By any standards demonetisation of 86% Indian currency that affects the wallets of 125 crore population is no ordinary decision. The Union Government sent shock waves among not just the hoarders of unaccounted money but also among the state governments and the huge political constituency. The measure may have precedence but the dimension of the effect has no precedence and therefore, economic historians are watching in gaze for generating a new script.
Cash is dirty; banks keep soap for their staff handling cash to wash off their hands because of the bacteria that causes pneumonia or skin infections. Yet we would love to hold them. Most drug dealers, casinos, prostitutes, or casual farm workers prefer to receive cash for they only receive small remunerations for their day’s labour or night’s pleasure. Waste and scrap dealers, many steel merchants only deal in cash.
Large farm owners in India who indulge in unaccounted leasing of their farmlands invest their incomes in films or tourism industry or clandestine drug peddling, showing the income as agricultural income and hence non-taxable. The vote bank politics has all along protected this clan from being taxed.
Many of those shocked out of their wits, quickly turned to gold shops. Several gold merchants, I heard, seem to have billed for one and half tolas (about 11grams) giving only one tola and billed on dates preceding the D-day. Institutions and individuals behave the same way in crisis. One of the prominent gold dealers told me that it would not be difficult to handle raids by the taxmen! He said that it is a win-win for him, his buyer and the taxman.
My instant praise for Prime Minister Narendra Modi on this daring feat has taken a U-turn on witnessing the events during the past few days. Hollow planning of the massive effort affecting masses is unfolding day by day. Automatic Teller Machines (ATMs) stopped functioning even one day one after the two-day recess. Strange that banks and the Finance Minister argue that the technology of ATMs cannot roll out new currencies without systemic correction (calibration)! Did they not they know this before announcing opening of the ATMs to the public?
Serpentine queues that had disappeared after computerisation are back in front of every bank. Banks will not be able to handle any other business for months to come as the process of readjustment to the new currencies and holding operations. Credit business will suffer for want of personnel, as all the bank employees are busy in handling only cash and cash for exchange operations.
Strange indeed that banks like State Bank of India (SBI) is speaking of huge accretion of deposits at the end of three days! After all, when you withhold withdrawal and allow only deposits would not the latter swell? The Reserve Bank of India (RBI) failed to pump in equal exchange in smaller denominations for Rs4,000 per person and in exchange is the Rs2,000 denomination currency note that can buy the goods and services a common man needs.
The RBI knows for sure that rural areas lack basic infrastructure to handle the demonetisation. Cooperative banks, local area banks (LABs), primary agricultural cooperative credit societies, regional rural banks (RRBs) and even commercial banks operating with as thin a staff complement as two persons do not have capacities to handle cash exchange required by the persons – customers and non-customers – living in their areas of operation. There are not so many ATMs either. Business correspondents (BCs) and business facilitators (BFs), the new clan of intermediaries in the financial inclusion engine of the RBI nowhere figure in this exercise. By any stretch of imagination, the infrastructure for this massive operation just does not exist.
The government may come up with the argument that till 30 December 2016 people have the option to deposit their currency. However, where is the cash for their day to day operations when there is still large scale illiteracy and poverty?
My maid and my driver tell me a different story. Both subscribe to an informal chit fund group, where the needy among the group bid for the chit amount at a small discount. Since all the members are of the same economic clan, they invariably put their bids within bounds. They say that their accumulated chit savings are all in Rs500 denomination that lost its value. They plan to cash it within the boundaries fixed by the Government before December 2016.
Barter and credit are other options that have suddenly sprung up. The retail shopkeepers in my locality offer liberal credit for the next one month. They are promised similar lines of credit from the wholesaler of grains and pulses. Here there are only promises and no promissory notes. But the promises are credible. The moot point is will they survive the entry of foreign direct investment (FDI) in retail? This trade operates on credit cards and debit cards, net banking and digital banking.
A few questions arise in. Will the RBI continue to be the monetary authority? Will alternate currencies like the Bitcoin or other innovations by mobile and digital traders overwhelm the governments? Can money move to the realm of public utility whereby the elected representatives take seize of the financial and monetary systems?
World Bank may have lauded the participatory budgetary process of Brazil that resulted in improvement of the standard of living of many communities where government could issue money directly to communities as a part of democratic process. But can it succeed in India where the local bodies in villages and panchayats are not trusted with cheque drawing powers till date in spite of legislative sanction embedded in 73rd & 74th Amendments to the Constitution?
It is strange that the FM should ask the people to bear the hardship for a few more days! Can the labourer who received Rs500 on the 8th November buy his loaf of bread or packet of milk next morning as he used to do otherwise? No. And there are millions in this group in rural areas. There can be no two opinions on the need for an overnight decision to clean up the economy. However, the PM could have set up a confidential think-tank on planning for the event and planned it better. The well-intentioned move is having roadblocks and potholes all the way.
(B Yerram Raju is an Economist and Risk Management Specialist and Adviser, MSME Facilitation Council, Industries Department, Government of Telangana. The views are personal