Good intention but poor thinking - what troubles demonetization?

Prime Minister’s surprising demonetization experiment has rich credibility and shows his commitment towards black money fight. People have extended tremendous support as well and are ready to bear further for the success of the programme.

At the same time, the programme has exposed some serious and unbelievably low quality thinking at the top level when comes to practical implementation. At the end of the first few day’s experiment, the demonetization is going on but the opposite process of monetization is facing tremendous difficulties. The inability to grasp relative importance of the most sought currencies – Rs 500 and Rs 1000 and to design and print them new in advance is a major failure. Following are some of the defects at the implementation levels.

Mistake 1: Rs 2000 notes can’t fill the transaction needs of this billion plus economy along with too smaller denominations.

The mistake of replacing the rightsized Rs 500 and Rs 1000 notes with a high denomination Rs 2000 notes without issuing new Rs 500 and Rs 1000 notes, was an unimaginably low quality decision. Simply look at different currency notes and their importance in terms their value.  Here, Rs 500 is the most sought currency and is the hero among currencies. Most of the day to day transactions are centered on Rs 500 notes.

Bank notes in circulation as on 2016 March (Source: RBI)

Denomination

No of units in circulation (Million pieces, with share in bracket)

Share in total value of notes in circulation

Rs 100

15778 (17.5)

9.6

Rs 500

15707 (17.4)

47.8

Rs 1000

6326 (7.0)

38.6

A Rs 2000 note can’t replace four Rs 500 notes in terms of performance and if somebody who advised it to the PM, he lacks sense.

New Rs 500 and Rs 1000 are yet to arrive

What dims lights in your eyes is the news that the two dear denominations are yet to arrive. At present, the government is in the process of printing new Rs 500 notes and nearly 2000 million units will be in circulation in two months. Previously, 15000 million Rs 500 notes were in circulation. Hence, the Rs 500 notes that filled nearly 50% of the value of currency notes in circulation will not be functional for the next few months.

The situation is more catastrophic for Rs 1000 notes as they are still on the design mode. Not to forget that these two notes have occupied 86.4% of the value of notes in circulation before monetization. The question is that how far the limited availability of Rs 2000 notes can meet the demand in the absence of Rs 500 and Rs 1000 notes.

It is this non-availability of the new Rs 500 and Rs 1000 notes that creates monetary paralysis in the country.

ATM recalibration is a time-consuming activity

2. ATM Recalibration: The people who advised the government on monetization are not seemed to be technically literate as they were not able to understand the process of calibration. Fine tuning the ATM by incorporating the fine features of the new currency units need time.

Most active segments in the economy are cash using and not digital.  

3. The wrong assumption that digital transactions are universal: India is still a currency using economy. Common man use currencies and not digital payments. Street vendors, small businesses, labourers etc., all use currencies rather than opting for digital settlement.

Altogether, the slow process of monetization may jam economic activities. Monetary paralysis will last till popular denominations are back. It will dampen economic activities including consumption, investment and production. Reduced tax revenue for the government is a real possibility and a decline in GDP growth rate also can’t be ruled out. The hardly generated and sustained economic momentum is on risk because of poor design.

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Tags : demonetisation problems