A close friend, stock market wizard and intellectual sparring partner, also a Marvel Comics and Stan Lee fan, has been keenly following the demonetisation debate in media and elsewhere. “So this all seems horrible,” he said, mimicking the nonchalant manner in which Dr Bruce Banner aka Hulk quips as he walks into a massive scene of destruction in ‘Avengers’.

My friend’s choice of Bruce Banner was intended, sharp and deliberate. Demonetisation was the destruction and Dr Bruce Banner aka Hulk was, well, you know who. After about 10 minutes of going through the wringer, buttressing our arguments with statistics, facts, figures and whatever else we could muster short of pots and pans, we were in a nice Clint Eastwoodian stalemate.

Bruised, we decided to step back and start asking some questions about cash in third person without anchoring them to demonetisation or any strings coming out of it. It went something like this (only a carefully curated sample is given) and it took us five questions to come to a certain inflection point:

Is cash in India or anywhere else free? 
No. it isn’t.

How much does cash in India cost then?
Rs 21,000 crore every year. That’s the total cost of designing, printing, minting, transporting and distributing the money (the value of which as per Reserve Bank of India is Rs 3.86 lakh crore).

To put it in perspective, Sarva Shiksha Abhiyan, the flagship universal education programme in the country, gets approximately Rs 21,000 crore allocated every year.

What the cost of money means is that every single rupee that you hold in your hand has cost something to produce and place it in your hand.

I am sure that printing and minting will take up bulk of the cost, does it not?

I thought so too. But surprisingly not so for printing.

RBI spends Rs 3,762 crore on printing and replacing soiled notes (with a 70% replacement rate). That spend results in the production of Rs 3.83 lakh crore in notes of various denominations.

The cost of producing that volume works out to slightly less than 1% of the value of the total notes put into circulation.
Minting is cheese to the chalk of printing. It costs Rs 2,000 crore to mint Rs 2,785 crore, that’s a whopping 72% of the total value of coins produced.
Even taking printing of money and minting of coin costs together, the total is Rs 5,762 crore.

Where does the remaining Rs 15,000-odd crores go?

It goes in transporting, storing, logistics chain and distribution costs and, of course, in formal and informal commissions.
So, think of it this way.

A Rs 10 coin is only worth around Rs 2.80 when it leaves the mint. However, a Rs 10 note is worth at least Rs 9.90 when it leaves the printing press.
Now, layer transaction costs on the Rs 10 coin and note. A typical transaction cost for a big shop, say a restaurant, receiving that coin would be its accounting team and systems and the costs that it would incur in putting it back into  the business.

In about three-five transactions, the actual value of the Rs 10 coin is reduced to zero or is in negative territory, while you are still able to buy Rs 10 worth of goods and services.

Similarly in about 12-15 transactions, the value of the Rs 10 note is almost reduced to zero, or is negative. This leads an ironical situation where money is subsidised by money.

So, how does pulling out so much cash (86% or so) suddenly make the cost of money cheaper?

It doesn’t. In fact, in the short run the government is going to end up spending a lot more in just pulling in all the old Rs 500 and Rs 1,000 notes and then figuring out what to do with it. 

In the longer run, the cost of money will reduce due to two reasons: the quantum and the denomination (the proportion of Rs 5-10-100-500-2,000 notes) of money in circulation (the proportionate cost of printing a higher denomination note is far less than that of a lower denomination note) and increasing digital and cashless transactions.

At this point, an inflection or a pivot if you are from the venture capital world, it became clear that the big D had two sides to it: demonetisation, a side that has had harsh lights of scrutiny trained upon it, and digitalisation, a side that seems to have been relegated to the role of a second fiddle playing a tune of its own.

The unique value proposition, we realised, came from seeing the two Ds together as Siamese twins, not to be separated as two individuals, but as a singular fabric composed of intertwined wefts and weaves.
As we started wrestling with the two Ds as one again, we could imagine at least three major paradigm shifts that seemed to have escaped the attention of the current set of debaters and discoursers (two Ds again, what’s with the D anyway?).

Increased investment maturity: Cash begets a certain mindset. That mindset is direct derivative from the sheer physicality of money. For instance, you can carry only so much. Or, beyond a certain quantum it becomes a human impulse and imperative to protect it, hide it, stash it or put it in a form that can be liquefied easily when required.

It’s this cash economy that has led Indians historically to invest in low maturity and suboptimal investment assets: case in point is land and gold. I am using suboptimal in terms of the collective socio-economic value created for the larger society. Both have not really yielded anything of material value to the Indian economy.

Dematerialisation of cash will lead Indians to become more mature investors making them amenable to experiment with different forms and kinds of investment instruments. And, one doesn’t have to look far. Dematerialisation of the stock markets in India has substantially improved the investment maturity of India in less than two decades. Dematerialisation does have its own set of capital and operating costs. The cost per unit, however, reduces drastically once it’s up and running. 

Reduced inequality: Hoarded cash is a clear manifestation of real inequality. Equity is as much a question of distribution and redistribution of resources, as it is a matter of real power. Power has to be exercised. It’s not theoretical. A lavish Rs 100-plus crore wedding is exercise of power through the channel of money and cash.

Today, cash propensity of India is way off the charts when compared to cohorts of countries with similar diversity and power dynamics. The value of money in circulation as a percentage of GDP in India is 12.04, compared to 3.93 in Brazil, 5.32 in Mexico, and 3.72 in South Africa.
India’s monetary base as a percentage of demand deposit and savings accounts is over 50. Mexico and South Africa are 9%, China, who we love comparing ourselves with, is 5% and Egypt, which is extremely cash friendly, is 24%.

A dematerialised monetary system (of which demonetisation is a first step) and a digital cashless transaction system can hit very hard at deeply embedded exploitative power dynamics. Disincentivise cash and you make hoarding unattractive, economically, socially and from the point of view of power dynamics.

Bridging digital haves and have-nots: Technology is technology: nothing more, or nothing less. What makes technology a game-changer is when all its potential and possibility is converted to kinetic reality. An internal combustion engine might have just been that, had it not been coupled with mobility and became the preferred mode of going from Point A to Point B.

Dematerialisation of money, which necessarily requires a backbone of digital identity, authentication, payment gateways and systems, policies and incentives, and clear-cut market-driven logic and players, can indeed become the transformative bridge that brings a majority of Indians on to a common and a decidedly more equitable digital platform.

Of course, it requires a lot of work and the Global Financial Inclusion Database (Global Findex) holds a good and honest mirror to us: Only about 35% of the population over the age of 15 have an account at a formal financial institution, less than 9% of that same group has a debit card, and only 2% has a credit card, while only around 2% have used mobile phones to receive money or have been involved in an electronic payment in the last 12 months.
Needless to say, these numbers go down further when it comes to females and rural areas. However, one must also remember that 10 years back, only about 300 million Indians had a mobile phone, and today that number is close to 900 million. That’s a leap of gigantic proportions.
When we stepped back, I threw back one at my friend, “That’s my secret Captain, I am always angry,” said Dr Bruce Banner before turning into Hulk and decisively turning a lost battle into a won war.


Swaminathan is a Stan Lee and Marvel Comics Fan. He is also a Digital Native.


(The story appears in the 16-31, 2016 issue of Governance Now)