I am obliged to return to the subject of ‘Old Notes for New’ because the hardship and suffering of the people continue. It is now clear that the decision to demonetise notes of Rs 500 and Rs 1,000 was ill-conceived, the preparation was terrible and the implementation was horrible. It has also emerged, through whispers of course, that besides the Prime Minister no more than four officials were in the loop, and the chief economic adviser was not among the four!
Look at the disruption:
1. About 86% of the currency in circulation was declared ‘illegal tender’ in one fell swoop, leaving practically no money with millions of people. There was no money to buy milk or medicines, pay for an auto or taxi, or buy vegetables or grain. I know people who went without a meal for a whole day because no eatery would accept a Rs 500 note.
2. There are 1,34,000 branches of banks in the country. Add 2,15,000 ATMs of which about 40% were working. Assuming that 500 persons, on average, stood in line outside each branch or ATM, every day more than 11 crore people spent hours standing in a queue to exchange notes. Most of them were working people. Calculate the impact on production and productivity.
3. For some inexplicable reason, cooperative banks were not allowed to exchange the notes. Millions of farmers could not deposit or withdraw money and, in the sowing season, there was no money to buy seeds or fertilisers or hire labour.
4. Wholesale markets shut down. Weekly fairs stopped. Retail outlets reported a calamitous fall in sales.
5. Industrial hubs such as Tiruppur, Surat, Ichalkaranji, etc, ground to a halt because there was no money to pay wages to the workers and no money to pay for ancillary and support services like transport.
6. About 33% of all employed persons are casual labourers (estimated at 15 crore). Suddenly, they found themselves without work because those who employed them could not find the money to pay wages.
7. Brokers and touts sprung up offering to exchange the ‘demonetised’ notes for a price. Men and women, without regular work, offered to stand in line to exchange notes for a fee. Honest people turned dishonest to get some money. The government’s response was to use indelible ink to mark the finger. It could have added a voting machine and converted each bank branch and ATM into a polling station!
The pain and suffering will continue because it will take months to print 2,200 crore notes of the new series to replace the old series and because of the limitations of bank staff and the ATMs (yet to be recalibrated). Meanwhile, the boasts of the government will unravel:
WILL DEMONETISATION END BRIBERY? Of course, not. Those who will take bribes will take them in the new notes. A case of bribery was reported from Gujarat where two officials of the Kandla Port Trust were caught receiving 124 notes of Rs 2,000!
WILL IT STOP COUNTERFEITING? Of course, not. If one human can print notes with new security features, another human can find a way to copy those features. The most counterfeited currency in the world is the US dollar. One way to combat counterfeiting is to phase out, periodically, old series of notes and introduce new series and try to stay one step ahead. The last time we did that was in January 2014.
WILL IT PLUG GENERATION OF BLACK MONEY? Of course, not. Sectors which are prone to use unaccounted money (wholesale trade, construction, jewellery, higher education, election funding, etc) will continue to demand unaccounted money and, therefore, ways will be found to supply unaccounted money.
No major economy is entirely free from the scourge of a black or shadow economy. According to a World Bank study, the shadow economy in the US is 8.6% of GDP (or about $1,600 billion); in China 12.7% (about $1,400 billion); and in Japan 11% (about $480 billion). India’s shadow economy is estimated to be $500 billion (22.2% of its GDP of $2,250 billion). It is large, but not unusual, and the good news is that its size is shrinking. Brazil, Russia and South Africa have larger shadow economies; Israel and Belgium are comparable.
The Prime Minister seems to have bought the idea of a cashless economy and decided to wage a war on cash. His supporters called it a ‘surgical strike’, little realising that the bulk of the money transactions of the people of India are legitimate and in cash—and will be in cash for a long time—for many reasons. Let me share one crucial data point: for 133 crore people, at the retail level, there are only 14,60,000 Points of Sale (POS)! Cash to digital is a long journey. The ‘surgical strike’ post-Uri was intended to put an end to infiltrations, but the reality is that there has been a three-fold jump in infiltrations (as admitted by the government).
The ‘surgical strike’ on currency has resulted in the immiserisation of millions of people and bringing many sectors of the economy to a grinding halt. I shudder to think what the next ‘surgical strike’ will be and what dreadful consequences that will bring.