Given that the government has now come around to declaring that financial inclusion, digitisation and formalisation as the central long-term aims of demonetisation, there is, understandably, a renewed focus on Jan Dhan accounts, the primary vehicle of financial inclusion. As of December 14, about 260 million such accounts had been opened, containing Rs 74,000 crore; less than a quarter of them remain “zero balance” accounts. Yet, concerns that these accounts were being used to recycle cash – with or without the consent of the account-holders – had become so persistent that Prime Minister Narendra Modi himself felt the need to warn that their misuse would be investigated. He even exhorted account-holders to not return any money that had been put into such accounts. However, reports suggest apprehensions of large-scale money laundering using Jan Dhan accounts are misplaced; less than 2,000 accounts have seen deposits of over Rs 3 lakh. Either way, it is important to not de-legitimise these accounts — or even to presume that deposits in them are inherently suspicious.
The government has set a deposit limit of Rs 50,000 and a withdrawal limit of Rs 10,000. But this is nothing more than a short-term solution. Moreover, it also ignores the facts on the ground. Farmers holding cash for seeds or other inputs might well have felt the need to put it into their new accounts. It would be dangerous and counter-productive for the government to launch a witch-hunt against Jan Dhan account holders. Unbanked individuals need to be able to trust formal finance for financial inclusion to become a reality. Buying into the idea that Jan Dhan accounts are being used for large-scale recycling will cause many to worry that their hard-earned cash may come under investigation. Given that agricultural income is untaxed, it is far from clear how such investigations would proceed — a fact that would just cause concern about witch hunts to grow. In other words, the government must not make it difficult to make use of Jan Dhan facilities; the fight against corruption and black money is essential, but there is no need for it to happen at the expense of genuine financial inclusion. That does not obviate the need to probe into the malpractices that led to the misuse of the 2,000 accounts in question. But, the government must not lose the perspective on resolving the structural issues.
This controversy over Jan Dhan accounts has revealed yet again how incomplete and imperfect the planning of the demonetisation process has been. It is a cautionary tale about not rushing through policy decisions without careful examination and consultation. Trade-offs need to be evaluated and possible loopholes foreseen and taken into account. This was not done, and now impulsive reactions about Jan Dhan accounts could cause a lack of trust in the financial system. This would be unfortunate, as the logic behind no-frills accounts remains sound. Indeed, irrespective of whether the level of corruption is limited to 2,000 accounts or far more widespread, it is important for India to persist with financial inclusion and make it easier for its unbanked citizens to enjoy the benefits of formal finance. The government must not throw the baby out with the bathwater.