Here is an interview with Dr K C Chakrabarty, former Deputy Governor of the Reserve Bank of India with Moneylife. Dr Chakrabarty gives us his no-nonsense views, for which he is famous, on how to tackle the issues raised by demonetisation of currency. A banker for over 40 years, his is an insider account…
Moneylife (ML): Based on what you have observed so far, there is no doubt that demonetisation ought to have been planned better. Would you have suggestions on how to salvage the situation or improve things even now, to minimize the negative impact?
Dr KC Chakrabarty (KCC): The negative impact is that you have to print new notes and you have to distribute them equitably. I believe that the present system of implementation is highly anti-poor. A person who has five bank accounts can withdraw Rs1.20 lakh. A person, who has only one bank account in a rural area, is not able to withdraw anything and is standing in the queue. The policy seems to be that the poorer you are the more you will be hurt. Look at another example. If I have five ATM cards, I can draw Rs10,000 even today. Nobody has bothered about this issue. When something is in short supply, you cannot manage things with a rule. I would say if you want to permit withdrawal beyond Rs2,000, you impose a fee. A sort of cash transaction charge.
ML: A charge to withdraw my own money? That is a radical suggestion. Won’t it hurt the poor?
KCC: Oh yes, a charge to withdraw money. That is because you are not able to give everybody the cash they want. You will have to ration it. One way is to make it equitable is to levy a fee, so that people only withdraw what they really need. You can reimburse the poor like you do with the LPG subsidy. Otherwise, you are not going to be able to control the situation.
In addition, if you want to encourage digital transactions, it will not happen by speech alone. You have to make it more expensive to do cash transactions while digital transactions must be free or even incentivized. As it is banks are charging you for withdrawing money from ATMs (more than three withdrawals a month), but they do not charge you to withdraw money from the branch.
Another important issue is the geographical distribution of currency notes that are being printed. You have to be able to reach the currency to the last mile. Transporting currency is not easy. You can have Air Force planes carrying it up to a point, usually to locations where there is an airstrip. But you need to distribute it securely even after that.
I have dealt with these situations before. It is all very well to say that the army or the Central Reserve Police Force (CRPF) will provide security, but the fights begin over who will pay the charges for it. There is bureaucracy and red tape everywhere.
These issues need to be monitored on a real time basis. We need an on-going declaration by the RBI of what denomination notes – especially Rs500 and Rs100 have been supplied to which area on a daily basis and how many have been received from the security presses. The disclosure must be complete in terms of production, transportation, distribution and last mile availability, only then will you have a snapshot of what is happening at the ground level. Today, all this information is computerised and available; why can’t it be put in the public domain? Do we know where the Rs100 notes are going? Is it to metro cities or rural areas?
If we expect people to bear the pain and suffer for some time, then we should also know how much I am suffering vis-à-vis other people.
When something is in short supply, the big question is, is the currency being rationally, equitably distributed in terms of denomination and geography.
ML: Will you explain the currency situation today, based on your knowledge as a Bank Chairman, Central Banker and a statistician: We believe that the government has put on hold printing of Rs2,000 notes and has asked RBI presses to print Rs500. How long before these flow into the market and when can we see some mitigation of the situation?
KCC: If they work very efficiently, it will take at least five to six months’ time before the situation stabilizes and they are able to supply all denomination notes. We need to print more Rs500 notes and Rs100 notes and distribute them swiftly. When anything is in short supply, even currency, there will be hoarding.
There are several issues in achieving this. I am privy to certain information so I can tell you that the second press is in a mess for the last two years. The Chairman and Managing Director of Security Printing and Minting Corporation of India (SPMCIL), which is under the central government, was sacked just a few months ago
following a public interest litigation. This is in the public domain. There have been other problems earlier too
. How will you manage a crisis situation when you do not have a chairman of the company? A joint secretary, who does not understand issues involved in high security currency printing.
ML: How can the printing process be hastened? There are some estimates about the presses working in two shifts and there is talk about whether they can work in three-shifts. What is your view?
KCC: That is not possible. Do you have people even to work in two-shifts? If you try to push them to do more, there could be a breakdown because of wear and tear of old machines. What happens then? People must also understand that currency printing is done in a highly secure environment. Even if I entered the security press, I have to go through a series of checks. My pockets are also checked, even as chairman of the company. Therefore, you cannot simply put temporary people on the job in the printing press and ask them to produce more currency.
ML: What is your solution?
KCC: I believe that the banking system will not be able to deliver so you need a master plan to deliver currency – first to various hubs and then to the last mile. You need to have a franchisee model where people pay for the cash. In rural areas, people have to travel 10 to 20kms to get cash, so they incur expenses already.
It is a myth that you do not want to burden the poor- the reality is that they pay more for everything even today, if nothing else in terms of time and productive work hours lost. We are used to giving lip sympathy to the poor. So the poor will not mind a charge if the system works and they get their money without hardship– you can always reimburse them by way of a direct refund into the accounts of the really needy.
Earlier we used to make foreign exchange available at bank counters. If they could make forex available, why cannot they do so with domestic currency?
Our public sector banks (PSBs) are not competent to ensure last-mile reach despite their network and non-public sector banks do not have a network. So it has to be done on a commercial basis. You may need to regulate the fee charged, but unless you create franchisees, you will not be able to reach currency through the banking system.
Do you know there used to be a flourishing business for procuring and distributing small change, small denomination new currency (Rs5, Rs10 and Rs20)? The business operates very close to Reserve Bank’s regional offices and RBI employees are fully aware of it. Go and check who are the people in the queue to procure new currency or exchange soiled notes—they are all touts.
When anything is in short supply (clean notes) there is a premium for it. RBI officers are fully aware of what is going on, that is why I had said, RBI should not distribute any currency at its offices; they should concentrate on banking supervision. However, my suggestion was opposed by the employee unions.
So my solution is that you need a franchisee model to ensure distribution of currency to the last mile – you can regulate the business, fix a price and give direct subsidies to the poor into their bank account, but initially everybody must pay. That is the only solution. Instead, today you have the Prime Minister’s Office (PMO) doing workshops on digital payments and mobile. That is not the job of the PMO.
ML: We are still not clear if this franchisee idea will be accepted.
KCC: As a deputy governor, I had recommended this in a report, sometime in 2013, when Dr D Subbarao was the governor (of RBI). I was heading a committee comprising to looking into the shortage of coins and notes in the system and how to improve the distribution. My report is lying with the Finance Ministry. They have not even made the report public. The report clearly said that you will not be able to improve last mile availability of notes and coins unless you have a franchisee model.
ML: You have been a big proponent of empowering those who do not have bank accounts. A large number of no-frills accounts were opened during your tenure as deputy governor. Will demonetisation and the desperation for cash change things? What are your thoughts on digital transactions?
KCC: You have to bring down the banking transaction costs. The fact is that banking transaction costs are so high that people are afraid of going to the bank. This is true across the globe. Even in the US, 20% to 25% of the people do not use bank accounts because cost of banking transactions is very high.
In India, at the very least we should have a proper consumer protection system in place. You may push a person to do digital transaction, but once a person has lost money at an ATM or in a digital transaction, he will stay away for 10 years. All over the world, unless the bank can prove that the customer is at fault, his money should first be credited to his account. That is a global rule. This is not yet implemented in India – there is only a draft notification
. So you have to make things cheaper and safer for people. When the rich lose money, it makes news, but when the poor lose money, especially in a remote rural area, they have nobody to turn to and it is lost forever.
ML: Would you have any specific thoughts on how to tackle black money?
KCC: There are three sources of black money in our country –
election, religion and administration. So first, you make all political donations cashless. The second source is religion. If you put money in a hundi at the temple, the minute they put it in the bank account, it becomes white. There is no know your customer (KYC) for that, but in a JanDhan account you are going to investigate all deposits above Rs250,000. The third is administration. All the perquisites enjoyed by government officials, members of Parliament (MPs), ministers and judges must be taxed at market value and valued on the basis of cost-to-company or country. Our ministers stay in a free residence, that is tax-free – why should it be priced at market value? Same goes for telephone calls and travel. You can pay them Rs1 crore as salary, but ensure that everything is taxed and priced at market rates.
(Disclosure: Dr KC Chakrabarty is on the board of trustees of our sister entity Moneylife Foundation, a not-for-profit organization engaged in advocacy for savers and spreading financial literacy