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The shock and awe strategy for demonetisation disrupted the lives of a billion people

If 99% of all demonised currency notes have returned to the banks raises questions of whether the severe disruption to the lives of a billion people was really necessary. If black has been turned into white, the policy did not achieve at least its initial objective. However well-intentioned the scheme may have been, it could have been rolled out more smoothly and with better planning.

analysis Updated: Aug 31, 2017 17:21 IST
demonetisation,currency,RBI
Regardless of the goalposts being changed, the demonetisation entailed collateral damage to the Indian economy.(AP)

The frequent change in official goal posts bedevil an objective assessment of what the demonetisation exercise launched on November 8, 2016 really achieved. The range of objectives have varied from flushing out large volumes of black money held in cash, checking counterfeit notes, promoting a digital economy, greater formalisation and use of less cash. Many of these objectives can be assessed only in the long-term. However, the fact that of the Rs 15.44 trillion worth of Rs 1,000 and Rs 500 notes that were taken out of circulation, Rs 15.28 trillion or 99% of them returned to the banks raises questions of whether the severe disruption to the lives of a billion people was really necessary.

If black has been turned into white, the policy did not achieve at least its initial objective. However well-intentioned the scheme may have been, it could have been rolled out more smoothly and with better planning. After all, the RBI phased out pre-2005 notes effortlessly from May 2013 without causing any inconvenience to the public. The authorities could certainly have gone about scrapping big notes methodically without causing needless suffering to the people. For instance, a smoother roll-out could have entailed phasing out the Rs 1,000 notes to start with, followed by Rs 500 notes. This would have made the demonetisation process much less painful.

Instead of all this, a shock and awe strategy was unleashed. As if this weren’t bad enough, the RBI was woefully unprepared to replace the old notes with the new. Demonetisation essentially is an exchange programme replacing old currency with the new. When 86% of the high denomination cash in circulation was suddenly taken out, the central bank didn’t have enough stock of new currency to enable ordinary people to exchange old for the new. It had only Rs 94,660 crore worth of Rs 2,000 notes that accounted for only 6% of the total volume of high-denomination notes demonetised. It did not have a single Rs 500 note in its kitty! No wonder people’s lives was disrupted.

Regardless of the goalposts being changed, the demonetisation entailed collateral damage to the Indian economy. When the cash economy suddenly shut down, consumer spending was subdued owing to fading footfalls in the shopping arcades and malls. The shock to the cash economy has been felt even in the current financial year as household consumption remains sluggish. Pay Commission arrears may make a bit of difference but brick-and-mortar retail trade is seriously stressed. Farmers experienced the full brunt of food deflation when their crops were sold in mandis for a pittance. Deflationary winds continue to blow in the current kharif or summer crop season as well.

As cash accounts for 90% of transactions, the crunch since November adversely impacted daily wage earners as much in the urban areas as in villages. There was no money to pay wages to around 46% of the unorganised workers who were either casual or contractual. Around 65% of daily wage earners went without work in urban areas in the wake of demonetisation and returned to their villages. The segments that bore the brunt of adjustment were all part of informal economy – retail trade, textiles and agriculture. A puzzling fact is that none of this was reflected in an uptrend in the monthly index of unemployment put out by the Centre for Monitoring the Indian Economy and Bombay Stock Exchange although labour force participation rates have come down indicating people opting out of seeking work opportunities.

Even if the cash economy may have returned to a semblance of normalcy, the uncertainty over growth still persists. There may be a transition to a digital economy. There may be more formalisation and a tax filing population. But the flip side is that demonetisation has resulted in the world’s fastest growing economy faltering in its stride. The collateral damage to the economy will take some more time to repair as it is far from transitory. The sectors that have been affected such as micro, small and medium enterprises, retail trade and the agricultural sector – where half of the population still lives off the land -- would require sustained policy attention from the government for the remaining part of its five-year term.

N Chandra Mohan is an economics and business commentator

The views expressed are personal

First Published: Aug 31, 2017 17:08 IST