A painful clean-up that will hurt common citizens

In his speech that in one fell swoop demonetised as much as 86% of India’s money in circulation, Prime Minister Narendra Modi spoke for honest auto rickshaw drivers and vegetable vendors, the toiling masses who power the economy at the grass roots. But it is these and a whole lot of other ordinary citizens who will face the brunt of the government decision as they queue up to exchange their hard-earned money from a banking system that is ill-geared to handle such a mass demand.

True, the move has been targeted to hit hard at hoarders of black money and will help clean up ill-gotten wealth and fake currency at a time the currency in circulation is already high and rising fast, particularly in the light of elections coming up in the key states like Uttar Pradesh and Punjab.  It is a fact that the currency in circulation has jumped up 6.8% in this financial year so far and was up an astounding 17.2% in 2016, the increase often being linked to the run up to a cluster of elections.

But equally, this is like a dose of extra-heavy chemotherapy that will likely cripple the patient and still not guarantee that the cancer of black money will be cured.

Worse, by feeding the economy with even higher denomination notes, the stage is possibly being set for a return of the disease with even higher force because if Rs 500 and Rs 1,000 is being described as high denomination currency prone to hoarding, then a denomination of Rs 2,000 makes it that much more easy to hoard going ahead, even if a one-time clean-up is achieved. Even that one time reward is doubtful if one goes by history.

I G Patel, who was the RBI governor when the Janata Party government under Morarji Desai demonetised notes of Rs 1,000, Rs 5,000 and Rs 10,000, had pointed out back then that “such an exercise seldom produces striking results.”

In his book, ‘Glimpses of Indian Economic Policy: An Insider’s View’, Patel wrote: “Most people…do not keep their ill-gotten earnings in the form of currency for long. The idea that black money or wealth is held in the form of notes tucked away in suit cases or pillow cases is naïve. And in any case, even those who are caught napping…will have the chance to convert the notes through paid agents…(it produced) much work and little gain.”

It is worth noting that the amount of this high denomination currency in 1978 was far lower (under 10% of the currency in circulation then) and many people at those times had not seen or handled a Rs 10,000 note. Yet, there were long winding queues, frayed tempers and banking staff stretched to the hilt.

Today, the situation is very different. On the one hand is a rising class of young people who use ATMs and have a decent level of consumption, and often carry notes of Rs 500 and Rs 1,000. But there is an even larger group of people who do not have access to debit or credit cards and ATMs, and still are paid their meagre wages in these currencies.

Among them are the drivers, the milk booth vendors, the petty trader, the daily wage labourer etc. This means hardship across the spectrum made worse by the fact that banks now want a declaration before exchanging notes, and that too with a cash withdrawal limit of Rs 4,000 at one go.

Day-to-day business

It is not surprising that a large part of the day-to-day business, which is often conducted in cash across millions of mom-and-pop stores and trading shops, has come to a standstill across the nation. In effect, it is an economy crippled while banks remain closed and are not equipped to handle the rush when they reopen for business. Reports are already coming in of branches reporting internally that they do not have enough Rs 100 currency notes to pay out even the Rs 4,000 that they are supposed to. 

It should be clear to everyone except those sitting in ivory towers that the system will face intense pressure. The nation has a total of some 80,000 bank branches with an average population per branch of about 15,000. Even if half of these turn up for depositing their currency, the system is faced with an impossible load that could lead to disastrous outcomes. The persons likely to suffer in this mad rush, and it will be no less than a scramble, will be the old, the infirm and the poorer sections, many of whom still need to spend for their household consumption on a daily basis.

Years ago, the former RBI deputy governor Savak Tarapore walked into a bank branch incognito to check the quality of service. His experiences in his words speaks out even today: “The perception of the common man is that the quality of banking service is dependent on who you are and who you know…incognito visits to bank branches have conclusively shown that the quality of services are sub-standard or even non-existent.”

When such a system is burdened with an unprecedented load, a breakdown will not be a surprise. All of this means that the move that is being described as bold and an indication of a war on black money is unlikely to be seen as such by the common man.

There remains a strong argument in favour of the move though to weed out fake currency used for terror and other illegal activities against the state. However, the continued inaction on fake notes is actually a failure of the government and the central bank.

As the RBI annual report of 2015-16 notes: “Central banks worldwide adopt standardised practice of upgradation of security features of bank notes to stay ahead of counterfeiter.” The RBI and the government have clearly not done so in this case for years, and the common man is now being asked to pay the price.

(Pattnaik is Professor, SPJIMR; Rattanani is Editor, SPJIMR)