The Curse of Cash

Emerging out of the cash chaos, the Government of Telangana has taken a right decision to go digital. The state wants to reap the early advantage by emerging as a cashless state.

But, a mere shift to electronic transactions in a cash-ridden monetary system, that too when all the avenues for parking black income thrive, does not weed out the illicit money.

The present paradigm of demonetisation has resulted in an unprecedented cash scramble as too much cash was withdrawn too soon from the economy.

As the former IMF economist Kenneth Rogoff said in his latest book, The Curse of Cash, the economies around the globe are awash with too much cash.

In India, cash is almost synonymous with money with regard to transactions. Thus, unplanned demonetisation has resulted in cash crunch-induced strangulation of money, resulting in a recessionary situation.

What has been done now in India was actually a currency swap rather than demonetisation. The replacement of demonetised currency notes with the new ones and introduction of higher denomination notes would only flood the monetary system with more cash.

Therefore, the present demonetisation move would not end the cash economy and its associated malaises. The cash economy fuels and funds tax evasion, through off-book businesses, unreported payments and receipts etc., terrorism, drug trade and corruption.

As this Harvard economist argues, financial inclusion has to be effectively put in place so that the poor are not left out of the system. The cost of going cashless for a developing economy is too large.

It can hurt too many innocent people and may not affect the really bad guys. The paper currency is only a vector that carries a disease.

Reducing cash flow in the economy is certainly advisable. But, imagining an economy totally free from paper currency is simply outlandish. The transition should be gradual so that it would not be painful.

Several issues need to be addressed before embarking upon a fascinating journey away from the world of cash. It includes no or low cost of financial intermediation, privacy of monetary transaction for not an unlawful purpose,

security of monetary transactions, unnecessary harassment of legitimate income-earners, loss of convenience of transacting in physical cash etc.

However, the cashless transactions can solve some of the problems emanating from ill-gotten wealth. But, assuming that it would eliminate the curse of illicit money is nothing but confusing woods for the forests.

Even the advanced economies are witnessing some of the mega financial frauds and accounts fudging not because of predominant cash transactions. The cronyism in the economy cannot be attributed to cash economy alone.

Cash’s liquidity and anonymity are often accused for its ungovernability. But, the money that is not in the form of cash can also be equally ungovernable in a non-transparent economic system patronised by an equally unethical political system.

The organsied loot and the legalised plunder of monumental proportion due to manifold scams that rocked India in the recent past were certainly not all-cash dealings.

The curses of cash are symptomatic of economic ills. Equating them turns out to be an ivory tower economic assumption.