From Treasure to Treasury

A socio-psychological analysis (not economic) of demonetization.

Demonetization of Rs500 and Rs1000 banknotes in India to eliminate black money by the Government of India, shall be a watershed notwithstanding its economic impact. The only view I have on the much disputed economics of this move is - I find economic views on demonetization bootless and deemed to be indeterminate. I am not an economist. But by definition economists are  projectionists of statistical past into future & hence will likely fail to provide quality guidance as demonetization is a black swan. The quality of implementation is nothing much to comment as fighting with facts is sheer wastage of time. What interests me are the social, psychological & political outcomes of the process.

Through my book 'Transformers' I had lamented that we Indians have become status-quoists as a consequence of the colonial past hardwired into us. Have to earnestly confess that demonetization, whatsoever be the motivation, is much more than a nudge to the society. The reaction of public at large has been astounding to say the least. Public has maintained composure notwithstanding hassles & almost outright incitation by many of those, who are desiring to milk public distress.

The tricky transfer of personal treasures in the mattresses to the state treasury is interesting, surely out-of-the-box & almost innovative. Through this essay I am trying an analysis rather than weighing in favour or against this action. Following are the underlying psychological outcomes in public that I have observed:

"The Government shall, with authority, take its due, one way or other".

Excellent outcome. It will nudge people to tax compliance and economically better the prospects of India and lay the foundations for future development of the nation. The possible detrimental side of this will be an increment in the distance of people from state. Two hundred years of colonial rule led to the State being equated to colonial authority. Though India is a Republic and democracy thrives - but it does only at a macrosocial level at the microsocial level - an individual still thinks of the Ministers he chooses as rulers rather than representatives. It is easy to deduct this - there are very few Indians (microsocial level) who oppose the powers that be, openly in public; but when thousands or lakhs get together they could do anything, including stripping the greasy of their clothes and beating them to death. By book (constitution) India became a Democratic Republic instantly - at the stroke of midnight hour, but that is not so in the minds and hearts. The caged, colonially-smudged psychology does not let commoners see themselves as an empowered Republic, but as the ruled. Therefore, the sense of ownership of most does not go beyond their fences. Though it is early to give a verdict, yet there is a fear of enhancement in Citizen-State distance.   

"Is this action of the Government, figment of an impulsive rulers' imagination, or is it a forewarning of a trend that is to emerge"?

Yes, I firmly believe that fright and pull-off by the State post-demonetization will do more damage, than gain. Therefore, it is critical that the government follows demonetization with other subsequent measures that makes this action seem a part of a bigger plan. It need not be mentioned that next such neatening action should be better planned and smoothly executed. A sure way to win the infamous title of 'Tuglaq' will be - not to follow demonetization with the next consequential steps for de-cluttering and straightening the socio-economic relationship of citizen & the State. Pull off will make the public feel that their sacrificed energy, efforts and comfort was all in vain - something that the people will not forgive the establishment for, notwithstanding what jargon the ruling party's spin doctors use in their propaganda. Rooting-out black money is not same as rooting-out corruption, former being economic phenomenon, while latter being social. So, the way this Government pounced to rein in the cash hoarders, it shall have to undertake serious efforts to rid Benami properties & bullion hoarding. For altering the social attitude towards corruption & corruption itself in a civilization corrupted by the urge to survive through centuries of exploitative rule of various dynasties and European colonizers is much more complicated & will need years of sustained social campaigns & nudges to change. 

Even if demonetization was a gamble - Government will have to up the stakes further. Increasing stakes sensibly has more chances of victory; withdrawal will increase probability of loss. A gambler's predicament ! Yes, but a coitus interruptus will be more punishing! 

"Great. Please plug leaks in State's income collection & punish the black money generators but then strike on corruption at large & illicit political funding."

I see only positive output from this. Its the socio-political quid-pro. People & media have started demanding from the politicians to set their house in order, as a quid pro for pushing discipline through the gut of public. Yes, the establishment will have to make these changes rather than be seen as a brazen power, making lop-sided decisions & inequitable in its approach.

"This action is an equaliser & it will usher in an era of economic development of those who lacked it."

Fair enough, all the more the process of equalisation has bled the rich class of illicit money, not clean sweat-money. But on the other side the Prime Minister has personally given away this idea of demonetization being a Robin-hoodish equaliser. This is the belief that has been implanted in public at large that demonetization is short-term pain for long-term gain. The memory of public in present, dense info-spatial age, has grown substantially. If the long-term gain in term of more jobs and money in the pocket of the lower strata of society does not actualise, the current equaliser will seem like a fraud. 

"This action will spark sympathy towards the risky rebel"

If the experiment succeeds, there will be a tacit socio-intellectual output according to me. This will clean our society of the calcified conformism. It might lead to a slow and painful but sure acceptance of the new norm, where some innovation & out-of-the-box thinking and action are acceptable to the society and the nation as a whole becomes less riskophobic.

These are the critical socio-psychological outcomes of Demonetization according to me. Extolling numbers, virtues, vices, pain and grief of the poor (which is truth but more often half-truth), anguish of the cribbing class and all other induced economic, quasi-economic, pseudo-economic and sometimes downright comiconomic conclusions are richly available on mass media 24x7.

I believe for sensible economic understanding of this move, we will have to wait as it unfolds.

India is for the first time in its recent nation-state history, treading a path that is dark, risky and untrod. This for me is the most exciting attribute of this move. Shaking a socio-psychologically stagnant, precedent-adoring India into action is worth loosing few points of GDP for two or even three years. We will live through it, if we have lived with sub 4% GDP for 50 years. I assure my readers, this is a short-term pain for long-term gain.

Banknotes and the future of Currency

Since mankind created units of credit in physical form - currency, its progress can be traced one to one with progress graph of mankind. Money started few thousand years ago as a statement of credit in a dematerialized form and is today come a full circle back to dematerialized form Tran sforming itself from Anatolian obsidian to Roman Moneta, Greek Drachma and the first ever punched metal coins minted in India and China in 7th century BC. Today commonest currency is that which is nothing but dematerialized promissory notes prevailing as credit cards, or mobile & electronic money. Though currency notes technically do not fulfill the conditions laid out for promissory notes under the Negotiable Instruments Act and are governed by a separate Indian Currency Act, yet in traits, banknotes are promissory notes; albeit they come with indefinite maturity period. A currency note is a bearer instrument which means that he who physically possesses it is deemed as the owner, until proven otherwise. Bearer notes were important to free trade which was hardwired to reputation. Bearer money indeed became an indicator of creditworthiness. As humanity progressed economists realized that a part of the money was always at rest, therefore bearer notes represent only a part of the economy.

So my seemingly bizzare question, that forms the foundation of this article is - do we really need bearer notes at all anymore in futute? 

Currencies like all other credit instruments are valued by the creditworthiness of the issuer, since currencies are a promise of the issuer to pay the holder specified amount on a specified date or on demand.

Soon enough there will be nations that will provide for electronic banknotes. Such notes will come with printed electronics which will enable among other things establish, register and log the holder of such banknotes.

Everytime such money exchanges owner, the money will electronically register the transaction in itself. The memory could be one time write-only. The logs could be everynow and then transmitted to a depository whenever there is an automated opportunity and get replenished in its memory.

Once the holder is physically identified by the banknotes, they will cease to be bearer instruments. Indeed, existing technologies are adequate enough to make this happen. Once such notes are made available money shall stop being a mode of bribery, corruption or even hoarding untaxed money. Presence of logs within the cash will make cash completely transparent and traceable.

There will be no need to count such notes, as the quantity will be known by proximity to sensors.

Some might ask if all such banknotes are electronic, how is it different from electronic bit money? Why then have banknotes at all? Anyway states are trying to go cashless using electronic transfers of various kinds. Well the answer is in the use of banknotes as an offline currency. In cases where connectivity is not available temporarily for electronic transfers such electronic banknotes will ensure that the economy keeps on going seamlessly. 

So, be ready for a regime where there just might not be black money the way we perceive it right now. Probably there will be other forms of keeping illegal valuables, but both land and cash might not be those means.

Soon one will be able to keep at home blank currency - pretty much like blank cheques and electronically activate the currency, taking it live. Indeed, such blank notes will replace cheques and demand drafts. Thereby purging the demarcation between currency and cheques or other means of negotiation.

And I hope India could lead the world in large scale implementation of such advanced technologies.