Harvard Business Review on note ban: poor policy and even poorer execution

Stating that it is the poor that bear the greatest burden of note ban, the article said asking people to go cashless is putting the cart before the horse

Harvard Business Review on note ban: poor policy and even poorer execution

Joining international media and renowned economists in criticising India’s demonetisation, Harvard Business Review said this unfortunate crisis is a case study in poor policy and even poorer execution.

The article, tilted ‘India’s Botched War on Cash’, said the country is in the throes of an unprecedented social experiment in enforced digital disruption.

Stating that it is the poor that bear the greatest burden of note ban, the article said asking people to go cashless is putting the cart before the horse.


“The horse in this case is the digital infrastructure and establishing a threshold of trust in the system; beefing up this digital ecosystem should come first,” wrote Bhaskar Chakravorti.

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In India, fewer than 35% of above the age of 15 had used a bank account, less than 10% had ever used any kind of non-cash payment instrument and less than 3% of the value transacted used cards in the year ending March 2014, the article noted.

According to Harvard Business Review, the primary losers in this disruption are the consumers themselves, while the biggest beneficiaries of this disruption, would be the incumbents, i.e. the banking institutions in the country.

Prime Minister Narendra Modi had earlier asked the people to let their mobile phones serve as a bank branch to deal with corruption and black money.

However, the article noted that despite a billion mobile phone subscriptions, just about 30% of Indian subscribers use smartphones and a little over a third of the population has internet access.

“India lacks infrastructure needed to reliably expand access. Connections are patchy and unreliable and there is great disparity in connectivity: 70% of those with mobile internet access are in cities; only 17% of Indian women use the internet, according to the Pew Research Center,” it said.

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Moreover, according to the article, there is great level of comfort in keeping moderate to significant levels of cash in hand and even credit card users keep significant amounts of cash in hand.

“The proportion of respondents who keep more than 2,000 rupees as minimum cash in hand is 29% in case of credit card users, as compared to 12% in case of cash-only users,” Chakravorti. Said.

”The average amount of minimum cash carried by cash-only users or “debit cash and cash” users is relatively lower than the amount carried by credit card users. The proportion that carried minimum cash in the range of 100 – 500 rupees was 13% among credit card users, as compared to 27% among the cash users,” he added.

Read Harvard Business Review’s article on demonetisation here

Here’s what leading magazines and newspapers of the world had to say about demonetisation:

The Economist: India’s “demonetisation” is a cautionary tale of the reckless misuse of one of the most potent of policy tools: control over an economy’s money. Demonetisation will probably make only limited strides in shrinking the black economy while affecting all of India’s 1.3bn citizens, the poorest most of all. (December 3)

The Financial Times:
 Will this demonetisation move sound the death knell for dirty money?

On its own, not a chance. Indian authorities have already released new high-denomination notes to replace the obsolete ones. This new currency, while harder to counterfeit, will soon become a vehicle for new undocumented transactions. As one commentator noted, demonetisation is like liposuction: it represents a one-time reduction in body fat. But if the body wishes to maintain its new physique, a healthy diet and regular exercise are required. (November 28)

The Wall Street Journal: Cash is vital to the Indian economy because it allows people to escape the crushing weight of state bureaucracy. Reduced reliance on cash could be a useful indicator that Mr Modi’s reforms are succeeding. But punishing Indians for their rational preferences will only backfire economically and politically. (November 16)

The Guardian: The scale and speed of Mr Modi’s scheme has more in common with the failed experiments of dictatorships which led to runaway inflation, currency collapse and mass protests. While Mr Modi campaigned to end corruption, it would have been better if the government had updated its antiquated tax system to realise such a task. (November 17)

The New York Times: Demonetization was ostensibly implemented to combat corruption, terrorism financing and inflation. But it was poorly designed, with scant attention paid to the laws of the market, and it is likely to fail. So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come (November 27)

China Daily: India’s sudden move of scrapping currency notes of higher denominations to curb the menace of black money seems to be a nightmare for the country’s poor and the middle class. (November 13)

Former US treasury secretary Larry Summers in the Washington Post: We strongly suspect that those with the largest amount of ill-gotten gain do not hold their wealth in cash but instead have long since converted it into foreign exchange, gold, bitcoin or some other store of value. So it is petty fortunes, not the hugest and most problematic ones, that are being targeted.

Photo: Vijay Pandey