Given the scenario of deflationary spiral and a lull in the credit off take, the access to interest free money (bank deposits with zero rate of interest) and worse with negative rates of interest (where the bank deducts a fee or bank charges from the deposits made with the bank) become imperative policy push for the coterie of financial elites and their political friends in the government.
But the constraint to monetary expansion is the engendered tribe of savers and the hoards of cash lying dormant in lockers or under the proverbial mattresses. On them the war on cash must be declared to achieve the big push for credit expansion. There must be a moral crusade against physical cash which is hoarded and not available for the orgy of borrowing and spending. To prise open the cash hoard there must be the shock of demonetization and laws against physical withdrawal of cash which ensures that the physical cash is corralled and sequestered in the banks for further credit expansion. The mirage of prosperity is maintained by kicking the can down the road.
However, to nail down the escape hatch for bank customers who may become uneasy with deposits not earning any interest or worse negative rate of interest and withdraw cash physically, it is necessary to put in place draconian capital controls which prevent withdrawals of cash and also prevent the messy spectacle of bank runs. Once locked in the bank account the depositors can get a surgical scalping to take care of the messy NPA's of banks caused by profligate lending to corporate elites. The entire class of savers such as senior citizens, deposit holders belonging to the lower middle class would be thrown under the bus.
The winners of the demonetization shock therapy would be the corporate elites who caused the debt crisis for the banks in the first place. For them the loans would be written off at the cost of bank customers. Following the dictum that every disaster offers a windfall they would appear once again as saviours after getting the licenses for starting digital banks or wallets. [vi] Here the shell shocked ordinary people would invest their capital without returns whatsoever for the joy of walking cashless in the digital space. It is de rigueur that animal spirits should be rewarded handsomely in the business friendly environment of NDA government.
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