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Resource centre on India's rural distress
 
 

In the Long Term Indians Might Lose Faith in Cash and Turn Towards Gold -Ravinder Kaur
-TheWire.in

The spectacle of ‘fixing’ India’s illegal economy is not only harming common citizens but also turning small investors away from financial markets.

Depending on who is talking, the demonetisation of higher value currency notes by Prime Minister Narendra Modi’s government has either been described by commentators as a ‘bold move’, ‘landmark policy’, ‘game-changer’ and even a ‘political masterstroke’ or has been labelled the single most high-risk political gamble undertaken since the economic reforms of the 1990s. The short-term effects of this move are already visible and public frustration is growing given the limited availability of cash and the chaotic disruption of routine economic transactions. The long-term effects are less clear.

How might the experience of demonetisation impact economic behavior and practices? While it is too early to completely predict the long-term implications, some trends are readily emerging.

The sudden annulment of high value currency has unsettled public confidence in the cash economy, which is very widespread, especially in rural areas and small towns. In 1978, when Rs 1000 notes were annulled, the impact was limited as only a few people possessed currency of such high value at the time. In 2016, the story is different. The annulled legal tenders of Rs 500 and Rs 1000 make up for more than 85% of the available money in the market. The disruptive effect, thus, is keenly felt in everyday life across urban and rural areas, albeit in different ways – from the derailment of wedding preparations to the difficulties experienced in purchasing seeds and manure at the beginning of the crop-sowing season. Or consider the widely told tales of thrifty women who routinely, and secretly, saved small amounts of cash for a rainy day, and who now find their small fortunes have turned into mere valueless paper in a matter of few hours. Paper money therefore now appears to be an unreliable instrument of saving and accumulating wealth.  

A possible outcome of this loss of trust in paper money could theoretically mean a boom for the cashless economy. Yet this possibility is hindered by the fact that banking facilities are neither widely nor evenly available throughout India. According to RBI data, there is one bank per 9500 persons within a 5 km range, and this covers less than 30% of the total population. While Indian cities are lined with banks, ATMs and mobile payment options, these facilities are only sparsely available in rural areas and small towns. The ambitious Jana Dhana Yojana – a financial inclusion scheme, launched in 2014 to bring the poor within the orbit of cashless transactions via low cost banking facilities – is yet to yield results. Under this scheme, more than 22 crore accounts have been opened. However, a vast numbers of these are said to be either duplicates or dormant accounts that generate no economic activity. The cashless economy, at this moment, seems to be a distant prospect unless mobile and affordable banking infrastructure is made available to the wider population.  

A more likely possibility, then, is that those mistrustful of cash might turn to the most trusted form of asset: gold. The Indian household’s preference for accumulating wealth in the form of gold jewellery is well known. It is hardly surprising, then, that the past three days have witnessed a surge in the purchase of gold, in what is being called a new ‘gold rush’ that has nearly emptied jewellery shops. In economic parlance, gold held as jewellery is considered a dead asset that contributes little to the economy, and actually takes wealth out of economic circulation for long periods. In 2012-13, about two-thirds of household savings in India were reported to be in the form of gold and property. In the current situation, even if the property trade slows down, gold remains a more secure asset given the rising global demand.

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