Refined repetition

The Modi government has once again announced a second demonetisation programme. This time, all old Rs 2000 notes will be invalidated after September 2023. The public has time till September 30 to deposit their old notes and receive new ones. The character of this demonetisation is fundamentally different from the one in 2016. The previous demonetisation came as a surprise and was unexpected for the common people. On November 8, 2016, the Prime Minister announced the discontinuation of the Rs 500 and Rs 1000 notes and the printing of new Rs 500 and Rs 2000 notes. People were given time until the end of December to visit banks and post offices to exchange their old notes for new ones. There was a significant delay in printing the new currency notes. People faced immense difficulties, with the marginalised section being affected the most. We have not seen any accurate statistics on the economic and social damages caused by demonetisation. However, according to the former Finance Minister P Chidambaram's statement, the national growth rate had declined by at least 1.5 per cent, amounting to Rs 2.25 trillion in a year. 150 million daily wage earners lost their livelihoods. Thousands of small and medium-sized businesses were shut down. All of these have been our lived experience.

The recent demonetisation has been in discussion for quite some time now. People are mentally prepared for it. The underlying political motives, especially how it can curb various forms of corruption, is still an open question and is not the focus of this article. The main purpose of this essay is to discuss the overall economic impact of such initiatives.

Regardless of the criticisms faced by the sudden demonetisation in 2016, one of its effects is being felt seven years later. According to various government and non-government sources, there has been a visible increase in digital transactions. Now, even small shops have started using ATMs, mobile payments, amongst others. Credit to the introduction of the Aadhaar card project in 2010, it is now possible to identify the buyers and sellers in any digital transaction. To carry out digital transactions, both the buyer and the seller need to have bank accounts. In the language of economics, the more people get connected to banks, the greater is the financial inclusion. In India, there are still many unorganised and unregistered institutions. Economists refer to these types of organisations as the informal sector. Cash transactions are more prevalent here, and there are no written salary contracts for the employees. As a result, revenue cannot be generated. With increased financial inclusion, the number of these organisations will decrease. As a result, the country will experience an accountable economic growth, and the rate of revenue collection will also increase. According to a study by the State Bank of India, the number of such excluded workers has decreased by almost 32 per cent between 2018-2021.

Greater digitisation of the payment system has an added benefit. It has a direct effect on the credit market. The transaction demand for cash decreases. Cash will no longer be considered as a good store of value either. In old times, my grandfather used to keep heaps of his hard-earned savings in the form of cash in the trunk and almirahs fearing that banks may fail. If there is a fear that the old currency notes can be invalidated at any moment, I more so, would not follow my grandfather's footsteps. What should I do then? Maybe I would buy gold, as its value is relatively stable. However, buying gold also poses a risk of keeping it safe. Buying a house and considering it as an asset is another option. But not everyone may have the necessary savings for that. Investing in the stock market or mutual funds is a possible avenue, but it also carries considerable return risk. The safest method for ordinary middle-class people with low risk tolerance is to keep money in the bank or buy government bonds. If bank deposits increase, the bank will be interested in providing loans. If I buy government bonds, I am lending money to the government. Both methods will increase the supply of loans. As a result, the interest rate in the market will decrease. According to World Bank statistics, the real interest rate (after netting out inflation rate) in India was 6.2 per cent in 2016. After demonetisation, it dropped to 5.4 per cent in 2018. With a decrease in the interest rate, small and medium sized business establishments will benefit. Investment will increase, leading to the country's growth and prosperity. This transmission channel works if the RBI does not intervene. However, after the price hike in 2022, the interest rate has increased because RBI interfered and boosted the Repo rate, mimicking the Western world. Thus, for the effect of digitalisation on the loan market to work, RBI should not manipulate the rate.

Demonetisation is not only happening in India alone, but also in other countries like Nigeria. On October 26, 2022, the Nigerian government initiated the project of demonetising their 200-, 500-, and 1000-Naira notes to halt illegal transactions. This project is called Currency Redesigning. This country also experienced a great turmoil following this measure. People revolted and ransacked banks. It appears that if demonetisation is done in a planned manner with gradual phasing out of old currencies, it could have positive effects on economic growth and the tax base. Whether these consequences will materialise or not depends entirely on the government's honest intention and strong initiatives.

The second demonetisation is also connected to the launch of a Central Bank Digital Currency in India. The government aims to create a cashless society. However, achieving this goal poses great challenges. Cash usage is still very much in vogue in the country. Digital payments are about three times higher in cities compared to rural areas. Even in many remote villages of India, finding an ATM machine or a bank can require traveling a long distance. Rural people have less digital literacy and smartphone usage compared to urban people. To overcome this digital divide, increased financial literacy and proper digital infrastructure is needed in rural areas. Therefore, the dream of a cashless society envisioned by Prime Minister Narendra Modi requires substantial efforts for proper implementation.

The writer is a Professor of Macroeconomics at Durham University, UK. Views expressed are personal