Let the economy settle down, India. Resist temptations of another demonetisation

Prime minister Narendra Modi’s government will have to come up with a straight response to reports of another demonetisation in the offing. while such news reports may or may not have necessary credence, they are most disturbing. But then, finance minister Arun Jaitley’s reported “silence” on opposition parties questions in Rajya Sabha on demonetisation version 2.0 has set rumour mills going into overdrive.

First, a prominent Delhi-based newspaper front-paged a story that hints at a fresh round of demonetising high value currency, especially Rs 2,000 notes. Several digital media networks trended all through on Wednesday with reports of new Rs 200 notes hitting the market from RBI mints as early as next month. But, both RBI and the government maintained studied silence while social media banter hit a crescendo. One only hopes that these reports are false, baseless and unsubstantiated.

Not many may support another round of economic disruption through fresh demonetisation reportedly intended to usher in a total withdrawal of Rs 2,000 notes to be replaced by currency in Rs 200 denomination.

Indian economy has already weathered too many upheavals in last eight months to face another demonetisation. First, it was demonetising Rs 500 & Rs 1,000 notes through a nationwide telecast made by Modi on November 8, 2016. While 86 per cent currency in value terms was withdrawn abruptly as part of his campaign to hit black money hoarders, the re-monetisation took time given the limited capacities to print new notes.

Both finance minister Jaitley and RBI governor Urjit Patel have till date maintained that counting of demonetised currency is still in progress and no official numbers were offered on value of extinguished currency. But, reports quoting several banking sources suggested that Rs 14.05 lakh crore worth currency was presently in circulation vis-à-vis Rs 17.01 lakh crore before November 8 last year. The inference was that about Rs 3 lakh crore worth currency either got out of circulation or was extinguished. Perhaps, one has to wait for authentic RBI data to assess the true impact of demonetising high value currency last November.

Though the government has been in denial mode, economic disruption especially in rural areas across informal sectors has had a devastating impact. Only now, with re-monetisation nearly complete at 86 per cent value worth currency, a semblance of normalcy is returning to the money market. At such a juncture, even to contemplate yet another deomentisation may be scary and just not advisable. It will send shockwaves across global markets that may treat Indian currency as “junk paper” and on par with that of under-developed economies.

Yet another demonetisation or even replacement of Rs 2,000 notes with Rs 200 in denomination should not be attempted if Indian banking and currency has to retain its credibility. In any case, the indian rupee has strengthened appreciably in calendar year 2017 to become on of the best performing currencies, any such move now will damage India’s credibility.

India’s efforts to make rupee a reserve currency may also receive a jolt while China’s renminbi has already been accepted into the global basket. If the reforms at World Bank and IMF go the India way and global financial markets were to widen its basket of currencies, rupee has an outside chance to enter this venerable league. Hence, turning rupee into worthless paper may not be in Indian interest at all. It may also unsettle India’s major trading partners, including US, UAE, China and European Union.

Though IMF has reiterated THAT India may clock 7.2 per cent growth this fiscal and improve further to 7.7 per cent in 2018-19, frequent disruptions in currency markets may not augur well for Indian economy from the growth and jobs perspective as well.

Already, Indian economy is going through adjustments in the aftermath of GST rollout beginning July 1. Several products, services and sectors are undergoing the big shift to a new taxation framework. Even consumers have issues with switchover to GST and new billing. Letting the economy to settle down to regain its full momentum by resisting temptations of  demonetisation should be the order of the day. Stability is the best way forward.