Did The Decision To Demonetise Need More Planning?

Posted on November 14, 2016 in Business and Economy

By Anwarul Hoda:

On November 13, as I went out to buy bread and eggs, I found that no shopkeeper in my locality had either of those goods. Similarly, it was hard to find commodities like rice, flour, milk, and other frequently consumed commodities. When I asked the shopkeeper, he told me that their stock was about to end. He said that due to a sharp decline in sales, there was no point in checking for available stock either. He added that many shopkeepers had decided to stay home as they are facing a huge fund-crisis.

On November 8, in a direct address to the nation, PM Modi surprised the nation by announcing that the Rs. 500 and Rs. 1000 notes in circulation would cease to be legal tender from the next day. Explaining that it is the “anti-national and anti-social elements” who hoard these notes, he said that the move was necessary for curbing corruption and putting an end to black money.

The Prime Minister’s intentions may be right but for now the outcome is chaos and a state of uncertainty throughout the country. His emotional appeal to the nation to bear with the hardship for 50 more days further makes it clear that the government did not plan in advance or prepare for contingencies. Furthering the problem is the fact that the ATMs are not compatible right now with the new Rs 2,000 banknotes, fixing which, according to the Finance Minister, will require 2-3 weeks.

This hardship could have been avoided if the government had taken appropriate measures before forcing its decision on the common citizen. There are several such measures one can think of.

For instance, if the finance ministry and the RBI had taken all banking institutions into confidence and had provided them with guidelines, then banks could have updated their ATMs accordingly. Since the five hundred and thousand rupee banknotes account for about 86 percent of all paper-currency in circulation, the government could also have started withdrawing them steadily before announcing the new measure. The RBI too could have replaced the notes being banned with notes of smaller denominations so that there was enough paper-currency in the market to deal with the condition. Outlets for exchanging currency other than banks and post-offices, new ATM machines, etc. could have reduced the burden on banks.

Think of the situation in places where there are no ATMs or banks to exchange notes. What about those daily wage earners who receive their payment at the end of the day in cash? It is true that more digitalisation of currency will keep the money in circulation accounted for. But we must also think about the kind of economy we do have, how organised our economy is, etc.

India is still considered an agrarian economy since nearly 52 percent of the labour force is employed in agriculture. How transactions take place here, how money is stored, and the behavior of spending in this sector should have been looked into while preparing for demonetisation. Panic and chaos, as is the situation right now, is never the good for any economy, especially when it is trying to influence the world economy.