Demonetisation: A Smart Plan With Poor Execution

Posted on November 22, 2016

By Jyotishman Lahon:

Around 8 pm on November 8, 2016, markets, restaurants, offices, bus stands, railway stations and homes were all buzzing with only one discussion: the PMs decision to demonetise the current ₹500 and ₹1000 notes and introduce the new ₹2000 and ₹500 notes in its place. Demonetisation in a simple sense means stripping the current currency of its legal tender. Various countries have done this in the past for various reasons, but the reason given by our PM was to get rid of the menace of black money.

According to the circular flow of income, two things happen in the economy: savings and leakages. When money comes into the market, it is called injection and when money is removed from the market, it is called leakage. Injections help the economy to grow while leakages constrict the monetary system. So basically, household savings, though useful and necessary for an individual, is harmful to the economy from a macroeconomic aspect.

In India, thousands of crores of black money are hoarded by corrupt individuals inside their houses to hide it from the Income Tax department. Not just corrupt individuals, many households also store liquid cash for future uncertainties. Yet, as it is not a part of the banking system, it remains unaccounted. It lowers the credit creation capacity of financial institutions and the calculated GDP remains lower than the actual one.

So, the move initiated by the government is aimed at bringing all the unaccounted money into the financial system. The people who deposit more than ₹2.5 lakhs and there is a mismatch in their income will be penalised by 200%. Even if they keep the money for themselves, the devalued notes will just become pieces of papers and the government will print new currency notes in its place. Thus, the money will again return to the monetary system.

Therefore, with a view to ending all this, the government and the RBI decided to embark on this brave venture. But though the move seems bold and the need of the hour, there have been certain complaints regarding its implementation. First of all, the government failed to take into account the rural and backward areas of the countries where banks and ATMs are still a far cry. With the government announcing the decision at around 8 pm and the change happening at 12 am, it is very unlikely that the news would have reached such areas in four hours. As a result, those people had to face a lot of problems in basic economic transactions the next day.

The next flaw in the implementation was that the government and concerned authorities overestimated the transacting power of banks and ATMs. ABP News had reported that the government had announced that from November 11, banks and ATMs would start issuing new notes. But even on November 12, many ATMs were not in operation. According to The Huffington Post, inside most ATM machines, there are four compartments (called cassettes) for different denominations. One for ₹100 notes, two for ₹1000 notes and one for ₹500 notes. According to the Indian Express, the ATMs could issue only ₹100 notes from one cassette. According to the Quint, the capacity of ATMs was reduced from ₹40 lakhs to only ₹2.5 lakhs. This probably explains why the cash continues to get exhausted so quickly in the ATM machines.

Thus, what I can say as a commoner is that, though this bold move of the government should be appreciated for the long run, there were some flaws and problems in the short run which could have been avoided with better planning.


 Satish Krishnamurthy/ Flickr.