What government and media failed to tell the people on demonetization

Suppose I borrow your car for a road trip from Mumbai to Lonavala and promise to bring it back safely. But I am a careless driver. I screw up and drive your car at high speed into a large tree. The car is destroyed.

No wonder you are furious with me. But I am a fair minded guy and I promise to make good for the damages I caused. So, I offer to buy you a similar car. But maybe you don’t want a car. Instead of the car, you want me to give you 5 buffalos, 3 chickens, 1 camel and 1 cup of milk from a female tiger in Corbett National Park.

I’ve never bought a buffalo before. I don’t know where the cattle market is. I know even less about where to buy a camel. And how am I supposed to get you the tiger milk! Come on, be reasonable.

But you don’t have to be reasonable. You insist that I OWE you for the car. I can’t get out of this. I must honor my debt.

This is where the government provides a way out.

untitled

It’s the concept of legal tender. All I have to do is offer to pay you for the car in Indian Rupees. You can take it or leave it. No, you can’t insist on being paid in chickens or camels or tiger milk. It’s the LAW. If you don’t want the Rupees, you can take a hike. Sad day for you.

So, here is what got lost in the entire slanging match over demonetization.  Here is the thing which, had it been communicated clearly by the government and spread around by the media, would have eased much of the pain and panic that we saw over the last one week. The lines are easing now, but even this much pain could have been easily avoided. Rather we would have seen an orderly deposit and exchange of notes at banks until Dec 30, 2016 with minimal inconvenience to the public.

On Nov 8, Narendra Modi did NOT announce a ban on notes of Rs 500 and Rs 1000. All he did was declare that those notes  would cease to be legal tender.

In other words, all that happened on Nov 8 is that people of India were no longer under any legal compulsion to accept Rs 500 and Rs 1000 notes as payment. They were just as free as always to voluntarily accept and trade in those old currency notes. At any time during the next 50 days, you could choose a time of your convenience and deposit/exchange those notes at a bank or post office. If you miss the deadline, the RBI would still exchange the old bills until March 31, 2017. Then, why rush?

Here both the government and the media are at fault. In the big Nov 8 speech (or at least in later pronouncements by the PM, the government, the top bureaucrats and the RBI), it should have been clearly communicated that notes had not been banned and people should have been encouraged to keep trading as usual in the old notes as the new currency was slowly pressed into circulation. Instead of doing lazy reporting from long lines, the media should have helped to educate the public. Ok ok…the second suggestion is outright laughable. To expect clear thinking from the media… lol. Especially when so many editors have just lost a lifetime’s worth of black money themselves (we all know the reality).

As long as you can account for the notes you deposit at the bank, there is literally nothing to worry about. The old notes are not worthless…no…not at all! As long as people are willing to trade in them, they are worth just as much as they used to be. The notes are guaranteed by the government upto March 31, 2017 and rather easy to exchange until Dec 30.  There was no reason to panic and stand in line last week. Absolutely none at all.

Side note: It could even be argued that the notes  would retain worth indefinitely, as long as people are willing to trade in them. Anything can be used to trade, from cups of tiger milk to drops of goblin blood to shiny pieces of paper we call banknotes. Although, this is a bit of grey area, for many countries do criminalize bartering…not for any morally clear reason or right/wrong, but merely because bartering prevents the government from collecting taxes. But I won’t go off here on a libertarian tangent about “what is money” and “fiat currency” and “alternative currencies” and whether we should even have central banks, but the topic is rich and vast. I’ll stop here.

Advertisements

11 thoughts on “What government and media failed to tell the people on demonetization

  1. CW..Good post!….you are so right! But humans don’t want to take risk with their hard earned money!!…hence the panic!

    Unfortunately hardened corrupt people will use this fact and try to save their ill gotten money till the last day!

    Like

  2. I have to disagree with your perspective. It is not as simple as what you have made it. Government has given only select persons i.e petrol pumps, hospitals etc to accept notes till 24th November (initially it was 11th November). Others cannot accept these notes and sell their products and services. Definitely they would be able to accept the notes and sell their products. Only risk is that after they deposit the money in bank account before Dec 30 when they go for tax assessment, they would have to explain how much was the cash balance as on 8th November and how much post that. Cash in excess of 8th Nov balance would be considered as black money. Otherwise the black money holders would convert the money into assets like gold, land etc and the very purpose would be defeated

    Liked by 1 person

  3. I agree with you Raghav, I have been following this blog for some time I find for the first time our beloved Chaiwala has got carried away. He should also take note of the news floating around regarding advancement of date from 18th to 8th following leakage of images of 2000 note on social as well as print media. if i recollect RBI has instructed banks to re-calibrate ATMs for 100 rs notes under the disguise of Clean note policy. such a massive exercise has its own set of unforseen demons. I believe Chaiwala is a engineer by Profession and I am CA. so we both know what can happen to a well planned project at last moment.

    Like

  4. CW,
    Allowing old notes to circulate in an unrestricted fashion post Nov 8 would have made it easy for black money to change hands and become white. The letter and the intent of the govt announcement was to make any transactions in old money illegal and businesses to only turn in old notes to the extent of cash flow until Nov 8.
    Your perspective on voluntary exchanges is interesting – of course people can also use marbles as currency if both parties like. There are two problems – first tax laws require you to value your transactions at market value and pay tax accordingly. Secondly, medium of exchange draws value based on intrinsic value eg gold or govt fiat eg paper notes. The moment govt makes its support for its currency conditional, it loses value as a bearer instrument.

    Like

  5. The flexibility proposed in the post would surely have defeated the purpose. Imagine when over several tones of gold changed hands for black money between 8 pm to midnight in just four hours, what would have happened if we made acceptance voluntary for everyone indefinitely. And by the way so many deals are still going on illegally. As for as pain in the Qs is concerned it couldn’t be avoided in any case. Half of Qs are by hired hands changing for others on commission and many more are converting much beyond their requirements. It needs a little consideration for others and for your country and there would be no problem. These days you hardly require cash for day to day life. I am a pensioner. I took new notes from my account and not from any Q and gave in advance a 2000 rupee note to morning store in advance to take care of my daily milk and vegetable needs for several days. There are many who are using Paytm. So if there is no other agenda the transition is not that difficult. It is laudable that Govt. is responding to difficulties on a daily basis and taking suitable measures.

    Like

  6. I agree with Raghav and bipanblog, and disagree with Chaiwallah — one of the few occasions where I do so. If the old notes can still be used in financial transactions “by mutual consent” then the holders of black money would have ample time to convert it into other assets. A more relevant suggestion is one made by Nupur Sharma on her blog (@unsubtledesi) that the PM should take great pains to distinguish between “cash holdings” and “black money.” I think this difference has not been articulated sufficiently.

    The suggestion that the media should help to ease the transition is as laughable as — well what can I say — a suggestion that the judiciary act fairly and impartially. Haven’t people read various tweets stating that the media is *paying people to stand in lines” just to spread panic?

    Somehow people keep harping in big bad businessmen getting their black money wiped out, and keep forgetting that while the businessmen are the PAYERS, there are also RECIPIENTS. Who are these? Again people keep harping on politicians like Mamata etc. But equally (or perhaps more) money is in the hands of media persons, bureaucrats, judges, etc. It is no wonder that judges, including the “Cheap Justice of India,” have now started inciting to riot, a la Krajiwal.

    To me the really interesting question is whether Jai-Italy knew about the move or not. He is going around pretending that he did, but that would be natural, because it would be a monumental embarrassment to the alleged Financial Minister of the country NOT to know about the biggest move in history. But somehow I am guessing, from the total absence of any leaks, that Jai-Italy did NOT know ahead of time (though he is of course busy planting stories in the media that he DID know). What do readers think?

    Like

  7. I read and re-read this blog, but have hard time understanding logic. Let us say I don’t earn enough to pay taxes, yet I have five thousand Rupees in 500 and 1000 denomination. Now why my grocer should accept my 1000 Rupee notes as payment for grocery? Won’t he have to stand in line to get rid of my 1000 Rupee notes? And just like the grocer if nobody accept my notes and I have no other money to buy grocery, shouldn’t I have to stay in the line for exchange?

    Although secrecy for the measure is the key, I believe what Narendra Modi could have done is, call all important players in a large conference room with ample facility for food, drinks etc. Lock them in and announce the idea Modi had in mind and let all of them discuss pros and cons, for however long it takes and come up with perhaps a little better implementation. Something like brain storming.

    Like

  8. First time, I dont agree CW. The purpose is to remove black money and also terror funding. It would have been a lottery for the black money holders. Yes, agreed that GOI should have taken enough measures, but for such a big country, some inconvenience was supposed to happen. I would say Indian media never thinks about nationalism. So, it is of no use to hope anything from them. In-fact they were also victims from this surgical strikes along with crooks.

    Like

  9. For honest tax payer and common man, time between November 9 and December 30 was good enough to exchange cash that he or she has kept at home/office. So, I agree with the following statement -“There was no reason to panic and stand in line last week. Absolutely none at all.”

    Traders and small business owners who do not deposit their cash in banks on a daily basis are at fault and should not blame Govt for the inconvenience. Anyway, they can easily deposit all their amount in bank account if they are honest tax payers.

    Like

  10. i disagree with ur interpretation of the legal tender definition. U see the GOI did the correct thing by removing the notes entirely and all of a sudden, otherwise people with black money would have kept trading it for some goods which they would have sold back latter on to get their cash back. Now with the announcement of the demonetization and asking people to stop accepting the notes it ensured that black money cannot be circulated and all the legitimate money has to come to the system once to get purified.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s