With 55 people already dead, the recent demonetization announcement by Prime Minister Narendra Modi has plunged the second most populous country of the world into a state of flux. Apart from targeting black money, corruption and fake currency, the Indian Prime Minister -- while announcing the move -- also indicated that demonetization will be a stepping stone towards a cashless society. Going cashless is, without a doubt, a stride towards improving financial efficiency and modernizing commerce, however, there needs to be a minimum acceptable market readiness to absorb this mammoth transition. Long queues, shouting customers, procedural ambiguity and under capacity has put the entire banking system under enormous stress.

The fact is that the Indian banking system, in terms of reach and penetration, is underdeveloped with more than 35% of the population still outside the banking umbrella. On average, a single banking branch in India serves a whopping 9300 customers (7000 in case of J&K); compare this to other BRICS nations with 2700 customers per branch in Russia and 2200 in Brazil. In developed nations, the numbers are far better, with 1500 in Italy and just 1400 in Spain. ATM distribution in India is even worse with just 19 ATMs per Lakh of its population (17 in case of J&K) compared to 278, 254 and 173 ATMs in South Korea, China and Russia respectively.

Now factor this: over 25% of the Indian population is still illiterate and almost 20% have no access to telephone/mobile phones. In a country where more than 50% of population still defecates in the open, we cannot force feed modern digital banking overnight to them. It needs enablers like education, banking inclusion, mobile and internet penetration -- most of which are still in the early adoption phase in India. While devising policies that affect every household, you cannot ignore these numbers and break all hell loose, leaving a substantial portion of your population to suffer.

The main goal, which has supposedly forced the government to take this decision, was to eradicate black money, contain fake currency and curb corruption. Let us make one thing clear: black money and cash are not same. Cash is just one of its many forms and the very premise that "people stash black money in cash” is absolutely misplaced. It’s 2016, and people don’t hide 500 and 1000 denomination notes under their mattresses anymore. If we go by historical records of tax raids, only 6% of black money in the system swims in the form of cash and when I say cash it includes all denominations, not just Rs 500 and Rs 1000 notes. Globalization has opened up options like foreign bank accounts and more innovative mechanisms, as recently revealed in the Panama Paper leaks. Time tested options like investment in gold, real estate, shell companies etc are just a phone call away. Was this mayhem worth? If after all this effort only 6% of the much hyped black money is getting affected, is the move even justified?

When we talk of curbing fake currency through demonetization, it is as bad as burning an entire village down in order to scare some harmful rats. The squeeze is surely not worth the juice. As per a study conducted in 2015 by the Indian Statistical Institute, Kolkata, fake notes with a face value of around Rs. 400 crore are in circulation in the Indian economy. This is just 0.025% of the total 16.42 Lakh crore of banknotes in circulation. And if we think that the new Rs. 2000 denomination won’t be copied, we are barking up the wrong tree. Need I remind you, we are living in times when they can clone an entire human being and you are talking of secure non imitable currency notes.

Then comes corruption which is also based on the same wrong premise that it’s done purely in cash. Even if the premise holds true, then introducing Rs. 2000 denomination is quite contradictory. The new denomination has made it easier for the corrupt to swap bags as it now weighs less than 5 KGs for an amount of Rs. 1 Crore compared to 12.5 KGs initially. Corruption runs quite deep in the Indian system and things like denomination are surely not sufficient to counter it.

Now take a look at the prices that the economy has already paid for this hasty and myopic decision. Scrapping 86% of total currency value has straight away eaten away a substantial portion of aggregate demand in the economy which has resulted in an immediate economic slowdown. By Nov 18, 2016 Sensex had already tanked more than 1400 points eroding Rs. 6.98 Lakh crore of wealth, FIIs offloaded shares worth Rs 2,044.52 crore, Indian Rupee shrugged Rs. 1.50 against the US dollar.

And then there are costs associated with new currency printing which runs in thousands of crores. Add to this other operational costs associated with logistics and management of the transition, the brunt of which has to be faced by the already limping Indian banking industry. These costs are without factoring the economic deceleration effects due to slowdown in job markets and future investment sentiment. The final picture might be even gloomy.

The fact is that as of now India is not ready for a cashless economy, and neither is demonetisation a magic wand to curb corruption, unearthen black money or eradicate fake currency. But one thing is for sure, demonetisation has unleashed miseries in all forms and people from all walks of life have been adversely affected. Improving the system of financial monitoring and regulatory framework was surely a better and longer lasting bet than this painful ineffective system cleansing exercise. If some people in a system are guilty, that does not mean that you will take an entire society to trial.

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