Demonetization Effect on Poor

Suyash Roy(via The Wire)

The financial lives of poor households are very different from those of the middle class and the rich in one crucial aspect – the intensity and frequency of financial transactions involving cash. The ratio of financial turnover to assets held, during a given period, is much higher for poor households. Financial turnover is the total value of all financial transactions, i.e. putting money in or pulling money out from any informal or formal financial instrument.

Make sure to have a look at the table summarizing a year in the financial life of a tailor’s household in Uttar Pradesh(from the book Portfolios of the poor).

The way most societies have gone to a ‘less-cash’ state is through slow, careful, detailed policy work. The willingness to use coercion at an early stage of India’s journey is troubling.

This scheme is a combination of bad decisions, insufficient knowledge of high volume of cash transactions, policy makers delusions of making history.

It is difficult to do meaningful improvisation, because this policy decision does not allow for much flexibility. Since the decision is founded on suspicion, flexibility is assumed to be “misused” to launder money. The only way to really cut costs was to roll the decision back, once it became clear that benefits might be smaller and costs might be larger than expected. However, rolling back would make the government look inept. Most leaders would prefer to appear authoritarian, than to appear inept. They would rather be feared than be ridiculed. Hence, improvisation seems to be the only politically feasible option. The kinds of things being done to improvise seem to be making things worse. This is not surprising, because governments are inherently not good at processing information quickly and efficiently, especially in a rapidly evolving context.

Even at the end of January 2017, banks are still not fully stocked(dispensing Rs 2000/- notes which is not accepted in almost 99% of the retail shops) and the ATMs are still closed. I am lucky that I am in Bangalore. Consider the case of villages.

This event has also revealed a great deal about our intelligentsia, our media, and even the broader civil society. There is much to be thought and learnt from this teachable moment. The shaping of the narrative is instructive to watch. In my eyes, there is one effort that has suffered considerable damage: the effort to build a new conservative movement in India