Partial Demonetisation and Behavioural Change by Anil Padmanabhan

It is three weeks since the Union government undertook the dramatic step to partially demonetise currency notes of the valuation of Rs500 and Rs1,000. In this period we have been witness to some of the most acerbic public debates—in social media, Parliament, drawing rooms and even public spaces. In the ensuing binary discourse, historians and commentators have pontificated as economists and some of the latter (like former Prime Minister Manmohan Singh) have morphed into polemicists to make their arguments. In the process, a key collateral gain is being overlooked: behaviour change.
Imagine if you are told one day that your daily newspaper will no longer be delivered as a printed copy, but digitally. Your reading habits and morning rituals are bound to be disrupted; some of us may well stop reading newspapers altogether. A similar disruptive moment has been brought upon us by the decision of the government to withdraw the two denominations, which together account for nearly 90% of the value of the rupee in circulation.
Unlike the newspaper example though, this transition from cash to less cash (and eventually digital) is not optional. Which is what makes it tougher and also something many free-spirited citizens believe to be an imposition by the state. And given that it intersects technology, it is not an easy transition to effect (an understatement actually, given the overlay of digital divide and poverty in the country and, of course, the legacy of financial exclusion).
Anecdotally though one is hearing of people undertaking this transformation. Naresh Guliani, the kirana store owner in my neighbourhood is an example. Immediately after demonetisation he baulked at the idea of an e-wallet (understandable given that he relies on his two landlines to talk to his clients, preferring to keep his mobile phone switched off); three days ago (after he was duly educated on the virtues of going digital by his teenage daughter) he settled my pending dues through an e-wallet (confession: I too acquired one only after 8 November). Count every such instance and you have a steady accretion of the number of banked in the country. More importantly this is merging the informal economy into the formal economy. Yes, while it makes one accountable (some more than others) it also brings with it attendant benefits. For example, at present, nine out of ten of the 470 million workforce do not avail of social security and workplace benefits—enjoyed by their counterparts in the formal workforce.
Demonetisation and the resulting transition to a formal payments regime will only accelerate the trend—formalization of the informal economy—already in place following the adoption of disruptive technologies embedded in the share economy (like Ola, Uber or Airbnb). This can only abet growth.
In a recent column in India Today, Nandan Nilekani, the former boss of Infosys Ltd and probably more famously the man who gave us Aadhaar, said as much: “India’s economy is largely informal. But once a taxi driver becomes part of Ola, then in fact he (or she) becomes part of the formal economy. He is able to use data, get a loan, buy a car and start paying taxes. So the formalisation of a few hundred millions of Indians will spur growth.”
Sharing such benefits also has one important implicit gain: embracing of a rules-based regime. To avail of payments in a formal set-up you need a bank account/e-wallet and for that you need an identity (Aadhaar, for example). And of course, those in possession of black money cease to get the pass they have got for so long; the clear signal is follow the rules or face the consequences or at the least it raises the cost of generating black money.
For most of the last seven decades, India has pursued an exception-based regime, manifesting in crony capitalism, accumulation of black money and elite capture of every institution in the country. The only way to break this hegemony is to adopt a rules-based regime. And hopefully partial demonetisation is another step in that direction.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus
Comments are welcome at anil.p@livemint.com

Comments

Renu said…
Modiji has taken this step without worrying about his prospects, hich no other leader could afford to do.It may not bring 100% compliance, but will certainly bring down corruption in the long run.
J P Joshi said…
I agree with you Renu. I too feel the same way and am a great supporter of the present PM, because after a long time we have a politician who can lead people out of the mess that we have got into. People do understand that it is now or never and that is the reason for large support to this measure; this inspite of grave provocations from the affected parties, which includes politicians, bureaucrats, journalists, businesses, etc. and hardships for the common man. I am confident that something good towards nation building will come out of this exercise. I am eagerly awaiting his speech to the nation tomorrow at 7:30 pm on the New Year eve.
How do we know said…
yes.. when this change happened, I also focused on the Bottom of Pyramid Economy joining the formal economy, and the sheer size of it had be gasping.. here is the article on that : https://www.linkedin.com/pulse/what-size-all-cash-economy-bottom-pyramid-india-nidhi-arora