It is reassuring that the citizens, at large, have stood by the Prime Minister Narendra Modi. There has been no law and order problem as many people had feared. But the hardships encountered by the commoners say that we cannot run away from some reflections
It just took us one announcement from the Prime Minister Narendra Modi on November 8 to realise the value of currency as opposed to wealth. Having withdrawn a bundle of Rs100 notes from the bank on the weekend, I suddenly felt myself richer than many high net worth individuals who were stranded with loads of Rs1,000, Rs500 notes, real estates and vehicles.
My mother dissuaded me from advertising this ‘affluence’. My instinctive feeling on the demonisation was that, it could be only as good or as bad as the Government could manage the re-circulation.
In a country as populous and cash-dependent as India, the task would be humungous. There were not more than 1,28,397 branches of scheduled commercial banks and 1,36,077 ATMs across India as on September 30, 2015 (Ministry of Finance Annual Report 2015-2016, P.321-322). Not many branches have more than two payment counters, but many ATMs and cash deposit machines have a notorious tendency of going out of order. Getting rid of Rs1,000 and Rs500 notes in one stroke might jolt the economy in short run. It is like a surgery without anesthesia. Moreover, demonisation by itself is not a cure for the scourge of price rise, black money, dirty money, terror funding that provoked the decision etc. It could only be a part of the pincer strategy.
It is reassuring that the citizens, at large, have stood by the Prime Minister. There has been no law and order problem as some, including me, had feared. But the stories emerging from the serpentine queues outside the banks and ATMs are testimony to people’s hardships. I hope we tide over the problem soon. But, there are certain reflections one cannot run away from.
Why and how Rs1,000 and Rs500 were allowed to capture huge share of currency pieIJ There were 11,405 million pieces of Rs500 amounting to Rs5,702 billion in circulation as on March 31, 2014. It represented 14.7 per cent in volume terms and 44.4 per cent in value terms of paper currency. The circulation rose to 15,707 million pieces amounting to Rs7,854 billion representing 17.4 per cent in volume terms and 47.8 in value terms as on March 31 (Reserve Bank of India , Annual Report 2015-2016, P.89). In these two years, Rs100 experienced a squeeze from 19.1 per cent to 17.5 per cent in volume terms and 11.5 to 9.6 in value terms.
The Rs1,000 currency notes slipped moderately in value terms from 39.6 to 38.6 between financial year 2014-2016, though in volume terms, it rose marginally from 6.6 to 6.7.
Thus, Rs500 and Rs1,000 have captured a quarter of monetary circulation in volume terms, but 86.4 per cent in value terms. In one stroke, 86 per cent of the liquid economy was gone. Now, let us see what the situation was a decade ago. As on March 31, 2006, Rs100 notes were 35 per cent of the pie in volume terms corresponding to 32 per cent in value terms. One could term it, as quite healthy. Five hundres rupee notes had share of 43 per cent and Rs1,000, a share of 15 per cent in value terms (RBI Annual Report 2005-2006, P.197). Thus, in the last 10 years, Rs1,000 and Rs500 had captured a further space of 28 per cent, whereas as the share of Rs100 has almost halved in volume terms and reduced by two-thirds in value terms.
Within a decade, there has been a 4.3 times increase in the number of Rs500 circulating in the market, whereas, the number of Rs1,000 increased almost 10 folds. But, there has been only 1.71 increase in the number of Rs100 notes. The number of total currency notes has increased by 2.38 times. Two justifications of this RBI’s policy shifts are possible. First, a shift towards high denomination notes is natural in an inflationary economy. Second, security printing and handling cost of printing one Rs500 note is lesser than printing five Rs100 notes. During the last financial year (actually July 2015-June 2016), the cost of security printing came to Rs34 billion. This has increased substantially since 2012-2013.
We might blame the UPA Government for distortion in the monetary policy. But has the present Government sounded any departure from the courseIJ Modi in his November 8 address said, “The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways. High circulation of cash also strengthens the hawala trade which is directly connected to black money and illegal trade in weapons. Debate on the role of black money in elections has been going on for years”.
Can we then expect a new discourse on ‘cash nexus’ from this GovernmentIJ Is the cash flow going to be recalibrated, or will there be prudent redistribution of denominationsIJ Perhaps, we will have to wait for calmer times.
A completely new category of high-denomination note Rs2,000 has been introduced (without the nano-global positioning system chip fabled in the social media). Five hundred rupree note has returned in a new design, and Rs1,000 will stage a comeback in near future. Are we only resetting the old storyIJ Or will we see a departure from this top-heavy currency modelIJ
Does the RBI take decision on currency printing by itself or is it the Finance MinistryIJ None can say for sure. The RBI is excluded from the purview of Comptroller and Auditor-General of India (CAG) audit. Though , the RBI claims, it has a fool-proof system of external auditing, the report is never put out on public domain. The current CAG viz Shashi Kant Sharma has advocated CAG audit into the functioning of RBI and Securities and Exchange Board of India. This is a welcome step towards transparency.
Indian currency, as an academic subject, has attracted the attention of many, including economist John Maynard Keynes and BR Ambedkar. Until the present crisis, we hardly realised the power of paper currency, first introduced in 1861 by the British, though we had been demonising them for destroying India’s economy.
Howsoever, we might criticise the ‘cash nexus’, a transition to ‘digital economy’ does not seem to be completely practicable. The recent ATM fraud, in which estimated 3.2 million debit cards were compromised, exposes the Achilles’ heel of digital economy.
(The author is a freelance writer)