Cash Crunch: Who to Blame Can Wait, What Must Be Done Cannot

Demonetisation arrived bang in the busy season – post-monsoon period of economic activity, as consumption takes off.

A woman requests a security guard to let her inside the bank to exchange her old high denomination bank notes as she stands in a queue outside a bank in Kanpur. (Photo: Reuters)

Talk about evolution! Residents of Khawbung village in Mizoram have designed their own Any Time Money. They issue each other promissory notes to overcome the cash crisis. The history of money tells us that paper currency – a byproduct of Chinese block printing during the Song dynasty – was preceded by paper bills used during the Tang dynasty in the 7th century.

It is not just the villagers of Khawbung who are travelling back in time.

In many parts of rural India, traders of perishable goods – milk, vegetables, poultry, et al – rely on paper bills or the value of the word.

Then, there are those who are struggling for words to describe their state. Workers in Surat, Ichalkaranji, Tirupur and many other industrial towns are stuck without wages. Worse, the units also face partial or total shutdowns. It is estimated that there have been 55 deaths across the country post demonetisation.

Also Read: Currency Ban Is Tearing Rural Banks Apart

To appreciate the anatomy of the cash crisis, consider this. In 2015-16, private consumption expenditure accounted for over half the GDP – for over 80 lakh crore out of 135 lakh crore. Sure. Not all of it is in cash. But it is known that over 45 percent of the economy is in the informal sector – that is, fuelled by cash. The big employers –agriculture, mining and construction – account for over 33 lakh crore of the GDP. With eight of 10 rupees sucked out, the wheels of the economy are stalling.

The brunt of demonetisation, aimed at unearthing illicitly stored value, is felt most by middle and lower-middle class India, which is left without a medium of exchange for day-to-day economics.

And demonetisation arrived bang in the ‘busy season’ – the post-monsoon period of economic activity when consumption takes off. It is the start of the Rabi season – which accounts for nearly 40 percent of agri output – and farmers are struggling to pay for inputs. It is the start of the construction season, which is cash-dependent. It is the start of the job season for the migrant unskilled worker. It is also the marriage season.

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Of Supply and Demand

To recognise the magnitude of the supply-demand gap, it is worth paying attention to what the babus did not. The government demonetised 23.2 billion currency notes worth Rs 14.95 lakh crore. Demonetisation must be followed by remonetisation. Even if we assume 20 percent of the notes will be “extinguished”, the government must replace over 18.6 billion notes. India’s currency printing capacity is 27.7 billion notes in a year – including 15 billion Rs 10, Rs 20, Rs 50 and Rs 100 notes. Even if the entire capacity was put in service, it would deliver 2.3 billion notes per month. Do the math for 18-plus billion notes.

Once printed, the notes must reach granular India – 5,93,731 inhabited villages, 4,041 towns, 3,894 census towns and 1,456 urban patches.

To service a population of 1,311 million people, India has 1.34 lakh bank branches – of which just over 50,000 are defined as rural. There are 2.02 lakh ATMs of which only 1.2 were functional. Add 1.5 lakh post offices and the facility of mobile business correspondents to get a sense of financial inclusion – residents of 64,000 villages with a population of more than 2,000 have no access to banking and across India 233 million are denoted as ‘unbanked’. Given the matrix of supply and demand, those serving the people in banks do deserve an applause.

Also Read: PM Modi, Demonetisation ‘Brahmastra’ Could’ve Avoided Hurting Poor

Across India, there is consensus on three points:

1. The objective of demonetisation is laudable.
2. The implementation has been appalling.
3. Institutional issues will follow individual hardship as the economy is hurt in the medium term.

To be sure, there will be a debate on where the buck stops, for accountability and answers on how this went so haywire.

The Gap Between Availability and Need

The blame game, though, can wait; what must be done cannot!

Measures like use of indelible ink and cash disbursal at petrol pumps address the symptoms. The need is to bridge the gap between availability and need. Ergo, the government must look outside the system for real time solutions to alleviate the pain. To that end, here are a few suggestions:

Seek Expert Advice: Get the top bankers, the mobile players, the tech guys (the Nilekanis and Chandrasekarans), the card guys, the FMCG giants, the retailers (including the e-commerce and share-economy) guys into a room to hear some out-of-the-box solutions.

Prevent Hunger: The government has over 40 million tonnes of grains in its buffer stocks. Why not ask state governments to distribute the next three months PDS entitlements on credit, or even free, to ensure that the poorest of the poor are not left hungry?

Enable Rabi Sowing: Allow farmers to use old notes to pay for seeds, fertilisers and inputs; allowing petrol pumps to accept old notes, and not seed outlets, is flawed politics and poor economics. By all means, induct an authentication process – even impose a cap on how much.

Outsource Currency Printing: Offshore a part of the printing overseas. It has been done before. In 1997-98, currency worth a trillion rupees was printed in the US, the UK and Germany. Over 50 countries print their currency abroad. To mitigate risks, outsource small notes so capacity is freed at home for high-value notes.

Pre-paid Plastic Currency: Why not look at creating pre-paid RuPay cards of different denominations – that can be recharged like mobile coupons – for day-to-day use. The cards could be used in urban and rural regions, distributed and recharged by mobile/retail outlets.

Induct Retail Players: Between them, consumer goods, agri inputs and mobile retailers would have more outlets than all the banks and post offices. It may be a good idea to enable these to dispense cash as it arrives from the mint.

Promote Online Payments: Deploy discounts and schemes to make government dues payable online so that currency is available for circulation in public. Use UPI to roll out mobile payments.

Incentivise Card-reader Penetration: Make card readers operable with mobiles, cheaper. Resolve vexatious issues to propel the use and penetration of digital payment systems in the rural economy.

The disruption in the economy and the ensuing human cost is visible and undeniable. These are but some suggestions towards alleviating pain. The point is, the economy cannot afford to be trapped inside the “all will be well soon” cocoon. It is imperative for the political regime to step in and seek solutions from outside the system.

There is a real risk of the cash crisis morphing into a crisis of confidence if not addressed urgently. As Benjamin Franklin, the man on the 100-dollar bill, said, ‘Time is Money’.

(Shankkar Aiyar, political-economy analyst, is the author of Accidental India: A History of the Nation’s Passage through Crisis and Change. The article first appeared in Sunday Standard and The New Indian Express.)