Government needs to remove limits on bank withdrawals by individuals & SMEs
Finally, the process of demonetisation got over last week and it is time now to focus on remonetisation. The way remonetisation shapes up in terms of geographic allocation and pace would determine the roadmap for the economic recovery ahead. For purposes of efficiency, the remonetisation drive needs to be split into two parts: Remonetisation of individuals and of medium and small-scale enterprise. Policymakers need to focus on both simultaneously, but with different approaches.
As far as individuals are concerned, efforts are needed to ensure that people overcome their scarcity syndrome, which has come to dominate the country since November 8. A large majority wants to hoard cash because of the uncertainty ahead, the sinking feeling that you may not get your hands on money when you need it the most. This has led to large withdrawals from banks, which was not the case earlier. This syndrome was mostly responsible for long queues outside the banks in the last two months.
The government also needs to focus on how fast it can completely remove the weekly withdrawal limit from banks for individuals. If due to unavailability of currency notes, it is difficult to remove the limits at present, it should immediately announce a future date after which there would not be any limit on withdrawal from individual bank accounts. It would be very important, of course, to stick to that deadline, come what may. There is little doubt that the moment the withdrawal restriction is removed, the scarcity syndrome and problems associated with it would also disappear. The consumption expenditure by individuals, hit in the last two months, as reflected in the slowing down of auto and FMCG sector sales, will start to look up.
Given that we are very close to a sharp dip in interest rate cycle, there is high probability that consumption expenditure would go even higher than pre-November 2016 numbers in a short period of time. For SME units, the limit of withdrawal of Rs 50,000 needs to be increased sharply at the earliest. This is too small a sum for a small and medium sized enterprises (SME), which typically makes small payments to casual labour and has other petty requirements in cash. Once this limit is increased, the overall limits on withdrawal can continue for a longer period of time. This is also because SMEs can buy a significant portion of their raw material through cheque.
It is also important that the RBI focus on geographical areas, which require more injection of liquidity. In co-ordination with banks, it needs to focus on increasing liquidity in rural and semi-urban areas. These areas have low penetration of e-payment and digital transfers here will take quite some time coming. During this transition, consumption demand from these areas should not be squeezed more than it already is. While it may appear that these areas have low level of consumption, but given the fact that rural and semi-rural areas are big consumers of goods made by small and medium sized units, easy availability of cash will have positive impact on their sales. The demonetisation exercise has led to a situation where banks and RBO have been able to collect priceless data about one aspect of Indian economy, matrix of money flow and its existence. This data can be easily compared with earlier figures to reach a bigger geographical swathe, which need more assistance in term of currency being pushed on an early basis.