Demonetisation: Govt silent on critical issues

With the audacious move by the Centre to ban denominations of Rs 500 and Rs 1,000, many questions arise that demand answers

Serpentine queues outside banks and ATMs, and people returning empty-handed even after wasting hours standing in such lines, at least till a few days ago! It all reminds us of what happened in Greece last yea

r.

Prime Minister Alexis Tsipras on a Sunday evening, towards the end of June 2015, announced that Greek banks would be shut for about a week. People were allowed only limited cash withdrawals from ATMs, many of which ran out of cash leaving a state of complete chaos in most part of the country.

Of course, India’s current currency crisis is not like that of Greece which went into financial turmoil after global creditors refused to extend any further bailout of its humongous debt. But the pain felt by an average Indian is similar to that felt by Greek citizens after Prime Minister Narendra Modi announced a ban on Rs 500 and Rs 1,000 notes on one such evening earlier this month. The move is since being called demonetisation.

The aim is to weed out black money, counterfeit currency in circulation and inculcate in people, the habit to move towards cashless transactions. But whether it will work, the way the government may have perceived, hinges on many factors. While execution will play a key role, the next government’s moves vis-à-vis currency will be equally important.

At present, there is a squeeze of currency notes in the system. According to Reserve Bank of India data, the total outstanding currency in circulation in the Indian economy as on October 28 was Rs 17.77 lakh crore. An estimated 86% of that was in the form of Rs 500 and Rs 1,000 notes, which at one stroke ceased to be legal tender.

The government has brought out refurbished Rs 500 currency notes, and also issued new Rs 2,000 denomination notes. But the volumes are still not sufficient. Finance Minister Arun Jaitley has said that printing of currency notes may take months because of the security features involved in them. Till then, there will be restrictions and the citizens are advised to maintain calm. The government has also unleashed a slew of measures through which payments can be made digitally.

Volumes have been written about how this cessation of currency has led to an “economic emergency” in the country. How the two most labour intensive sectors — agriculture and textiles — have suffered, and the poor have been oppressed, devoid of using their own hard-earned cash. Former Prime Minister Manmohan Singh has even gone on to say that the objective may have been to fight graft, but the step is a “monumental management failure”.

Some have also called it a temporary crisis, and teething problems exist which will eventually be eradicated and smoothed. But the question is whether after this step, black money will be eradicated from the economy, at least partially? According to the government-commissioned National Institute of Public Finance and Policy (NIPFP) estimates, most of the black money is now in the higher education sector, real estate and mining. Gold and benami transations are other sectors to hide illicit wealth. In 2012, a white paper on black money in India, brought out by the then UPA government, said, the cash component of undisclosed incomes ranged only up to 7.4%.

Another issue is whether the move, at one go, will make Indians change the way they spend, and bring them on a digital platform. According to current estimates, a whopping over 90% of those possessing debit cards in India, swipe them only to withdraw cash, and not to pay bills.

Professor Kavita Rao of NIPFP argues that inaccessibility of cash will lead to compression in demand, as well as in income generation in the economy for a longer period, until people get familiar with the functioning and use of digital modes of transaction. It said, the compression in demand would mean a decline in imports, while exports might not be adversely affected. This change in the balance of trade would induce an appreciation of the currency. Along with lower interest rates, this could result in inflow of investment by FIIs as well.

A related issue is that of its impact on the economy as a whole. International rating agencies, economists across the spectrum, and other independent agencies have unanimously said that demonetisation will weigh on the country’s GDP growth in the second half of the current fiscal, which could slow to the tune of half a percentage point. In over two weeks into the crisis, the government has not been able to manage the cash economy even half way through. This has impacted businesses in the unorganised sector, which constitutes a large part of the Indian economy.

Certain questions that the government has not yet answered are — What was its preparation before launching the world’s biggest currency exchange drive? According to the finance minister, six months were used not just to print enough Rs 50 and Rs 100 currency notes, but also to plan the operations meticulously. If that was the case, why is there still a currency crunch? When the demonetisation move meant discontinuation of high denomination notes, why did the government come up with an even higher denomination of a Rs 2,000 currency note? The government is changing rules related to demonetisation every day. In the past 14 days, more than a dozen relaxations have been announced in the norms. Critics have questioned whether the government was advised adequately before announcing such a big step affecting millions of India’s poor and farmers ahead of sowing of the winter crop.

The finance minister has also said that after the demonetisation is complete, public sector banks will be able to up their lending to the productive sectors of the economy. They will have enough cash. The move will take care of their re-capitalisation needs. But the public sector banks have been in a mess because of corporates defaulting on loans.

The current move has filled banks with deposits, but that comes with a cost. Companies have been cutting jobs, wage payment to labourers have been affected, and construction activities are coming to a standstill. The government has been saying it is a small blip, but how is it going to prevent further generation of black money through the same route? Is it going to change currency notes periodically? The Centre is yet to answer.

Centre Stage:Q&Awith the govt

1 What was its preparation before launching the world’s biggest currency exchange drive?

2 According to the finance minister, six months were used not just to print enough Rs 50 and Rs 100 currency notes, but also to plan the operations meticulously. If that was the case, why is there still a currency crunch?

3 When the demonetisation move meant discontinuation of high denomination notes, why did the government come up with an even higher denomination of a Rs 2,000 currency note?

4 The government has been saying it is a small blip, but how is it going to prevent further generation of black money through the same route?

5 Is the government going to change currency notes periodically?