Demonetization, ‘Financial Inclusion’ and the Great ‘Unbanked’

A Prologue

There is a lot of talk these days about ‘exclusion’ – which is almost unquestioningly assumed to be a bad thing. The corollary to this understanding of exclusion is that all inclusion is necessarily good. One hears a lot about ‘financial inclusion’ these days,  which truth be told, makes me shudder. There is thus a lot of angst expressed these days, especially by the rich and powerful, over the ‘financial exclusion’ of the masses. Here is the basic argument (read the full article, disowned by the edit department, here):

Inclusive growth would mean that all sections of society benefit from economic prosperity. A key metric for inclusion is ‘financial inclusion’ i.e. the access to banking services and affordable financial products such as bank accounts, loans, and deposits for all individuals and businesses. When the poorest of the poor have access to credit and savings facilities, this translates to their financial security. They can grow larger businesses, manage consumption and household expenses better and plan for shocks. The standard of living improves and poverty falls, allowing people to contribute more to the economy as well.

Remember, however, before we proceed:

(i) That in 1997, the Asian financial crisis that wiped out the hard earned life-savings of millions of people, in one fell swoop, was an instance of financial inclusion.

(ii) That it was the banks that were fully responsible for the crises across the USA and Europe, 2008 onward. That the Occupy Wall Street movement was basically a movement against the  robbery of ordinary people’s money saved in banks by the banks, who on top of everything wanted to be bailed out with tax payers’ money.

(iii) That very recently Iceland has had to jail 26 bankers responsible for the 2008 financial crisis, “for crimes ranging from insider trading to fraud, money laundering, misleading markets, breach of duties and lying to the authorities”.

(iv) That one of the major reasons India escaped the worst effects of that crisis was because effectively 70 percent of its population still lies outside the banking and financial sector. Of course, the other important difference with the Western capitalist economies was that India’s banks were still largely in the public sector. In other words, banks do not only do what they and the economists say they do. Banks play with the hard-earned savings of the relatively poor, often simply handing handing them over to predator corporations and then writing off!

The Demonetization Gamble

A lot has already been said by now on the Modi government’s decision to demonetize Rs 500 and Rs 1000 notes. Economists and economic analysts from the Left-wing Prabhat Patnaik to others like  World Bank Chief Economist and former advisor to the Indian government, Kaushik Basu and journalist Swaminathan Aiyar have expressed serious doubts about both the rationale and feasibility of the move.  The point has been effectively made by them and others like Arvind Kejriwal (who have been centrally concerned with the issue of corruption and ‘black money’ for a long time now), that this measure does not touch the real big players in the game of black and unaccounted money. Big corporate sharks don’t need to go the ‘black money’ route because government policy itself is written by them and everything they do is made ‘legal’ either in advance, or retrospectively, because the government is in their pockets. Of course illegal activities even at those high levels often go on nevertheless, because the power-corporate elite has become so used to the idea that nothing really matters in this country – that everything they want is theirs. And in any case, the real big money lies deposited in Swiss banks or in circulation elsewhere, in other forms.Black money, it has been pointed, is not a ‘hoard’ that lies idle, stacked away in pillow cases and mattresses but is in fact, something that circulates. ‘Black money’, as Patnaik rightly points out, is linked to “a whole set of activities which are either entirely illegal, such as smuggling, or drug-running, or procuring arms for terrorist organizations, or are undertaken in excess of what is legally permitted, or are not declared at all so that taxes are not paid on them”. ‘Black money’, in other words, constitutes what is often called a ‘parallel economy’. Now this is not a simple and self-evident term. While we can easily recognize things like smuggling (and of course, ‘terrorism’), we may miss entirely the parallel economy of political parties that reaches a frenzied pitch before as crucial elections approach. This economy produces votes through a range of investments – all too well known to be repeated here but the important thing is that all of them depend on cash. However, for the moment, I want to focus on something else.

Patnaik’s list refers to three kinds of activities: (i)  those that are entirely illegal such as smuggling, drug-running, terrorism etc (ii) those that exceed the limits of what is legally permissible. But it is the third kind of activity that one needs to look at more closely: those that are not declared and therefore pay no taxes at all. This third set includes the large sector that we normally refer to as the ‘informal economy’. The informal economy has been in the news, in the last few years, for reasons very different from what it has traditionally been known for. As we wrote in Kafila in 2009, citing a Wall Street Journal report:

“Economists have long thought the underground economy — the vast, unregulated market encompassing everything from street vendors to unlicensed cab drivers — was bad news for the world economy. Now it’s taking on a new role as one of the last safe havens in a darkening financial climate, forcing analysts to rethink their views”, states a recent Wall Street Journal report

“With the spread of industrialization and wealth, they [economists] thought, underground endeavors would be replaced by factory and office jobs. Rickshaw drivers would get replaced by big transport companies, while street-cart vendors would give way to restaurants that paid taxes and observed health codes.”

This was the goal that economists and policy-makers not only expected but actively worked towards – the elimination of the informal sector. The reason why at least some economists and analysts  were rethinking its role was because it managed to stay virtually unaffected by the financial crisis. What is more, they realized that in many third world countries, people losing jobs in the formal sector due to the crisis, managed to find a decent livelihood in this sector. The important thing that many people were realizing was that the informal sector was providing reasonable livelihoods to people who could not find a place in the formal economy, not that this sector was not paying taxes. Dominant opinions, including those that drive the Modi regime, however continue to fantasize about ‘smart cities’ and ‘cashless economies’, where every single economic transaction would be recorded and taxed (including ever new taxes like Swachchh Bharat).

In the context of the demonetization of 500 and 1000 rupee notes, an earlier post on Kafila Baidurya Chakrabarti had drawn attention to this informal sector and argued that

RBI statistics shows that 80% of monetary circulation in India consists of Rs 500 and Rs 1000 notes…Modi’s demonetarization is announcing more than 80% of this country’s monetary economy to be suspect and henceforth made pariah. If the 80% of a country’s (monetary) economy is ‘unaccounted-for’, is in all probability ‘black’, then can that really be called ‘black money’? Lest we start calling the largest economic sector of India—the Informal sector—‘black’, we should give up on this absurdity of ‘black money’.

It is this that the Modi regime has struck against. It is, after all, elementary that if you really want to tackle the black money that moves in the other circuits identified by Patnaik, then you should attack it right there. As AAP leader Sanjay Singh put it in his interview to ABP News, the two things should have been done in that case was to

(i) act against all those who hold accounts in Swiss banks and those whose names figure in the Panama papers leak and

(ii) act against all those, starting with the Ambanis and Adanis to all those who are wilful defaulters owing hundreds and thousands of crores of rupees to our nationalized banks, effectively robbing the tax payers. If you are not doing this clearly your target is elsewhere.

It is worth restating the point made by Patnaik about the 1978 demonetization – that it never really affected ordinary people, for it covered notes of Rs 500, Rs 1000 and Rs 10,000 value and those denominations were hardly used by them. The hundred rupee note was what most people used. Those were the days when matrimonial advertisements used to state their preference for bridegrooms earning ‘four figure salaries’ – that is to say, Rs 1000 and above! We, who were in the university in those days, had never seen even a Rs 500 note. So, that was clearly a much more targeted measure, leading to little or no impact of everyday life of common people. In comparison, Rs 500 and  Rs 1000 denominations today cover, as Baidurya Chakrabarti  points out, as per RBI figures, 80 percent of the country’s monetary economy. What the sudden attack by Modi and his entourage has done and the intent behind it was laid out very clearly by our very own Marie Antionette  – Arun Jaitley. You should move to digital transaction and electronic money said this man who understandably could not win his seat even in the favourable atmosphere of 2014. Idiotic at one level, for it shows the extent of disconnect, but very smart at another. If things are going as planned then, as MS Sriram put it in his article in, this is what is happening:

Right now, the ones who are celebrating the assault on black money, terrorism and counterfeits and pontificating that we should bear a bit of pain for a great gain are the ones who are in the electronic economy.

We are abandoning the auto-rickshaws for cab aggregators, the roadside eateries for card based home delivery, the local kirana store for on-line groceries and buying vegetables from the superstore instead of the push carts. We are holding on hoarding a few hundred rupee notes, not even parting with them as tips.

Imagine these service providers whom we are bypassing are the ones who are not in the digital economy, and are losing business. They are very large in number. They either have to work, or stand in long queues for getting their own legitimate hard-earned cash.

In other words, the distress that people are put through is calculated to effect a transition among more and more middle class people to the corporate world of malls, superstores, retail chains and transport aggregators. At one level, this is the most cynical part of the vision of contemporary capitalism and the political elites that work for them: it basically considers a large part of the world population entirely dispensable. But there is another equally cynical aspect to it: if only the wealth produced and saved by the poor can be brought into the formal banking system, then that too can be made available to the predatory corporations. For as businessmen-economists like Hernando de Soto have been arguing, based on their researches in Peru, Egypt, Indonesia and other third world countries, the amount of wealth produced by the poor is many of these countries is more than what circulates in their national stock exchanges. But, says de Soto, this is ‘dead capital’ because that wealth is not available in the formal economy and in capital markets. Turning them into ‘live capital’ requires what has been called ‘financial inclusion’ in the article cited at the beginning of this post. Various UPA government schemes like Aadhar and Direct Benefit Transfers (cash transfers) were meant to enroll the ‘excluded poor’ into the fold of the formal economy.This basically means that the lives of the poor will be subject to economic surveillance as the ambition will be to record and tax every transaction. It will also mean that their hard-earned life savings will be made more easily and readily available for corporations.

But for a moment, let us suppose that the government’s move will bring black money back into the fold of the white – the idea that this ‘black money’ will be used for some mythical thing called ‘development’ is facile, because the government is simultaneously withdrawing subsidies, and steeply reducing expenditure on development sectors like education and health. The only ‘development’ contemplated is in the sense of ‘smart cities’ and ‘cashless’ economy – or in other words, it will mean annihilation of the poor.

Modi has only continued that same vision with greater vigour and far  greater ruthlessness than UPA as capable of – as we can see in the current demonetization move.

3 thoughts on “Demonetization, ‘Financial Inclusion’ and the Great ‘Unbanked’”

  1. Dear Aditya Excellent…what we are seeing is a Financial Enclosure movement….to destroy the commons of the poor…no one knows what will happen to the millions who use roatating credits”committee”‘ the only saving mechanism the poor have- risky certainly but built on trust in the neighbourhoods…what is being threatened is trust itself…this is bound to be counterproductive for the ruling groups even in the short term…


  2. Thanks Prabhu. Even as we wrote this piece, this has happened:

    “In what could be one of the largest credit facilities extended by an Indian bank for an overseas project, the State Bank of India (SBI) will provide a loan of $ 1 billion (over Rs 6,000 crore) to Adani Mining, the Australian subsidiary of Adani Enterprises, for its mine project in Queensland.

    The Adani group, headed by Gautam Adani, and the SBI have signed a memorandum of understanding which provides for a credit facility of up to $ 1 billion, subject to the detailed assessment of the company’s mine project at Carmichael, near Clermont in Western Queensland.

    When contacted, a senior SBI official declined to share the details. Adani already has borrowings of close to Rs 65,000 crore.”

    See the report here:


  3. Janata Will Find a Way

    Thanks for an illuminating piece, Aditya Nigam; it is difficult to ‘isolate’ the informal economy into a financial ‘inclusion’, and to domains of enclosure, mopping up the economy of ‘surplus’ populations, and effecting dispossession.
    However, it is worrisome that sentiments cloaking the (de-mon.) measure as a valorous charge (rather than a quixotic tilt) are bound to reinforce political beliefs/attitudes, even as the media is out to assume this devious cloak. Prof Patnaik’s link, for instance (above) doesn’t work…(disables my browser every time).
    Tuesday’s (today) Hindu carried a telling editorial

    B.Chakrabarti in another piece, notes loosely the ‘terror’ entailed in this measure: a) in terms of timing- the element of a (post-Diwali) surprise, shock and awe tactic; and b) anxiety and hardship (wreaked on nervous systems of the proletariat) visited on unwitting populations, expecting all to abide with this pain, without any certainty of their gain (a fascist infliction of pain on citizen?subjects). Even Nehru had sought to ‘implore’ (tribal) populations to part with their lands (for the country’s development). So, for the publics, is it always the ‘larger’ cause that matters in the end?…nation or development…


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