Shankar Gopalakrishnan,

Much of the demonetisation debate has focused on whether the economy can be revived or become more cashless. The implication is that if it does both, all will be well. This ignores demonetisation’s biggest impact, which will be on the distribution of resources within the economy, whatever happens to the economy as a whole. Demonetisation is a giant vacuum, sucking up the resources of the weak and delivering them to the powerful, while acting like it’s doing the opposite. More importantly, this transfer will be permanent.

Estimates differ, but roughly 80% to 90% of Indians work in the informal sector and, therefore, earn and spend in cash. The ongoing cash drought will impact all of these people, but it will impact them in unequal ways.

This unequal impact starts from within households. Working-class women married to alcoholic, abusive or simply irresponsible husbands all keep cash squirrelled away for emergencies. Now that money has to be either lost or revealed and, in either case, the woman loses her security, exploiting her becomes easier.

Farmers unable to sow their rabi crop or to sell their produce will have to turn to moneylenders, especially since demonetisation has effectively shut downcooperative banks, who are still not allowed to change money. In the process, they will pay high rates of interest, and if they can’t repay the loan, they may lose their land too.

The same applies to workers who are being laid off in droves and small factory owners who are facing closure themselves. All of these people are being forced to turn in desperation to informal finance and risk losing assets in return.

Everyone who has to change money in a hurry – for food, medical expenses or emergencies – is being forced to approach brokers. On Saturday, I was in a small slum in Dehradun in Uttarakhand. In this slum of around 300 families, no less than five people had approached the pradhan that day, asking for four Rs 100 notes in exchange for a Rs 500 note. He is an honest man, so he refused the commission. But money dealers are making a killing. With these rates (Rs 400 for a Rs 500 note and Rs 800 for a Rs 1,000 note) being widely reported, whoever is changing money is losing 20% of that money’s value overnight.

Small vendors, shopkeepers and hawkers are all losing business to those with card machines (to the extent that people are not postponing purchases). Lest you believe in PayTM, you need a smartphone to use it, and a tax information number if you want to earn more than Rs 10,000 through it. Vendors have begun to sell off their carts and shopkeepers to close down their shops, and that process will only accelerate.

Bailing out the powerful

At the macro level, this pattern of wealth transfer is repeating itself. Flush with cash sucked out of circulation, banks are lowering interest rates. Some seem to expect this to lead to increased investment, but it isn’t clear why investment will occur when the cash crunch means there is little or no demand.

However, there is one group who will immediately benefit from lower interest rates – those holding loans, the larger the better. Consider this: according to data in March 2015, India’s 10 most indebted corporate groups were holding Rs 7.3 lakh crores in bank debt. A drop in interest rates by a single percentage point would benefit these 10 companies with Rs 7,300 crores this year alone. If this just seems like good luck, consider that this benefit is occurring purely because crores of people cannot access their own money. Banks and corporates are effectively utilising that money rather than its owners.

There are even larger transfers occurring. For instance, commentators seem to assume that all unreturned notes will be black money. But many of those too sick, too poor to afford losing days to queueing up at banks or too far from banks will not be able to change their notes either.

Take one such group: those without identity documents. Comparing the statistics for adult enrollment in Aadhaarwith estimates of India’s adult population, at least 5.8 crore adults in this country don’t have an Aadhaar card. It is safe to assume that most of these people won’t have any other form of ID either, and hence also have no bank account. Practically every household in India keeps cash at home for transactions and emergencies (one of the few studies in this regard showed that those in the lowest income quintile kept 59% of their savings as cash at home). If we assume that on average each of these people has Rs 2,000 in cash that they cannot exchange or deposit (and no, they can’t give it to someone else to do so, because no one can exchange more than Rs 2,000 in total), that means Rs 11,400 crores in unreturned notes. What will happen to this money?

The most widely reported plan is for the Reserve Bank of India to give the government a higher dividend based on unreturned notes, despite the apparent illegality of such a move. If that happens, for the amount taken from the poor at least, any dividend would be straightforward robbery. If it does not happen, the savings are still gone, and those without them will be forced into more desperate situations – leading to the same losses outlined above.

Irreversible loss

None of these shifts are going to be reversed after 50 days. Land lost, savings lost, jobs lost, commissions paid, people dead from lack of food or medicine – these will not come back. The gains and losses are permanent. Moreover, the massive transfer of wealth that demonetisation is causing is not due to any productive reason whatsoever. Those who benefit have done nothing to earn their windfalls, they gain purely because they are more powerful. There cannot be a more textbook definition of a regressive economic policy.

Demonetisation’s supporters argue that this is worth it because it will curb tax evasion (and, though very few seem to talk about this, the government could then offset the transfer with welfare spending). But there is no evidence that this government is serious about tax evasion. India’s biggest tax dodgers are large companies – the single ongoing case against Vodafone is now worth over Rs 20,000 crores. Yet, the General Anti-Avoidance Rules, which were brought in 2012 to close the loopholes that the telecom firm Vodafone was using, were never implemented. Since 2012, both the United Progressive Alliance and the National Democratic Alliance have keptpostponing implementation of these rules. This year, the NDA also announced that the rules would not apply to any transaction before April 2017 (penalising past tax evasion is reserved for those with cash in suitcases, apparently). Meanwhile, small tax evaders have faced at most a one-time loss, with a likely return to normal channels (or new ones, such as Bitcoin) in future.

A tax windfall – or an RBI dividend – will certainly lead to some immediate welfare announcements. But this government has neither the political intent nor the administrative capacity to implement the long-term, massive hike in public spending that would be required to even begin to offset the injustice of demonetisation. Demonetisation is being portrayed as a crusade against tax evaders to help the poor. Yet, it will leave India’s economy more unequal than before, and its gigantic population of vulnerable people even more vulnerable. A masterstroke, indeed.