It is perhaps easy to surmise, based on the widespread disruptions of the past 50 days since Prime Minister Narendra Modi announced the demonetisation of high-denomination currency notes, that the intellectual argument for doing away with “the curse of cash” has been irremediably lost.

After all, you don’t need satirical social media memes — of which there are plenty — to remind you that it wasn’t just black money hoarders who were traumatised and inconvenienced by the overnight withdrawal of ₹500 and ₹1,000 notes.

Given the unvarnished reality of India — where, rightly or wrongly, the levers of the microeconomy continue to be greased by the lubricant of cold, hard cash — the extinguishing of about 85 per cent of the notes in circulation induced the currency equivalent of a cardiac arrest.

And given the Modi government’s artless articulation of specific policy objectives, its constant shifting of the narrative goalpost, and its tragi-comic tweaking (on average about twice a day for 50 days) of the microdetails of the guidelines for currency deposits and withdrawals, the case for a cashless society could not have been made more inexpertly.

The case for ‘less cash’

But it would be unfair to dismiss the merits of the underlying argument based solely on the flawed implementation of the policy. There is, even today, a persuasive case to be made — in India, and in many other countries — for “gradually doing away with high-denomination currency notes”.

In his book The Curse of Cash , Kenneth Rogoff, former chief economist at the IMF, makes a forceful pitch for just such a radical move in the interests of discouraging tax evasion and crime.

Rogoff’s point is simple, and one that he has been making for nearly two decades: phasing out high-denomination currency notes over a period will make it progressively difficult to engage in recurrent, large and anonymous cash payments (which are typically correlated with crime, including tax evasion). But small-denomination notes can and must be around indefinitely.

Thirdly, phasing out paper currency can clear the way for central banks in recession-hit developed economies to overcome the monetary hurdle of the “zero lower bound.”

Rogoff’s authorial preoccupations are centred rather more on the US and Europe: in fact, India figures only peripherally in his mindspace — and even then only to say that India currently lacks the financial inclusion infrastructure that is a pre-requisite for transitioning to a “less cash” economy.

Nevertheless, the points that he marshals in defence of his policy prescriptions for a “less cash” society apply, with some important tweaks, to India too. Virtually every one of the criminal activities that Rogoff says are facilitated by the “curse of cash”” — from corruption to tax evasion to sponsorship of terrorism to counterfeiting to human trafficking — applies with greater malefic effect to India.

Where the Modi govt erred

The foundational premise that underlay Modi’s dramatic demonetisation announcement was, in that sense, rock-solid. The problem lay in the timing and the implementation.

As Rogoff points out in a passage that the Modi government’s policy advisers evidently overlooked, “the speed of transition (in phasing out high-denomination currency) needs to be slow, stretching changes out over at least 10-15 years. Gradualism helps avoid excessive disruption… It puts authorities in a position to make adjustments as issues arise…”

More critically, Rogoff writes, “it is essential that poor and unbanked individuals have access to free basic debit accounts… and possibly also basic smartphones.” Modi is manifestly a man in a hurry — and in any case, there is no certainty that he will be in power for 10-15 years — so he appears to have abridged the Rogoff-recommended transition time-scale to 50 days.

Additionally, he and his policy advisory team made the cardinal error of putting the ‘demonetisation’ cart in front of the ‘financial inclusion’ horse.

And their failure to foresee how the corrupt entrenchments would leverage the gaping loopholes in the system (such as the tax shelter for agricultural income and for political donations below a threshold) reduced them to a bunch of hopelessly ill-equipped fire-fighters.

Rogoff is, among things, a chess Grandmaster, the honorific given to those who have attained the highest level of distinction in the game. And even in his policy prescriptions, he exhibits an ability to think several moves ahead.

He anticipates every one of the arguments that critics of a ‘cashless’ or ‘less-cash’ system raise, such as the risks of hacking and the threats to privacy, the possibility of ‘cyber blackouts’ or power outages during natural disasters (such as Cyclone Vardah recently), and even ‘what if I drop my cellphone in my bathtub?’

In every case, he provides practical survival tips and concludes that “one can think of endless objections to change, but most are quite superficial and can be easily dealt with, especially given a long transition period.”

Monetary musings

After making a persuasive case for a ‘less cash’’ system on all these counts, Rogoff commends it for reasons that are linked up with arcane monetary policies. His prescriptions in this space are no less provocative. Central banks in developed economies, Rogoff notes, have been grappling with the “zero bound constraint”: that is, they find themselves unable to invoke unfettered negative interest rate policies in order to fire up recession-mired economies and get out of a deflationary spiral.

That’s because in the cash-based system as it exists today, negative interest rates would trigger a stampeding into paper currency, which at its core works like a zero-interest anonymous bearer bond, in the sense that it at least preserves value in a deflationary environment.

Rogoff argues that doing away with paper currency would provide such central bankers with endless “magic bullets” and allow them to go deep into negative-rates territory and do “whatever it takes” to raise inflation expectations. In his reckoning, negative interest rates are more potent than “quantitative easing” and offer central bankers a way around the monetary policy paralysis that has gripped developed economies. Like a chess player playing many opponents simultaneously, Rogoff views “the curse of cash” through several prisms, and offers a compelling rationale of the merits of a ‘less cash’ economy. The imperfections that showed up in India’s implementation of the policy can be traced in large part to the cherry-picking of policy prescriptions and the collapsing of the time-scale for the transition.

A more complete understanding of Rogoff’s intellectually robust recommendations may have yielded more gainful results than the demonetisation exercise in India seems fated for in the short term.

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