Undergoing acute financial stress

The distress for the millions worsens –getting cash from banks, even within the weekly limits set by RBI, to meet their urgent needs – into the second month of the “revolutionary” demonetisation of November 8. 

This has raised serious concerns for the people with their hard savings deposited, about faith in India’s banking system, as never before. Adding to these are the fears of hundreds of millions outside the digital community of a greater shock in store, if there is another reckless exercise of authoritarianism, at short notice, to foist a “cashless society” with all its deleterious consequences.

The Modi Government is certainly not faulted in its late surge against fake currency, corruption and black money. Experts, however, fault it for callously disregarding the consequent misery for the honest citizens. This could have considerably lessened at least had adequate care been taken to ensure cash availability for millions dependent on banks for their day to day needs, given the fact of 86 percent of the money in the system declared illegal at one stroke.

The secrecy required in mounting an offensive – the “surgical strike” – against the evil-doers of different hues would in no way have been infringed in the matter of building up cash reserves in the banking system over a sufficiently extended period as a regular process. The logistic challenge was totally ignored in magnitude, no matter the social and economic consequences for the people and the country’s growth.

The chaos in the aftermath of a massive demonetisation with ever-longer queues of both customers waiting to deposit the notes which ceased to be legal tender and get some replacement plus those dependent on banks for cash for meeting necessary purchases continued. Payment of wages of millions of workers, rural (farm and other labour), construction and other infrastructural works are also dependent paid in cash.     

Consumer confidence in banks is badly shaken, and the squeeze reflects on demand for producer and consumer goods. As former Prime Minister Dr Manmohan Singh points out in his article in The Hindu, more than 600 million Indians are still in unbanked areas, towns and villages and their daily subsistence depends on cash. Throwing lives of hundreds of millions of people in disarray is a “mammoth tragedy”.

Taking a round of bank branches in a business district of Chennai brought out a picture of gloom, men at the counter proclaiming “no cash” and in some, pleading with customers not to write cheques for more than four to five thousand rupees. This kind of stock answers for most days has led to shorter queues after the harrowing scenes inNovember including scores of fatalities estimated at 70, mostly seniors.

The new rs.500 notes are nowhere to be seen, when the banks are running short of even the smaller denominations of Rs.100 downwards. Let alone whether there was a proper assessment of risks and benefits, the Finance Minister Mr Arun Jaitley remains supremely satisfied it was a “well-planned” move which serves the purpose. He has, however, admitted GDP would take some hits for a couple of quarters.  

However, with credibility of the country’s monetary authority (RBI) under a cloud – whether it was kept in the loop – RBI has attempted a face-saving exercise and both the Reserve Bank Governor Dr Urjit Patel and Deputy Governor, Mr R Gandhi, maintained at a press conference on December 7 that decision to demonetise was “not taken in haste but after a detailed deliberation”.

Governor Dr Urjit Patel, who had hardly spoken on any issue since he took over on September 4 from Dr Raghuram Rajan, said RBI and the Government were “conscious of certain immediate difficulties that the public at large could face, and all efforts were made "to minimise them and mitigate them”.

The current situation does not square with their assertions and assessments on mitigation and availability of cash. RBI had no doubt been relentlessly issuing notifications in modification, each time after noticing pain to customers, and even so what it has decided has not gone down to the level of branches beyond bank headquarters perhaps. 

All that Dr Patel could tell us is that “all dispensations were put in place to ensure that the period for disruption is minimal while we recalibrate our note supply to the denominations not withdrawn regarding the legal tender character.”

Leading international economists have been critical of the way India has embarked on a process of massive demonetisation without adequate precautions and overlooking its highly disruptive effects both for the economy and the daily lives of people. There are now varying estimates of the negative impact on GDP for the near term.

The fifth bi-monthly Monetary Policy Statement of December 7 itself lowered GDP estimate for fiscal 2017 from 7.6 to 7.1 percent (GVA). Also, demonetisation has coincided with a period of heightened global economic uncertainties. According to the International Institute of Finance, Washington, the demonetization shock is likely to depress aggregate demand for two-quarters so that average real GDP growth falls to 6% in fiscal 2017 from 7.6% in 2015/16, before rebounding in 2017/18.

Also, IIF noted, by December 8, of the 227 billion in discontinued notes, around $170 billion had been deposited with banks, but only around $60 billion in new currency had been disbursed. “The resulting cash crunch is hitting hard retail, property, construction and the informal sector, as evident particularly in the slump in the services sector. RBI authorities are evidently still struggling to cope up with demand for currency, and over the last two weeks, they have recalibrated production towards the scarce new 500 and the 100 currency notes. Once that happens, they expect circulation of the 2000s, now not meeting needs of retail distribution, also to go up. On growth, Dr Patel said that GVA was already down by 50 basis points, much of it due to the Q2 revision. The demonetisation impact is also being factored in, but he dismisses this decline as a “transitory phenomenon”.

Governor Patel, as far as he is concerned, assures the country that the controls on withdrawals is a transition process, and “the money in your deposit accounts are where they are, and there is absolutely no doubt that RBI will fulfil this liability”. For him, at present, no “fundamental trust” deficit has emerged, but meeting liabilities would depend on the Modi Government that has effectively curtailed the traditional autonomy of the central bank.