FROM THE EDITOR-IN-CHIEF
Much has happened in the five weeks since Prime Minister Narendra Modi declared that Rs 500 and Rs 1,000 notes would no longer be legal tender. We’ve had 60 communications from the Reserve Bank of India and finance ministry, once even at variance with each other. Obviously, the prime minister has chosen to ride a tiger and he really does not know where it is taking him. But he knows that if he doesn’t tame it soon, he may just be devoured by it. This explains the flurry of activity. It all started with great flourish with the laudable goal of eliminating the evil of black money, corruption, counterfeit currency and financing of terror. Now with barely a week left for the demonetisation deadline to expire, it seems that of the Rs 15.4 lakh crore that was demonetised, most of the black money—estimated to be Rs 3-4 lakh crore—has been laundered, with Rs 13.2 lakh crore already being banked. With banks overworked, there is no way to check fake notes and the government may now have the embarrassing prospect of having more money in banks than the amount of currency in circulation as declared by the RBI.
The government now has the stupendous task of determining how much of this money was black, an exercise to be carried out by the income-tax department, which is not known for its rectitude. Without reforms in rules and regulations—which give great discretion to politicians and bureaucrats—there will be no reduction in corruption. Black money will soon be generated in new currency. This may be why the government narrative has changed from unearthing black money to making India a cashless economy if it is to be considered a modern nation. Again, a laudable goal. The question is, at what cost and how quickly? In spite of the Pradhan Mantri Jan Dhan Yojana, which created 250 million bank accounts, over 45 per cent of Indians are still unbanked. The government argument points to India’s billion mobile phones (although the number of cellphone users is actually in the 600 million range) which can perform digital transactions. But the cellphone revolution has grown organically over many years as connectivity and instrument costs declined. It was not done overnight.
Today, the government is trying to make a virtue of its blundering implementation. Rs 15.4 lakh worth of currency was taken out of the market and, till December 19, only Rs 5.92 lakh crore has been replaced. The government expects to print half the demonetised currency—close to Rs 8 lakh crore—by the December 31 deadline. It thinks this will force people to shift to digital payments. At present, a minuscule 2 per cent transactions are digital, compared to advanced economies like the US, where it is 45 per cent. It is not clear how much of the cash the RBI intends to replace. But if the cash crunch continues, this will be a prolonged painful process, causing much suffering to the poor. The challenge for India to make more digital payments is enormous.
Our cover story examines how this process will unfold. The good news is that India has the backbone for a digital payment society. Digital tsar Nandan Nilekani, who was interviewed by Group Editorial Director (Publishing) Raj Chengappa, believes personal consumption expenditure will quickly go up to 20 per cent digitally. The Aadhaar card can be used to create bank accounts through micro ATMs. India is a country of jugaad, as seen with money launderers. As IT minister Ravi Shankar Prasad is fond of saying: “Indians first observe technology, then they adapt it, and after that they adopt it.” Hopefully this is true.
The onus, therefore, is on the government to overcome this Modi-made crisis. As World Bank chief economist Paul Romer likes to say, a crisis is a terrible thing to waste. It has positioned Prime Minister Modi as a crusader against corruption, a moderniser and a Robin Hood, all rolled into one. The acid test of his audacious move will soon be seen in the state elections of Uttar Pradesh and Punjab. As a magazine that has chronicled history as it happens over the past 40 years, we like to take the long view. If demonetisation reduces corruption, increases funds for public welfare, minimises government, changes election funding, and accelerates economic growth, then the Prime Minister will have established his place in history as a true reformer and India will be well on the road to becoming a modern economy.