Demonetisation Is A Welcome Disruption For The Indian Economy

The scrapping of high-denomination currency notes is an unparalleled event in Indian history. An exercise of this nature, where 86 per cent of the currency was sucked out of a system that affects 1.25 billion people, has never been attempted in recorded human history. How this will pan out over the next few weeks and months, and what its intended consequences (tackling black money, counterfeits) and unintended consequences (the switch from cash to digital money, greater financial inclusion) will be will occupy the public discourse for many weeks to come.

One particular question that bothers many well-meaning commentators is, will the Indian public, a lot of them poor and illiterate, be able to cope with a less-cash economy? The answer to the question probably lies in the phrase used by one of the greatest modern economists, Adam Smith, “invisible hand”. It implied that an individual’s interests and survival instincts – for his own benefit – will have unintentional benefits to the society at large.

This writer believes that the Indian public is very enterprising and has, in the past, adapted to disruptive changes with more agility than many commentators give them credit for. This assertion is based on historical evidence.

Computerisation

The first known disruptive change in this writer’s life came in the form of computerisation. The effort was led by Rajiv Gandhi with professional guidance from Sam Pitroda. All opposition parties were up in arms at the time, particularly the left unions, who professed that jobs will be lost in an India that is still illiterate and who wanted to perpetuate an inefficient India that relies on manual book-keeping. Their disdain for computers was well known from the time when their stalwart Jyoti Basu refused to allow the offloading of a supercomputer in Kolkata port. In essence, they were attempting an infant murder of computerisation. But people stood behind the concept of modern India and today, the results are there for anyone to see. The Indian Railway Catering and Tourism Corporation (IRCTC) is one of the largest e-commerce players in the world. Our banking system is now entirely computerised. Our Information Technology services are the envy of several countries. The “invisible hand” forced more people to learn how to use computers, and a new sector was born.

Election process

The election process was the second disruptive change. In those times, Indian elections were known for their notoriety. There was rampant booth capturing, bogus voting, violence and wielding of money power. Every general election used to cost lives. Then came a focused man, T N Seshan. He took on everyone, made tall claims that he would give voter identity cards and electronic voting machines (EVMs) and conduct peaceful elections. Many of us laughed at that prospect in the beginning. He and his successors have demonstrated ever since that an election without muscle power is possible. The “invisible hand” of self-interest has pushed voters – literate and illiterate alike – to adopt voter ID cards and EVMs to protect their democratic right and today, the Indian election process is a model for many democracies around the world. It is a different matter that the visible hand of politicians still leads to the wielding of money power.

Toll roads

The introduction of toll roads was the third disruptive change. In his early days in banking, this writer met the then chief executive of Volvo India who was setting up a new plant to manufacture trucks and buses with air-conditioned cabins and higher tonnage for longer hauls. He was convincing this writer on why we should finance those vehicles even though they were priced at three times that of the competing Leyland and TATA vehicles. He was passionately saying how the golden quadrilateral project proposed by Atal Bihari Vajpayee was going to change the way Indians travel. This writer was sceptical on the willingness of Indian truck operators to pay tolls (and their ingenuity to find alternate routes to avoid tolls). However, when the truckers saw the benefits that they would accrue from good roads in the form of fuel savings, faster travel and lesser maintenance costs, they rapidly adapted to this disruptive change, all in their interest.

Other disruptive changes

The story of Indians embracing the mobile telephony revolution has been told several times. In fact, several sceptics initially derided mobile phones as a rich man’s toy. But today, it is an incredible success story to watch everyone, a vegetable vendor, a plumber, a student or a pensioner, speak on a mobile phone, which would have been entirely unimaginable even just a decade ago.

The most recent disruptive change is the Aadhaar. Former Prime Minister Manmohan Singh, with the help of entrepreneur Nandan Nilekani, attempted the most audacious experiment of providing an Aadhaar unique identity for every Indian. It was a mammoth experiment for 1.25 billion people. The sceptics had a field day. Can we create social security equivalent to the US? The intellectuals were against Aadhaar on the grounds of right to privacy and the possibility of excessive state control on individual lives. However, a billion people enthusiastically adopted Aadhaar when they understood the incentives that would come with it. Nilekani and his team delivered the largest and most cost-efficient system of the world.

These examples and many others from Indian history clearly indicate that Indians are highly enterprising and adopt change quite quickly when they see the incentives associated with it. It is no one’s case that one should be forced to start using digital money through government fiat. But suitable incentives, such as the ones recently announced by the government, can help accelerate the process of moving India to a less-cash economy.

Today, the country has more Facebook users than those who do mobile banking or use e-wallets. Government initiatives and incentives can bridge this gap and move India to a less-cash economy soon. The benefits of such a shift are enormous for the country in terms of tax compliance, black money, counterfeits and more, and should therefore be embraced.