Demonetisation as a tool for India's inclusive growth

Making India a developed economy has been an unending process. Since 70 long years post independence we as a country (though not as a nation) have been trying to achieve a faster socio-economic growth trajectory. However due to lack of both policy and ground level inclusiveness, innovation and implementation; a “developed India” has remained a much admired dream.

Perhaps the recent drive for a cashless economy through massive demonetisation is a decisive step forward towards this dream.

India is an economy where 90 per cent of all transactions are in cash. This is due to the large informal sector, which employs 90 per cent of the workforce. The overwhelming majority of them are not hoarders of black money. And yet, India cannot become a cashless society unless its mammoth informal sector transitions to digital payments.
As it happens, cash is the most powerful instrument of financial inclusion. Anyone can access it directly, without depending on rent-seeking technological or financial intermediaries. Once you have it, you could spend it whenever, wherever, and in whatever quantity you want to, without anyone being able to track you doing it. These are basic freedoms and rights that we take for granted. It is because these freedoms matter that there is resistance to their loss — a loss that is a given in a cashless society.

The prime minister sought to pre-emptively quell the resistance such a forced transition would evoke by presenting the campaign for a cashless India as a campaign against black money and corruption. By dissolving the distinction between legal cash and black money, he cleared the ground for the treatment of all cash as potentially black unless proven white.

In other words, the informal sector is not an unintended casualty of demonetisation but the intended target. As the Reserve Bank of India Governor has clarified, the government was fully cognisant of the consequences of its move, and it was not at all an ill-planned operation, as some have suggested.
There was thus a logical need for a ‘phase one’ of demonetisation where the idea that it was about black money could be firmly planted in public memory. In phase two, which would kick in after ‘black money’ and national pride have been inserted into the demonetisation discourse, ‘cashless’ would be equated with ‘clean’, and cash with ‘dirt’ and the suspicion of dirty or black money.

But what explains this urgent drive towards a cashless society?

One way to answer this is to consider the likely outcomes of a cashless society, and read back from it the intent behind such a move.
One immediate outcome of a cashless India would be a sharp rise in indirect taxes compliance. Traders, small businesses, shopkeepers, and consumers routinely use cash as a means to avoid paying service tax, sales tax, VAT, and any number of indirect taxes and fees. This mindset needs to change if the imminent Goods and Services Tax (GST) regime is to actually work. Brutally enforcing a cashless payments system — by sucking out 86 per cent of paper money and letting people flounder for a period in a condition of acute paper money scarcity — is perhaps the quickest means way to get there.
Apart from the state, another big beneficiary of a cashless India is finance capital. At present, India’s low-income households access credit through informal systems — be it a pawn broker or employer or a relative with cash savings.
This informality has been partially dented with the arrival of self-help groups that can access formal credit. But given India’s population, both the debt and the savings of the working classes constitute an enormous market that global finance has so far been unable to access.
Forcing them to shift to cashless payment platforms instantly formalises this world of informality. As the Prime Minister himself has reiterated many times, the mass opening of bank accounts under the Pradhan Mantri Jan-Dhan Yojana is a means towards financial inclusion, but in reverse: it channels personal income (wages/cash transfers) to financial markets via insurance and pension schemes such as the Pradhan Mantri Suraksha Bima Yojana and Atal Pension Yojana. Thanks to forced deposits, unlike cash in a piggy bank or a plastic pouch, money in Jan-Dhan accounts can serve as a fresh source of liquidity for financial institutions.

Where might India be 10 years from now?
India 2025 will be the world's most populous nation, with a population of just under 1.5 billion, a little ahead of China. Gandhiji's famous statement that "India lives in her villages" will remain true with under 40% of the population in urban areas. Agriculture will remain the mainstay of employment with over 40% still dependent on it even as its share of economic activity continues to shrink.
Literacy will rise significantly to over 80%, but that will still leave about one in five adults illiterate. At least 2.6% of all children born will die within their first year, but life expectancy will cross 70 for both genders. The fertility rate — the number of children born to a woman — will fall just below two, making us a nation of "hum do, hamaare do" decades after the slogan was conceived.
Some of this sounds depressing, but on the economic front, rapid strides would have been made. Gross domestic product (GDP) will touch nearly $8 trillion, almost four times the current level, and the addition to the GDP in the decade will be nearly thrice the amount added in the 68 years since Independence. With population growth slowing down, this will also mean per capita incomes rise about four-fold to $6,000.

In all these developmental dynamics going cashless and more inclusive are perhaps the best policy alternatives India must build upon right now.

By: Abhishek Sharma