Devangshu Datta: The consequences of notebandi

Salvation, Moksha, Nirvana, Paradise, that great gig in the sky — mainstream religions tend to promise the good and faithful follower, some sort of reward after death. This is clever. Human beings behave better if they think there will be a light at the end of the tunnel in terms of reward (not oncoming trains). It is also better to make that reward conditional upon after death, since it could otherwise be objectively verified.  

This also instinctively exploits the “jam tomorrow”, “jam day after” but “no jam today” that is implicit in many value systems. Apparently you have to wait for a reward to really savour it. Deferred gratification is always considered better for some reason, even though it is not necessarily so. 

It is true that an ability to defer gratification is a sign of self-discipline and that is useful for a whole range of activities. For example, a student who studies for an exam rather than goofing off, is deferring instant gratification for long-term gain. A batsman who settles down before playing big shots has a better chance of getting a big score. 

But deferred gratification isn’t always optimal. There are times when immediate indulgence is best. For instance, a hungry person who defers gratification by delaying eating, risks fainting from lack of sustenance. Someone with a full bladder, who decides to hold it in, risks suffering an embarrassing accident. 

Deferred gratification can be both good and bad at the same time. Let’s say, an individual defers gratification, lives frugally, and invests her money. She is setting herself up for a pleasant and prosperous life in future. But if everybody displays this sort of admirable self-discipline, there is a general collapse of consumption and that is bad for the nation as a whole. 

The consequences of mass-deferred-gratification can be pretty bad. People stop buying things; people making things find themselves out of work; they also stop buying things. General unemployment results. That results in even sharper cutbacks on consumption, setting off a vicious cycle where economic activity spirals down.  

This push-and-pull, where deferred gratification is both good (for an individual) and bad (for the macroeconomy) creates a delicate balance for policymakers. At one level, policy should generally encourage consumption. At the same time, individuals should be advised to manage their money carefully and to generate savings. 

When rigid self-control about consumption is imposed on a nation from above, for example, by rationing during a war, it is often the precursor to recession. If such controls are in place for long periods, there are changes in consumption patterns for the long term.

I fear the current notebandi will result in such long-term changes in consumption patterns. It has imposed a cash crunch, which has resulted in a sharp drop in consumption. That drop will last several more months for sure, simply because there isn’t enough cash. By the time the cash crunch ends, quite a lot of people will be unemployed. Some of them will be white-collar people in cash-sensitive industries. Others will be lower-income folks slipping below the poverty line. 

By the time cash is back in the system, the power and the desire to consume may well have been reduced. People who see recession looming tend to be cautious. People, who have been prevented from touching their own money for several months, tend to hoard it, when they can get their hands on it. People will buy gold or dollars; they won’t buy chocolates. 

Such a behavioural change could result in a longer recession than most assume will be the case. Consumption might not resume in linear fashion after a two-quarter blip. I’m old enough to remember a time when consumption was muted, due to the lack of goods and the fear of income tax raids. That caused a growth recession that lasted roughly 20 years. I don’t think this will be anywhere near as bad but it could last two or three years.

Twitter: @devangshudatta