Note Ban: High Expectations, Botched Calculations and Ensuing Pain

The government hoped to make monetary gains in excess of the amount it estimated to collect as income tax in 2016-17. (Photo: Reuters/Altered by The Quint)

A week after the demonetisation announcement, the Attorney General (AG) informed the Supreme Court that of the Rs 15 or Rs 16 lakh crore immobilised on 8 November, Rs 10-11 lakh crore was expected to return to the banks. The rest, a hefty Rs 5-6 lakh crore, the government reckoned, was the amount of black money held in cash and hence would never return. If the script had played out that way, the government would have made a huge one-time gain of at least Rs 5 lakh crore.

In other words, the government hoped to make monetary gains in excess of the amount it estimated it would collect as income tax in 2016-17.

(Photo: Rahul Gupta/The Quint)

(Photo: Rahul Gupta/The Quint)

Lofty expressions like “surgical strike on black money” or “the kind of India you wanted will be delivered after 50 days” therefore stemmed from a firm belief in these very optimistic calculations.

Since the focus was on expected gains, very little thought, perhaps, went into the process of remonetisation. All that the Reserve Bank of India (RBI) did was to print the new Rs 2,000 notes worth Rs 4.92 lakh crore. No recalibration of automated teller machines (ATMs), no planning to print additional lower denomination notes, and very little effort to ramp up the cash distribution channels.

In fact, two of the four currency printing presses were not even ready to print the new Rs 500 notes at a critical juncture of the remonetisation process. But an overconfident AG informed the apex court that Rs 10,000 crore worth of new notes would be added to the system every day. Did he realise that even at that rate it would have taken at least 150 days to entirely remonetise the system?

(Photo: Rahul Gupta/The Quint)

The chaos – long endless queues in front of banks and ATMs – that followed and continues, exposed the lack of even a semblance of planning that should ideally have gone into a decision as big as this. Here is what happens when big decisions are backed by very little planning:

1. Almost a month after the demonetisation announcement, the RBI could pump in less than what it claims it already had on 8 November. The reason? It had printed high denomination notes in bulk without caring to print lower denomination notes of at least four times more than that. There was no plan to take care of even the salary week rush. There are various estimates about remonetisation’s timeline, and none paint a rosy picture.
   
   Former commerce secretary and TRAI chairman Rahul Khullar estimates: “Suppose that 10 December onwards the printing capacity allocated to Rs 500/2,000 notes is tripled. Then, it will take 118 days to replace the Rs 500/1,000 notes in value… if the capacity is merely doubled, then the time taken is 177 days.” (Business Standard, 27 December)

2. As the liquidity crunch began to bite, the government started singing the cashless economy tune, without realising that the vast majority of Indians do not have access to the Internet.

3. As deposits began to soar, the RBI jettisoned all norms of transparency and stopped providing regular updates on the amount of money in old notes already in. In fact, the confusion persists about the amount of currency (Rs 500 and 1,000 notes) in circulation and the amount that has already made it to the banks. According to reports, the government immobilised notes worth Rs 15.44 lakh crore and more than Rs 14 lakh crore is already in.

4. The government was so focused on gains that no estimate was made of the collateral damage the demonetisation decision would have. And the damage has been pretty severe. Writing in the Business Standard (26 December), economist Ajay Shah gives some numbers that paint an alarming picture. He estimates that sales of two-wheelers slumped by 169 percent, three-wheelers by 289 percent, and cars by 37 percent in November. All figures are seasonally adjusted.

He argues that:

“In this macroeconomic trauma, some written contracts or implicit contracts will be violated. Some firms will fail. Everyone is trying to survive the storm but some will falter. The NPA crisis will deepen. These are the deeper disruptions, which will have a more sustained adverse impact on GDP beyond 2017.”

Can any gain be worth this much pain?

(Photo: Rahul Gupta/The Quint)

The direct cost of demonetisation is going to be huge. But what about some of the unintended consequences? There are reports in leading business dailies that private money-lending is back with a vengeance, and thriving, following the near-collapse of institutional credit channels in the wake of patchy remonetisation.

Recent Income Tax raids suggest that the creation of fresh black money began the moment demonetisation was announced. Have we created new demons without landing any decisive blows on the old ones?

It is now time to mitigate Indians’ pain rather than counting gains. The tsunami of mounting worries is waiting to be tackled now that the 50-day deadline is almost over.