Demonetisation nightmare

Note ban: Recovering just 10% of bad loans from corporates would have served India better

The effects of what is commonly known as demonetisation are now fully playing out. But what we get to see is the impact in the proximate areas – largely the urban centres where the media has been able to reach out.

As time passes, we will begin to see how agricultural markets are collapsing, trucks are getting stranded and economic activity is slowing down. We are told that this is okay, we need to bear this in the interest of the nation. This argument is false for a large part. While it may affect people having unaccounted wealth, it disproportionately affects the honest tax payer.

The importance of currency is in its fungibility or interchangeability. All other assets are specific assets – they have a way of identifying ownership. From a mobile phone to a motorbike, there are identity markers that establish the ownership of the asset. Currency is owned by the bearer, which gives it the nature of fungibility. The sudden move by the government is making a fungible asset into a specific asset, even if it is for a short period, by identifying currency with the bearer’s identity and income. The ridiculous act of applying indelible ink on somebody who has swapped old currency with the new ones undermines the basic nature of currency. There is a difference between income, which is to be accounted and taxed, and holding of currency, which is a medium of transaction.

By making each citizen to stand in the queue and asking them to account for currency and prove that this holding is a result of a legitimate means is as ridiculous as taking a declaration from each driver that s/he has not jumped any signal while driving. The currency bears the promise of the government. This move has broken that promise – the promise to pay the bearer a sum written on the currency and signed by the RBI governor.

The government is now the biggest defaulter in the country for not honouring the promise, even if it is for a brief time. A loan that is not repaid when it is due is a default. The RBI is defaulting on its promise by not paying the bearer the amount. It is bad enough not to honour that commitment for a brief period on the currency, but to deny access to what is obviously “accounted” money kept in a demandable deposit in the bank in a form that is convenient to the customer is evil, sinister and immoral.

Let us for a moment assume that people who voluntarily stand in the queue for movie tickets, in temples for ‘darshan’ or for a bottle of alcohol should be willing to stand in the line to get their own money to wear a badge of patriotism and nation building. The question is: How long? When do I earn my badge of patriotism and nation building?

For anybody doing elementary math, the dimensions of the crisis should have been evident from the word go. There are two aspects to the preparation that was needed to be handled for an operation of this size: Was the replacement currency printed and adequately in stock to be released into circulation? Was the network and logistics ready to handle this in the shortest possible time?

The answer on both the counts is a resounding ‘no’. Saumitra Chaudhuri, former member of the erstwhile Planning Commission, has shown calculations to indicate that the printing and distribution could take all the way up to May 2017 to replace the stock that was removed with a single announcement. Is six months a fair period to stand in queue for demonstrating our patriotism? And at the end, do we actually get the denominations that are liquid enough to carry on the day-to-day transactions?

The distribution logistics – assuming the currency supply is in place – is currently working to full capacity and breaking down. We can see this at bank branches and ATMs.

The government machinery surely was not ready to launch this “surgical strike”. Assuming that there is enough supply of currency, just the replacement of the massive amount of currency would take four months in the least – a figure that can be easily calculated based on the first few weeks’ performance numbers put out by the banks. This is a terrible implementation strategy.

Effects of bad planning

And the effects of bad planning and implementation are there for everyone to see. There have been deaths. The agricultural sector, which has been reeling from consecutive droughts, is going to see a man-made disaster. Farmers are unable to sell their produce and the trucks are unable to transport the stocks. This has implications on food availability and food prices in the medium term. 

While celebrating the opening of Jan Dhan accounts, the financial inclusion drives and technology roll out, all of which were helping the poor, we suddenly find that a migrant worker is unable to deposit money in his wife/father/brother’s account because a cash deposit to another account has to be accompanied by an authorisation.

The cash stashed away by a poor housewife is struggling to find an outlet because she does not have identity papers or a bank account. The government is at a loss and it is evident in its constant flip flop. Finance Minister Arun Jaitley said that the limit of Rs 4,500 for exchange of currency across the counter was not a one-time limit, but because of logistics, the banks may choose to make it a one-time limit. The next we hear is that it is indeed a one-time limit to be identified with indelible ink. Then the limit is reduced to Rs 2,000.

Now, we hear that petrol pumps will dispense cash against swiping of debit cards, a good move because it addresses, though minimally, the distributional logistics. While all this can be tinkered on a day-to-day basis, it does not address the basic problem – that there is not enough currency to circulate. Secrecy was the word and the weapon used by the government to justify the mess. Now, we know that the veil of secrecy ensured that there was no sane advise or inputs to the decision makers. No wonder the situation is in a mess.

The shortage of currency and the resultant mess is turning out to be an opportunity for operators and touts to cash in on the asymmetry reigning in the market place. Is the current `surgical strike’ providing opportunities for generating further unaccounted income? That is the worst irony.

(The writer is a visiting faculty at the Centre for Public Policy, IIM-Bangalore)