Open up a news site right now and you’re likely to find lots of stories about demonetisation. Most of these are likely to be about distress. People dying in ATM lines, empty factories in Punjab or ratings agencies predicting a decline in Gross Domestic Product growth rates. Meanwhile, the only stories that are optimistic about the government’s withdrawal of older Rs 500 and Rs 1,000 notes are coming in the form of statements from ruling politicians assuring us all is well and that India will emerge from this shining.

Why the mismatch? Is there a massive media conspiracy to toe the Opposition line and sabotage the government’s note-replacement policy?

Zee TV ATM Queues- People support the Govt

AAJ Tak Queue- Some discomfort here

NDTV Queue- Citizens in this queue are dying of heart attacks — Rajat Sharma (@SanaSecurities) November 16, 2016

1. Eventual gains?

To understand what may be happening here, it’s worthwhile looking at what the government’s policy actually is and what it’s hoping to get out of it. On November 8, Prime Minister Narendra Modi, in an unscheduled address to the nation, announced that as of midnight that day, Rs 500 and Rs 1,000 notes would no longer be legal tender. The prime minister framed the move as a fight against black money and terrorism. He listed out the ill-effects of the high-value notes:

“The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways. The poor have to bear the brunt of this. It has a direct effect on the purchasing power of the poor and the middle class. You may yourself have experienced when buying land or a house, that apart from the amount paid by cheque, a large amount is demanded in cash. This creates problems for an honest person in buying property. The misuse of cash has led to artificial increase in the cost of goods and services like houses, land, higher education, health care and so on.



High circulation of cash also strengthens the hawala trade which is directly connected to black money and illegal trade in weapons.”

Presumably Modi is hoping the replacement of currency will address many of these issues, but as you can see none of them is short-term. Bringing down the level of corruption, improving the purchasing power of the poor and the middle-class, reducing the cost of goods and services – especially land, education, health care – none of these will happen overnight or even over one quarter. Similarly, assessing how much tax revenue will come in from this move will itself take many more months and the question of whether the Reserve Bank of India can turn it into a dividend remains open and unaddressed.

That makes it hard for people to gauge whether it is actually happening and impossible to report on, because the effects of such moves will take months and maybe even years to quantify and understand.

The government has also sold this as an excellent opportunity to move to digital cashless payments. But until liquidity has fully returned to the system, which isn’t expected until early 2017, it will be hard to gauge whether the spike in use of things like PayTM or debit cards is temporary. Will employers actually be looking to transfer wages directly to workers in a year’s time when cash is freely available? Will your next home-buying experience no longer include black-and-white components? We won’t know for some time.

Politicians have insisted that the other part of the move, cutting down on counterfeit currency and terror funding, has already been successful. But that sort of information is distant from ordinary citizens and, again, hard for reporters to independently assess..

2. Immediate pain

While we wait for those indicators to come in, the distress that this move has caused across the system has been evident. Up to 90% of transactions in the country took place via cash, and the withdrawal sucked out 86% of the currency in circulation, meaning a massive liquidity crunch across India. Initially this played out in the form of long lines at banks and ATMs, as people sought to deposit their older notes or exchange them for newer ones.

But the impact goes far beyond just bank lines or shoddy implementation. India’s food markets froze as the lack of currency made it impossible for sales to happen, rural traders saw transactions come down massively, migrant labourers have been asked to return home because they cannot be paid, patients are unable to find the money to pay for hospital treatment, Adivasi villagers are surviving without vegetables and factories are lying empty. What was initially supposed to be an inconvenience has turned into a huge dip in economic activity, causing distress across the board. GDP forecasts have been cut. This is a massive economic shock.

These are actual indicators on the ground that can be reported on, not conjecture about potential gains. Economists are expecting there to be a rebound in economic activity to deal with the pent-up demand, but that is hypothetical and presumes sentiment will improve.

3. No precedent

There’s also no precedent for a move like this. A few other countries have carried out demonetisation efforts before, but only when their economies are already engulfed in a crisis. India too has done this before, but the last time it involved a minuscule portion of currency in circulation. India’s gigantic population, coupled with a policy that affects nearly every single Indian, means this is a massive move that is impossible to predict for.

It’s possible to cover the research work that recommended demonetisation, but even economists like Harvard’s Kenneth S Rogoff – who wrote a book advocating the withdrawal of high-value notes – are choosing not to say much about what this will mean for India, simply because it’s impossible to tell. Nothing like this has been done before. It will take years before we fully understand what the impacts have been.

V Anantha Nageswaran noted that those analysing the move are giving too much weightage to the distress that they see right now, without factoring in the potential benefits. Though there has been some analysis of potential benefits, pointing out how little black money is held in cash for example, he may have a point but one that can hardly be addressed: Without any precedent, how can you estimate how deep or lasting any of the gains will be?

4. Opaque government

What makes gauging the success of the effort harder still is the government’s reluctance to tell us how it arrived at this decision. We can look at the number of deposits right now, thanks to data periodically released. Banks are informing the government about how much currency has been exchanged. Usage of digital payment systems have clearly spiked.

But we haven’t been told what the government was expecting in the first place. How much held currency did it expect to see return to the system? How much is it hoping to mop up in tax revenue and penalties this year? What percentage of GDP decline did it expect to see? How much currency has been printed, and how much more is expected back in the system? Does the government plan to write-off the RBI’s liabilities if cash doesn’t return?

The entire move has been sold as an effort to crack down on black money, yet the government told Parliament last week that there is no official estimate of black money in the Indian economy. If the government won’t tell us what it hoped to get from the exercise, how can we gauge whether it was successful?

5. Long-term effects?

One thing reporters have found in many parts of the country is that, despite the economic distress, people remain positive about demonetisation. Even when forced to return home without labour work or see their shops emptied out because of dipping demand, many believe the efforts will lead them on the path to prosperity. Modi has successfully sold the idea of suffering for the nation, and managed to convince people that this move will actually hurt the corrupt at the top of the food chain.

But the government has not been transparent about how long it will take for liquidity to return to the system, beyond platitudes about there being “no currency shortage.” This makes it impossible to estimate whether this positivity will last, as the economy slows down and people’s livelihoods are hit.

Moreover since this isn’t technically a demonetisation, with the Rs 500, Rs 2000 notes coming in and even a new Rs 1000 note on the anvil, it remains to be seen whether black money generation and corruption itself will also return. As a result, most analysis of the long-term effects involves grasping in the dark, whereas reportage on the current distress is concrete and actual. Until the government starts offering up more data on the effects and we start to see some of the benefits of the move, we won’t be able to make sense of this massive move.