense of vague and unrealistic legislation which is a hindrance to many honest business and comes at a huge cost. There have been no studies done on the damage Dodd Frank has done so far, no analysis of how many business were actually forced to shut down due to the cost of complying with these types of regulations. Meanwhile economic chaos reigns in India, as tons of people line up outside ATM's. Retail and wholesale markets have by and large stalled.

Proponents of the war on Cash in India will doubtless cite the socialist example of Sweden, where less than 2% of transactions are in cash (The figure in the U.S.A is 32% in Germany 80%) . However on closer inspection the analogy simply does not hold, as Sweden also happens to have low corruption in government, reliable legal infrastructure and social cohesion. India has none of this, and it may be worth noting that some 600 million odd Indians do not even have a bank account. While there may be some benefits to digital finance, the mandatory implementation of a society free of cash is nothing short of draconian, going against all that economic liberty stands for.

The irony is that most Indian's use cash because there is already too much bureaucracy and regulation in the economy, thus they are more or less forced to use cash to avoid. Soon they will have no way out whatsoever as cash is eliminated and we are all forced to wait hours in line for basic services: They simply won't have a choice. The core issue really is that power is being taken away from the individual and given to centralized powers, an even greater irony being that the action of a cashless economy makes the rich richer and the poor poorer, all the while marketed to the masses as being an effective tool to fight terrorists who are by and large ordinary Indians trying to make ends meet in an over-regulated and highly bureaucratic world.