Demonetizing for better!

‘Change is only constant’ has always been a saying. Needleless to say, the list of changes in our behavior are endless. Transformational changing events are very rare. A few years from now, the current event will be regarded as path breaking reform, which unleashed far reaching positive consequences for the economy.

The historic mandate of 2014 election has started reaping its fruits. It’s an established fact that India is a highly cash intensive economy and with a high cost of handling cash. India’s cash intensity also stands out in contrast to other developing countries. The value of notes and coins in circulation as a percentage of GDP in India is 12.04%, compared to 3.93% in Brazil, 5.32% in Mexico, and 3.72% in South Africa (Reference TOI). Hence, the move by the government is expected to be fraught with implementation and execution challenges, some rather large and undesirable.

Here’s some interesting trivia. Did you know that this is not the 1st time that India is pulling bank notes from circulation? The 1st instance was in 1946 when Rs 1000, Rs 5000 and Rs 10000 (the largest currency notes to have ever been printed by RBI) notes were taken out of circulation and the 2nd was in early 70s when demonetization was suggested to unearth and counter the spread of black money. The genesis of “black money” started when personal taxes were extremely high, which forced people to hide their income and seek ways to generate more funds and not pay tax on them. Well, if third time’s a charm, let’s see if this ban can wipe off corruption from India.

The scrapping of the currency notes of the highest denomination is being asserted as bold move on the part of Indian economy. With decision, the government rendered almost 86% of the current cash in circulation illegal tender and it is probably one of the biggest big-bang reforms undertaken by any government for a long time.

The World Bank estimates about 33 crore internet users in India, which makes it the second largest internet market. Several of these mobile and internet users now have a bank account under the Pradhan Mantri Jan Dhan Yojana, a scheme to link every household to a bank account. In addition, over 127 crore Indians are enrolled in Aadhaar, a biometrics-based digital identity database that has become mandatory for anyone who wants to continue to be part of food or pension schemes. But the problem for the majority of India is multi-layered as abbreviated below:

• Lack of Access (To Traditional Banking Services, Identification/Address Proof)
• Lack of Acceptance ( To electronic Transaction Methods, other modern methods)
• Lack of knowledge (Financial Consumer Literacy about how to use payment methods safely and securely)
• Lack of Alternatives (To Cash )

The brunt of demonetization, aimed at unearthing illicitly stored value, is felt the most by middle and lower-middle class India, which are left without a medium of exchange for day-to-day economics. It is the start of the Rabi?—?which accounts for nearly 40% of agri output?—?and it has been reported that farmers are struggling to pay for inputs. It is the start of the construction season, which is cash-dependent. It is the start of the job season for the migrant unskilled worker. Contradicting the move, with regards to earlier events it was far easier to demonetize high value currencies in 1978 as it was low in value terms. But things have changed a lot as the value of Rs 500 and Rs 1,000 currencies has now risen to more than 80 percent of the total money supply. Following the concerns, questions about the Government being serious enough to stop/minimize the circulation of black money have already been raised, it should have followed different mechanisms, and should not have exposed the entire country to a state of (yet undeclared) economic emergency. Also many around are still in the questionable mode of how could the leader of a rising superpower not see the chaos that would follow demonetization? While common men standing in queues for hours can be justified, what about the ones who have died waiting? What about losses like one’s health and life? How millions have faced unnecessary harassment, and sizeable loss of income due to a sudden and unprecedented demonetization of the economy? Where do you draw the line? As might be expected from this long and tremendously brutal cycle, the emotional responses will express from shock and sadness to grief and mourning; some telling stories of the good deeds; some bad deeds; and yet others feeling nothing at all.

Demonetization must be followed by remonetization. RBI released data on the money supply in India as of 30 Sep, 2016, which stated that there was a total of ? 17,540 billion of currency held by the public. Of this there were 15.78 billion notes of Rs 500 denomination in circulation and 6.84 billion notes of Rs 1,000. Even if we assume 20 per cent of the notes will be “extinguished”, the government must replace over 18.6 billion notes. India’s currency printing capacity is 23.7 billion notes in a year. Even if the entire capacity was put in service, it would deliver 2.1 billion notes per month. Once printed, the notes must reach granular India. India has 593,731 inhabited villages, of which just over 50,000 are in rural areas. To service a population of 1,311 million persons, India has 1.34 lakh bank branches and 2.02 lakh ATMs (of which only 1.2 lakh are operational), 1.5 lakh post offices and business correspondents. Given the matrix of supply and demand, those serving the people in banks do deserve applause. The need is to bridge the gap between availability and need. In the current situation, government must look outside the system for real time solutions to alleviate the pain.

The point is the economy cannot afford to be trapped inside the “all will be well soon” cocoon. It is imperative for the political regime to step in and seek solutions from outside the system. There is a real risk of the cash crisis morphing into a crisis of confidence if not addressed urgently. Clearly being nimble is the one thing that can save from tripping over and falling off. Most people are willing to put up with the hassle hoping there is light at the end of the tunnel and things will get back to normal soon.

Demonetization might not be new to India but the circumstances are. To conclude, the country is undergoing a massive political transition, which would drive the future leadership from being ordinary to extraordinary. Yes, we as a country are rebooting but at what cost is still an evaluation.

Not only so, but we also glory in our sufferings, because we know that suffering produces perseverance; perseverance, character; and character, hope.

-Bible Verses

Rajiv Kumar is the MD & CEO of Universal Sompo General Insurance Company. 

About me: This article expresses my personal views, and not those of any of my employers?—?past, present or future.

Reference:

1.       https://timesofindia.indiatimes.com/business/india-business/Indias-love-for-cash-costs-3-5bn-a-year/articleshow/45934597.cms

2.      Image source : Times of India