By Eugene D. Thomas,
Since the hon’ble Prime Minister of India made the shocking announcement on 8th November 2016 withdrawing the Rs.500 and Rs.1000 notes as legal tender, all hell broke loose!Almost instantaneously, people had money, but no liquidity. Merchants had goods, but made no sales. People queued up before ATMs but got no money. Banks stayed opened even on holidays, but failed to satisfy the demands of the customers. Almost 50 elders lost their lives in the country while standing in the queues. All political partiesupped their ante, either opposing or defending the step taken by the central government. And individual politicians saw agolden opportunity to project themselves in the media, and they made full use of it. Nobody talked about anything else but demonetisation. Social media was used overtime to spread money and Modi jokes and unknowingly (or knowingly) even forward rumours.
The stated intention of the central government and the party in power is that this bold step is to fight black money, fake money, and the insurgent outfits’ kitty. I will not go into a debate on this, but simply accept it as a fact; this being the taken position, I say that this intension is laudable and bold.
However, I have some musings on this issue that is affecting all – the rich and the poor.
The first thing that struck me is that 86% of the national currency in circulation had been declared as no longer legal tender! One official of the RBI had stated that it would take 4 years’ time to print this amount of stock of money, utilizing all the printing presses of the Security Printing and Minting Corporation of India Limited (a GOI undertaking)working at optimum! How do people trade, businessmen operate, and commerce run in the meantime when 90% of transaction in India are in cash? The last time demonetisation of such high-denomination notes took place was in 1978 when the Rs.1000 note was withdrawn. At that time, these notes constituted only less than 1% of the national currency in circulation!
Secondly, as many others have also questioned, why introduce the circulation of Rs.2000 notes first? It doesn’t need a financial wizard to figure out that withdrawing 86% of the national currency in circulation will lead to an immediate liquidity crunch and monetary exchange impediments. If the new Rs.500 notes were circulated first, I don’t think that there would have been such difficulty in obtaining ‘change’ in the market as is the case now.
Thirdly, this faulty implementation of demonetisation has led to the hoarding of Rs100 notes. The local SBI has made a plea for people to part with their Rs100 notes and not hoard them. My question is this – why shouldn’t the consumers and vendors hoard these notes? If goods are in scarcity, people will hoard them. If smaller denomination notes like the Rs.100 are in scarcity, as is the case now and acknowledged even by the banks, people will hoard them! A simple arithmetic – I go and make a purchase of Rs100, and pay with a Rs500 or Rs1000 note. The vendor will have no problem in returning me four Rs100 notes in the former case or one Rs 500 note plus four Rs100 note in the latter scenario; in both cases, he will part with only four such notes. Today, for the same purchase, I present a Rs 2000 note – which vendor in his right mind will give me nineteen Rs 100 rupee notes! That is why hoarding of Rs100 notes is being resorted to by consumers and vendors alike.
Further, I have three outside tours scheduled within the country in the coming two months. I will need ‘change’ for taxi fares, sumptuous street food, tips etc. So, will you blame me for starting to hoard the Rs100 notes? If the market was initially flushed with the Rs.500 notes, this problem of liquidity would have disappeared in no time!
Against this backdrop, these questions still haunt me: (a) why introduce a Rs 2000 denomination note as a first step? And don’t put forward the argument of the mechanism of rolling black money by converting the old Rs1000 note to a new Rs1000 note (if it had been reintroduced) or the new Rs,500 (if it had been circulated now) – limits on withdrawal have been imposed and all deposits/exchange are now known to the government! (b) why start the attack on black money by demonetising when it is estimated that only 6% of black money is kept in cash? (c) who gives whom the right to restrict me from withdrawing my own hard earned money. In fact, this just reminds me of those bygone years, of the communist era in other countries, of queues for everything, trading through barter, artificial shortage (like lower denomination currency now and the spillover effect on consumer goods which I can’t buy but can afford).
However, one of the many unseen benefits that all this has brought back to the fore are three very important institutions (if I may call them that) – non-banking credit, hope and trust. The consumer has no change so asks for credit in hope, the businessman has no change so gives credit on trust!
In all this, and all said and done, there can be no argument on one issue – that the officers and assistants and supporting staff of the banks deserve our appreciation and salutation for the mental and physical stress that they have endured in these last two weeks. I hope the central government thinks of some form of showing its gratefulness to these bank staff, and not just the customary compensatory leave.
(The author teaches Economics in NEHU)