Demonetisation in Kerala: Dismantling financial sources may have short-term effect, say experts

Kerala is one of the few states where demonetisation of Rs 500 and Rs 1,000 currency notes generated so much heat. The state witnessed a rare phenomenon of the entire state Cabinet sitting on a day-long dharna with the mutually acrimonious ruling party and the Opposition joining hands against the Union Government over the issue.

Economic experts are wondering why the demonetisation move aimed at flushing out black money has met with so much protest in Kerala, which incidentally is the country’s first total banking and completely digitised state. They feel it could be because of pressure from the black money lobbies.

Firstpost spoke to a cross-section of experts to get a dispassionate view of the situation. This is the final part of the series. You can read the first, second and third part here.

Experts in Kerala are divided over the long-term gains of the demonetisation drive launched by Prime Minister Narendra Modi with the objective of flushing out fake currency and seizing black money.

While a section of the experts believe that it will bring ‘acche din’ that Modi promised, others think that the introduction of Rs 2,000 notes in place of the defunct Rs 1,000 notes may help the unscrupulous elements targeted by the prime minister to bounce back in the longer run.

Demonetisation in Kerala: Dismantling financial sources may have short-term effect, say experts

Representational image. PTI

“A major target of the prime minister is terror originating from Pakistan. Terrorists from the neighbouring country do not need much Indian currency to strike in India since they are sponsored by agencies in Pakistan,” said PK Hormis Tharakan, former chief of Research and Analysis Wing (RAW).

He told Firstpost that Pakistani terrorists involved in various strikes in India in the recent times did not carry much Indian money with them. He pointed out that the terrorists who carried out a major strike in the country recently had just Rs 25,000 with them.

“Fake currency printed and circulated by Pakistan is the biggest threat posed to India. Demonetisation will only check the fake currency now under circulation in the market. It may not prevent Pakistan from printing the new currencies since the equipment used by India to print the currency is also available to Pakistan,” said Tharakan.

Tharakan, who was also a member of the National Security Council and was also chief advisor of strategic affairs, said the introduction of Rs 2,000 note in place of Rs 1,000 note may make matters easy for Pakistan. Dismantling of financial sources may have some effect in the short-run but it would need a comprehensive mechanism to check external terrorism in the long-run, he said

Tharakan, who had also served as director general of Kerala police, said that it was not possible to check internal terrorism through measures like this. He said that a different approach was required to combat domestic terrorism.

“Domestic terrorism mostly arise from misunderstandings and a feeling of injustice. They cannot be curbed through strong-arm tactics. We can solve this only through dialogues. We need to take all the parties concerned into confidence to address this issue,” he said.

However, he said that demonetisation may check the flow of hawala money to extremist organisations within the country. Most of the outfits engaged in subversive activities are getting black money through hawala, he added.

S Irudaya Rajan, head of the research unit on international migration at the Centre for Development Studies, Thiruvananthapuram does not think that hawala money could be held under check for a long time. He said that it will stay strong as long as migration continues.

“Demonetisation will have only a temporary effect on the hawala operators. They will always devise methods to overcome the present state. The operations will become easier when Rs 2,000 notes will come to the market in a big way,” said Irudayarajan.

Leading economist Mary George is, however, very optimistic that demonetisation will cleanse the economy and make life easier for people. She said that the hawala money that came with the migration had made life tough for the common man in Kerala.

“The illegal money pumped into real estate sector by the Non-Resident Keralites (NRKs) pushed up prices of land, construction materials and labour. It has made not only shelter costlier but also rendered agriculture unremunerative, said Mary, former head of the department of economics in Kerala University.

She is hopeful that the demonetisation will bring down the price of land that skyrocketed following the flight of migrants to the West Asia in the 1970s and make home affordable to the common man.

Builders agree with her partly. They concede that it may bring down the price of land and houses built by the unorganised developers. The latter may be forced to reduce the price due to distress selling, said a leading builder at Kochi.

Abdul Azeez, a member of the executive committee of Kochi chapter of Confederation of Real Estate Developers Association of India (Credai), believes that demonetisation will not affect the construction industry in the organised sector since cash component in their business is almost zero.

“Nearly 90 percent of Keralites, whether local or NRI, buy homes with the help of bank loans. The cash component in these deals is only very less. This is very good news for us, because we have very little to change in this new, more transparent economy,” said Azeez, who is also the chairman and managing director of Skyline Builders.

Banking experts feel that the demonetisation may benefit the state in the long run if the government make use of the opportunity to adapt to the cashless economy

While various agencies have predicted a 30 percent fall in the price of land at national level, real estate agents in Kochi say it need not be true in the case of Kerala since there is acute scarcity of land in the state.

“The demonetisation may bring down land sales. But the lull may not continue for long since majority of Keralites prefer to have their own homes,” said Benoy Varghese, a leading real estate agent at Kochi.

State Finance Minister Thomas Isaac, who himself is an economist, does not share the optimism of the pro-demonetisation sections that the withdrawal of high denomination notes would unearth black money and rejuvenate the economy.

“The prime minister may have embarked on the demonetisation drive thinking that large amount of currency under circulation in India is black money. This is not right. The black money available in the market in the form of currency is only 5 percent. An operation of this sort was not necessary to capture this black money,” said Isaac.

He said that the demonetisation would hurt states like Kerala deeply. Though the current restrictions will be in force only till 31 December, the adverse effect of it on the economy of the state will linger on much longer. Isaac said that he may need at least four months to put the economy back on track.

However, banking experts feel that the demonetisation may benefit the state in the long run if the government make use of the opportunity to adapt to the cashless economy. They believe that it was easy for Kerala to switch over to cashless economy since it is one of the best banked states in the country today.

Apart from 100 percent bank account coverage for all households that the state achieved way back in 2011, Kerala has also attained complete digitisation. The state now has one bank branch for every 5,900 customers as against all India average of 11,000.

Kerala was declared as India’s first complete digital state in 2015 after it achieved 100 percent mobile density, 75 percent e-literacy, highest digital banking rate and broadband connection up to panchayat level. Apart from this the state has implemented e-district programmes in all districts and has linked Aadhaar card with bank accounts.

Experts consider this as strong foundation for switching over to cashless economy. But the finance minister does not think this sufficient. Isaac said that it would not be easy to change the mindset of people who are used to cash transactions.

“We cannot change the mindset of people overnight. It needs lot of efforts. The economy will move only if people have currency in their hands. Demonetisation has messed up the economy. It will take a lot of time to clear the mess,” says Isaac.

Part One: Hawala, fake notes play big role in state's economic growth
Part Two: Curbs on cooperative banks are hurting Non-Resident Keralites
Part Three: Terror outfits use contraband money to indoctrinate youths

Firstpost is now on WhatsApp. For the latest analysis, commentary and news updates, sign up for our WhatsApp services. Just go to and hit the Subscribe button.

Updated Date: Nov 24, 2016 15:21:34 IST

Also See