Demonetisation : What lies Beneath?
One of the least noticed
features of the introduction of
economic reforms in India 25 years ago was the manner in which addressing a short-term payments crisis on the country's external accounts became a pretext for the government to introduce—without any debate befitting a supposedly democratic society—sweeping, long-term changes.
One need not be a votary of the license-permit raj to have observed the stealthy manner in which international financial institutions dictated the key policy shifts of the next decade of what (inappropriately) came to be called "liberalisation" ('corporatisation' would be a more accurate description). It permanently changed the very character of Indian economy and society, not to forget the ongoing devastation of the country's ecology.
Unemployment remains huge, inequalities have risen alarmingly in this past generation and, ominously, over 400, 000 farmers have committed suicide. The last fallout being a direct consequence of the open-economy agriculture dictated by the agreements under WTO.
Meanwhile, more than 4,000 multinational corporations are doing lucrative business in India today. Whatever else they may have achieved, the stealth reforms since 1991 have certainly gold-plated their way.
PM Narendra Modi's recent demonetisation call—shrouded in high executive secrecy—is deeply reminiscent of the manner in which the reform era began in 1991.
Its long-term significance in terms of digitising the Indian economy in the global corporate interest should not be underestimated. Its far-reaching implications are likely to last much longer than the man who brought it about.
Those running the larger world have a keen grasp of how policies favourable to their interests can be enacted through Indian leaders, ever conscious of their global ratings, no less than of their domestic popularity.
It is slowly dawning on a few waking heads that Modi has not acted as a cashless solipsist in a country that runs mostly on cash.
There are forces much more powerful than him who have successfully utilised his impatient political opportunism, his high office and his inflated popular image to push through the demonetisation of currency notes of the highest denominations, ostensibly aimed at removing black money, a shortage of cash in the country.
Their aim? To nudge, and shove where necessary, Indians well beyond the aspirational classes to end their digital deprivation and begin making payments for their transactions electronically.
According to research conducted by the Boston Consulting Group there is an annual jackpot of $500 billion (a quarter of India's GDP) waiting to be made within the next five years in the digital payments industry. But this is only if millions can be persuaded to abandon cash as the preferred mode of daily transactions.
Even if the top half of the Indian population can be drawn into the digital net, there are big fortunes to be made. The bottom half can be ignored, unless they become politically restless and vocal.
Events of big consequence in history are polysemic in their significance. Whatever his own motivations might have been, in effect, Modi has been prompted by the globally-agile digital finance companies to demonetise and drain the liquidity out of the banks (damaging banking as people have known it), effectively compelling hundreds of millions to go digital.
The recapitalisation of Indian banks is temporary and incidental. Indian banking is all set for a disruption. The digital disruption of banking is as inevitable as of media and retail have been in the past.
Digital payments are a possible threat to traditional banking everywhere now (as this McKinsey Report makes clear).
Once digital payments banks have taken over, banking would reach almost every Indian in the next decade (or so Indians are told) and the mobile would have become a virtual ATM. Airtel will go where ICICI cannot.
A handsome share of this digital booty is likely to accrue to the already wealthy. Two days after the announcement of demonetisation on 8 November, an important business event took place.
Jio Payments Bank, a "first-of-its-kind" joint PPP venture between Reliance Industries and State Bank of India, was incorporated.
It aimed to marry Jio's mobile subscriber base and SBI's vast national database to build a formidable distribution network and grow into what is likely to be one of India's largest companies in the future.
Reliance has already invested over $20 billion in 4G infrastructure. It is obviously quite sure of making good on the huge investment.
'Jio Payments Bank' is one of the several other banks slated to occupy the digital payments platform in India. Others in the Fintech game with Jio are Airtel Payments Bank, Paytm Payments Bank, India Post Payments Bank, NSDL Payments Bank, Aditya Birla Idea Payments Bank, Fino Pay Tech, and Vodafone m-pesa.
These entities have globally dispersed ownerships, though their promoters are Indian.
Recently, IT billionaire Nandan Nilekani, one of the architects of Aadhaar, and now one of Modi's consultants, drew attention to the merits of the digital transformation of banking by pointing to the key breakthrough of a 'Unified Payment Interface' (UPI) launched by RBI Governor Raghuram Rajan before he left his job.
UPI greatly simplifies the transfer of money by consumers. Nilekani argues that this will "shift the business models in banking from low-volume, high-value, high-cost and high fees, to high-volume, low-value, low-cost and no fees".
There is a strong constituency both in the corporate sector and the government which believes it thus has the "solution" to financial exclusion. The expected windfall of profits is incidental, of course.
Modi has always been a digital enthusiast. With the creation of more than 250 million Jan Dhan bank accounts for the hitherto financially excluded, and its huge promotion of the Aadhaar card (a creation of the UPA government before him) as a means for accessing financial services and the transfer of subsidies—all that the Modi government thinks it now needs in order to push the Indian economy towards cashlessness is a mobile-mediated digital payment system.
To its thinking, Jan Dhan and Aadhaar-linked mobile payment (JAM) will achieve the desired goal of digital villages—where mobiles are already available on EMIs. Just like most of India skipped land-line telephones to acquire mobiles, it is believed that there is no longer any need for physical bank branches across the country. Mobile phones will be enough.
Small wonder then, that the government's Niti Aayog has been cooking up schemes to financially "incentivise" digital payments in grassroots India, long accustomed to cash.
The prime minister's pro-poor rhetoric at his public rallies notwithstanding, it is perfectly clear what this government's actual priorities are. If some of the poor can also be seen to benefit, all the merrier.
Cashlessness ("less-cash" for the time being) has from the beginning been the unstatable long-term goal of the plank of policies of which demonetisation is likely to be the first.
The full digitisation of the economy is the greater goal. The process may take 10-20 years in all, but the globally-agile plutocrats have made a daring start in (a napping) India.
'Black Money' (or busting terrorist financial plans) was just the excuse/pretext to usher in digital coercion. It is hardly the main goal.
Cashlessness will make even plastic obsolete. In addition to working as a virtual ATM, the mobile will work as a debit (and in favourable circumstances in the future, a credit) card too.
What Modi and the digital payments artists in India are doing is completely in line with the recent World Bank line for developing countries.
A World Bank Press Release approvingly quotes the CEO of Bill and Melinda Gates Foundation: "Governments have to take the lead and drive digital financial development forward... We need governments to establish the vision, the digital platforms and the regulatory assurance to pull the hundreds of millions of currently-excluded people into full participation in the modern economy." (Bill Gates has himself offered an enthusiastic endorsement of demonetisation).
And governments are doing just that.
Nobody—beginning with the previous Governor of the RBI—with any knowledge or experience ever believed that demonetisation would put an end to black money, even temporarily.
The very fact that—half-way into the 50 days the prime minister had asked for—most of the demonetised currency is already back in bank deposits, is a tribute to the resilience of laundering habits in the country.
If the isolation of black money was the main goal of demonetisation, as the government has repeatedly been telling the people, it is failing miserably. Another few weeks will make the picture perfectly clear.
It is the drive towards a cashless economy which is likely to outlast the hunt for black money (which can resume its journey after a gap with the help of the new currency notes).
The assumption, all along, is that digitising the economy would enable a full record of transactions, robbing the cash-driven parallel economy of its informal, invisible power.
Formalisation of economy in this manner, people are told, will somehow make human economic behaviour more honest.
In fact, a claim could be made quite convincingly that digitisation might ultimately greatly increase the scale and impenetrability of the black economy. Technology is not known to impart a conscience to human beings, somehow rendering them more honest, even if it sometimes appears to make cheating difficult for small thieves in the short-run.
In a time of digital opacity, the risks are particularly high. Don't believe this author, just go and speak to regulators anywhere who have to deal with the mounting menace of offshore banking where astronomical fortunes casually evade the hawk eye of governments across the world.
The sums involved make the black money the prime minister has gone after in his stentorian moral crusade seem like bashful pennies.
In fact, it is worth asking him why he has so far failed to take any action against the large unaccounted fortunes hidden in offshore accounts, which appear to be the final destination of much of the wealth spirited away from the country.
Unsurprisingly, the frequency with which the prime minister has mentioned "black money" or "fake notes" has declined sharply if one tracks his speeches through the month of November.
At the same time, the objective of moving India towards "cashless" digital payments has been heard much more frequently in his speeches. The goal-posts have shifted noticeably to prepare the public for what is to come, especially after the patience of the anguished public wears thin after the promised day of reckoning, 30 December.
The popular appeal of demonetisation—and the reason why Modi Sarkaar still survives despite the criminal disruption of the Indian economy—rests on the government's claim that it will put an end to black money in the country.
If things had been presented to the public the other way around, and the government had been up front about the objective of achieving a cashless India (the removal of black money being but a secondary goal), there is little doubt that the policy would have been immediately unpopular.
As things are laid out, it will take a while for the public to see through the rhetoric of patriotism. This is how stealth reforms are meant to take effect. Meanwhile, just like in 1991, the economy is subject to fait accompli policy-making, digital coercion being a necessary part of the bargain.
Aseem Shrivastava is a Delhi-based ecological economist and writer. He is the author (with Ashish Kothari) of Churning the Earth : The Making of Global India (Penguin Viking, Delhi, 2012).
[Courtesy: CatchNews, Source: http://www.catchnews.com/india-news]
Vol. 49, No.27, Jan 8 - 14, 2017