Why Radical Disruption is not Always Beneficial: Lessons from Demonetization

Is Demonetization an Example of Radical Disruption?

The Indian Economy and Body Polity was treated to a Shock Exercise when the Indian Prime Minister, Narendra Modi, decided to demonetize 80% of the total currency in circulation at a stroke of a sudden announcement and in a most unilateral and arbitrary manner.

This policy announcement that took almost everyone by surprise was touted as a means of radically altering the Status Quo as a prelude to the War on Corruption.

Indeed, by most accounts, such a disruptive economic policy was never implemented anywhere in the world, let alone India.

While its proponents pointed to it as the only way in which the Indian Economy could be cleansed free of Black Money, its opponents took the view that such earthshaking moves must be planned well in advance and implemented thoughtfully.

Indeed, the fact that Demonetization impacted the Indian Economy has been borne out by subsequent studies done by reputed economists who questioned the motives behind such a gigantic and gargantuan move.

Of course, such policy measures are endemic to the Neoliberal Capitalist Free Market ideologies as the very basis for this economic paradigm rests on the foundation of Shock Therapy and Radical Disruption of the Status Quo.

Uber as an Example of Successful Radical Disruption

Agreed that the emerging Digital Economy is all about Disruption as can be seen from the way I Startups such as Uber have profited immensely from their Game Changing Business Models built on Platform Capitalism.

Indeed, Uber is an example of a Unicorn that capitalized on the Aggregator Model of Capitalism wherein the Internet and Smartphone based technologies have obviated the need for intermediaries.

In other words, as Brokers and Middlemen thrive because they have “access” to buyers and sellers and have more information than either, they are able to monetize their knowledge and reap the benefits of Asymmetries of Information.

Uber, by connecting the buyers and sellers directly through its App ensured that the savings accrued thus could be passed on to the Drivers and the Riders.

Thus, Uber is an example of a Radical Disruption that was beneficial and hence, more than ever, many have been tempted to follow the route taken by it and other App based firms.

Why Demonetization Failed and Lessons for Other Disruptors

Indeed, this can be an explanation why the Indian PM decided to address the nation directly when announcing Demonetization and hoping that the removal of the arbiters of contacts and information meant that he was directly talking to the people in order to win them over.

Thus, it can be argued that Demonetization was a Stellar Example of a Radical Disruption except that it failed and that too spectacularly as can be seen from the subsequent liquidity crunch and the resignation of the RBI (Reserve Bank of India) governor, Urjit Patel.

The primary lesson from Demonetization is that radical disruption can succeed only when the necessary conditions and the foundations of the system on which it is being thrust are ready for it.

In the case of India where a majority of the people lack access to formal banking channels and where the penetration of Digital Technologies is abysmally poor, one cannot expect the Indian Populace to transform themselves overnight and use electronic payment channels and digital forms of banking.

Indeed, more than anything else, Demonetization impacted the Rural Economy as can be seen from the severe farm distress and the near collapse of SMEs or Small and Medium Enterprises. One cannot simply ask the citizens to stop using cash when the infrastructure for the alternatives is not in place.

Moreover, India is cash driven economy where cultural and social mores are such that many people use informal credit channels and have a cultural affinity to using cash rather than relying on cards.

Thus, while as an idea, Demonetization might have been what the Indian Economy needed at some point, the way in which it was implemented without any consideration of the ground realities meant that it was a Dangerous Idea Doomed from the Start. Having said that, Demonetization succeeded in bringing more people into the Tax Bracket and hence, it can be said that at least, this was a Net Gain.

Creative Destruction and Radical Disruption Gone Spectacularly Wrong

As mentioned earlier, capitalism works by Creative Destruction and hence, from time to time, the laggards need a Kick on the Butt to Shape Up or Ship Out.

In other words, the radical disruption is part of Neoliberal Capitalism and in this sense; the Demonetization exercise might have spurred Indians to action and shaken them from their complacency.

On the other hand, there has been other equally radical innovations world over that failed mainly because the market for them never existed and the consumers were simply not prepared for them.

The Concorde Supersonic Flight, the Polaroid Camera, and the Iridium Satellite Phone are examples of radical disruption that did not click with the Consumers.

Thus, as the preceding discussion showed, Demonetization failed mainly due to the wrong assessment of the ground conditions including the premise that Black Money was in the form of cash and not real estate or gold.

Moreover, India is yet to shake off its Socialist attitudes which meant that radical disruption like in the Capitalist West might not succeed.

The inescapable feeling is that perhaps, Demonetization was a Disruption Whose Time Had Not Yet Come.

Therefore, to conclude, radical disruptions are not always healthy or beneficial and hence, it is better to study the preconditions and the way in which the measure is implemented.