Cashless economy brought about by demonetisation hurt the poor and the economy

I have been invited to write a comment on the ‘failure’ of the Demonetisation exercise of Prime Minister Modi. True, it was an obvious failure if you judge it by its declared objective of fighting corruption, terrorism funding and tax dodging.

Almost all the demonetised banknotes were deposited in banks and thus re-inserted into the legal economy. It was a failure also if judged by the secondary goal of promoting financial inclusion. Rather than helping the poor by giving them access to modern means of savings and payment options, demonetisation disproportionately hurt the poor, as they were robbed of the free means of payment that they used to have at their disposal: cash and which was working well for them.

Those well integrated into a social web of support found ways to cope. Those at the margin of society, like migrant workers, suffered tremendously from being temporarily excluded from participation in the monetary economy.

It would be unthinkable for a US-government to take most of the cash out of circulation at four hours’ notice. If it is done in India to Indian people, however, it is alright!

Representatives of the US-Government praised the measure. Bill Gates, head of the richest foundation of the world, declared the overall benefits well worth the temporary suffering of the poor. So did the Better Than Cash Alliance, of which the US-Government and the Gates Foundation are the two core members.

The excitement in the US about demonetisation is understandable, if inclusion is taken literally to mean locking-in, i.e. locking-in of all money in the commercial financial sector. In 2015, at the Financial Inclusion Forum in Washington, PayPal’s CEO Dan Schulman explained: “Financial inclusion is a buzz word for bringing people into the system.” And Bill Gates elaborated at the same occasion that the US-government had to make sure that financial flows take place in a digital system in which the US-government can “find those transactions that you want to be aware of or you want to block.”

Gates also said: “It is certainly our goal to make full digitalisation happen in the next three years in the large developing countries. We have worked directly with the central bank there (India) over the last three years.” Nachiket Mor is head of Gates Foundation, India. He has also been a member of the central board of the Reserve Bank of India until recently, with responsibility for financial supervision.

Demonetisation has been quite successful in bringing Indian people into “the system”, in which they can be tracked. It is not far fetched to assume that this was demonetisation’s real goal. “Our dream is that there should be a cashless society”, said Narendra Modi less than three weeks after the start of demonetisation in his monthly ‘Mann Ki Baat’ address.

He had entered a commitment to this goal when he visited Washington shortly after his election in 2014. On this visit, a partnership was announced between USAID, which represents the US government in the Better Than Cash Alliance, the Indian Ministry of Finance and a host of US and Indian companies interested in digital payments. When US President Barack Obama returned the visit in 2015, one of Modi’s welcome gift was India joining the Better Than Cash Alliance.

Besides the US Government and the Gates Foundation, the Better Than Cash Alliance has key commercial members with their own interests. These are Visa and Mastercard, the US card payments giants which dominate the world market and Citigroup, the world’s largest bank at the time the Alliance was founded.

Shortly before demonetisation, US consulting firm BCG and Google published a report in which they called India’s payment market as a “500 bn-Dollar Pot of Gold” After demonetisation started, US investment bank Morgan Stanley listed Visa, Mastercard and Amazon among the likely top beneficiaries.

Commercial banks like Citi dislike cash just as much as credit card companies. Instead of making money on it, as they do on digital transactions, it costs them money to handle cash. Worse, people can take their money out of the banking system in the form of cash, if they lose trust. This limits the ability of the banking system to enter large financial bets.

The less cash is used, the more money takes the form of bank deposits. The more deposits banks control, the more profitable business they can venture into. Arundhati Bhattacharya, CEO of State Bank of India, was outright euphoric in an interview with Germany’s Handelsblatt newspaper, about the amounts of money that flowed into the banking system. She said that deposits grew in a way they have never experienced before. “Before the reform, we processed 950 million debit card transactions a month. 50 days after Demonetisation it was 3.9 billion.”

From the perspective of the commercial members of the US-Indian partnership, demonetisation was a resounding success. Usage of mobile wallets tripled in 18 months after demonetisation, usage of debit cards at point of sale doubled and the increase in usage of credit cards increased substantially.

Bhaskar Chakravorti is Director of the Institute for Business in the Global Context at Tufts University, an institute funded by the Gates Foundation and Citi. In his judgement on demonetisation in the Harvard Business Review, he admits that demonetisation failed in terms of its professed goals and that poor people and the economy were hurt.

Not a problem, though, he continued, since the main lesson is something entirely different. Noting that Modi scored big successes in midterm-elections despite the hardships associated with demonetisation, he wrote: “When people feel that you’re fighting for them, it seems even the most concrete evidence wields less and less influence. Ultimately, the victory of the narrative over data may be the takeaway from India’s demonetisation saga.”

Making grandiose promises with no regard to evidence is indeed the strategy that the Better Than Cash Alliance is pursuing with determination. They are claiming ad nauseam that digitalising payments will help end poverty and lead to leaps in growth. It does not matter that there is plenty of evidence to the contrary.

This article was first published in the National Herald on Sunday