Demonetisation: Could it not have been done more efficiently? | columns | Hindustan Times
Today in New Delhi, India
Feb 23, 2017-Thursday
-°C
New Delhi
  • Humidity
    -
  • Wind
    -

Demonetisation: Could it not have been done more efficiently?

columns Updated: Nov 26, 2016 20:16 IST

500- and 1000-rupee notes. Today we have an undoubted shortage of cash, which is why the government has imposed restrictions on how much can be drawn. That wouldn’t have been necessary if the new notes had been ready in greater number and the circulation of the 100-rupee note sharply increased(AP)

Three weeks after demonetisation I believe we can attempt to credibly answer two critical questions: How effective will this be in extinguishing black money — to use the finance minister’s preferred verb — and could it have been done with better planning?

Let’s take the second issue first. Given this has been allegedly planned for 10 months, the government should have printed and kept ready for immediate distribution a far greater number of the new 500- and 2000-rupee notes. It should also have vastly increased the number of 100-rupee notes in circulation. When it was withdrawing 86% of all currency, this was essential.

Not only did it not, but the printing of new notes only happened after September 4, when Urjit Patel took over as RBI governor. His signature is proof of this. Consequently, since our mints can print only 3,000 million pieces of currency per month whilst the government has removed over 23,000 million, the quantity of new notes ready for immediate infusion was irresponsibly — actually recklessly — small.

Read: Demonetisation was well intended but very badly executed: Shatrughan Sinha

Today we have an undoubted shortage of cash, which is why the government has imposed restrictions on how much can be drawn. That wouldn’t have been necessary if the new notes had been ready in greater number and the circulation of the 100-rupee note sharply increased.

Second, the government could also have ensured that the new 500- and 2000-rupee notes were the same size, weight and thickness as the old 500- and 1000-rupee notes. After all, all dollar notes, whether one dollar or a 100, are the same size. If that had been done there would have been no need to recalibrate ATMs.

Third, the government should have permitted cooperative banks to exchange notes and accept deposits of old ones. These banks cover rural India far more effectively than mainstream ones. They have 100,000 branches in rural India with Rs 10 lakh crore investments. In comparison, 33% of the 138,626 branches of mainstream banks are in just 60 Tier-1and Tier-2 cities.

Read: Demonetisation shows PM Modi’s ‘enormous courage’: Ratan Tata

Now, to the question of effectiveness. This, after all, is the raison d’etre of the exercise. Pronab Sen, the former chief statistician, says only 6% of black money is held in cash. Former finance minister P Chidambaram puts the figure at 15. So even if this demonetisation is 100% successful the percentage of black money it will extinguish varies between small and minimal. Each of us must decide whether the pain, as well as the length we suffer it, is justified by this level of gain.

The demonetisation is also intended to eliminate counterfeit currency. Last weekend defence minister Manohar Parrikar claimed thousands of crores would be eliminated. However, a study in 2015, done by the National Investigation Agency, says that at any point of time only 4,000 million of counterfeit currency is in circulation. That’s just 0.028% of total currency. The study also says this increases by just 700 million a year.

Read: Vijayawada temple receives Rs 1.05 crores in banned currency notes in a month

So, once again, is this demonetisation and the pain it’s entailed an appropriate way of tackling counterfeit money? Venkaiah Naidu says it’s dealt a sledgehammer blow to Pakistan’s funding of terror. But isn’t that true only if Pakistan can’t find other means of raising currency of 5,000 million?

I’m not an economist so I must admit I can’t definitively answer the two questions I began with. Nonetheless I do believe the facts I’ve presented and the points I’ve made are relevant to any honest answer.

The views expressed are personal

tags