Fifth Columnist : A case of overkill
Nov 18 2016
Will demonetisation propel growth, reduce poverty and check counterfeit currency?
The official notification of the decision to scrap Rs 500 and Rs 1,000 bank notes attributed the move to two factors, namely eliminating counterfeit currency used by terrorists and smugglers and the dehoarding of illegal monies held by generators of large sums of black money.
While it is one thing to make the repeated point about uprooting the menace of black money in the course of a long-winded political campaign, it would appear from the benefit of hindsight that its application on ground is quite something else.
Certainly the chaos all around suggests that the preparation for such a move – keeping in mind that secrecy was central to the entire operation – has been less than adequate. In fact as troubles mount by the day, it would appear that any preparation where 85 per cent of the legal tender is withdrawn by an executive order within a matter of minutes would prove to be grossly inadequate.
The Rs 500 and Rs 1,000 notes constitute the bulk of Indian currency. Replacing this 85 per cent is not going to be easy and estimates of how soon it could take varies from the prime minister asking for 50 days to domain specialists, who suggest it could take months if not years for the money to be replaced. The capacity to print notes is strictly limited, particularly if the smaller denomination notes, which need to be printed in large numbers on an immediate basis.
The secrecy vs operational effectiveness debate swims into focus when it comes to ATMs, the principal conduit now for those seeking to draw quick money, instead of the bad old days when cash was disbursed by the bank teller after a cheque was produced for his scrutiny.
A week after the decision to demonetise, the government seems to have woken up to the vagaries of recalibrating ATMs, which would disburse new Rs 2,000 notes with a different size. Belatedly, a task force has been set up under the RBI deputy governor to track the resetting of ATMs. (See Financial Chronicle, Nov 17) Should a decision of such far-reaching import have been considered earlier? No, says the government, because it would have compromised the secrecy aspect of the operations.
But look at its implications. There are a total of 2,01,861 ATMs in the country. Of them, working at a feverish pace, the government had until November 17 managed to recalibrate roughly 10 per cent of such machines. It is now a matter of pure conjecture to arrive at a definitive time frame as to how long it would take to reset all or a substantial number of ATM machines in the country. By a conservative estimate, this exercise too could take several weeks, even months.
Naturally, those who own plastic money can freely use credit and debit cards to pay their way through, but that still constitutes a minuscule minority, given the country’s size and enormity. The impact of demonetisation on small businesses, small farmers, daily wage earners and the rest of the working class is yet to be ascertained to any significant degree.
Yet, despite all the sound and light on TV screens and crocodile tears being shed by some opposition politicians, who it is safe to assume have lost their money bags, there is public support for Modi’s move. Like during the 1965 war when people responded to Lal Bahadur Shastri’s call of eating a meal less for the country’s honour, common people are willing to make sacrifices for a greater national cause of rooting out corruption and bring down those high and mighty strutting around with extra cash in their fat wallets.
But the moot point is this: will demonetising put them in their places and achieve what it proposes to achieve, namely propel rate of growth of economy, reduce poverty and impose checks on counterfeit currency? After all, the expenditure on security as a counter-terror measure has been going up every year, valuable resources, which could be ploughed into the social sector. But what is there to suggest that the new currency being printed by the RBI is not going to be counterfeited by expert forgers across the border? Frankly, next to nothing.
While the zeal to do away with corruption is laudable indeed, it would appear that the government may have underestimated the power of black money holders, who may be small in number but are well-equipped to handle any situation. Like white money, they too are keen that their hoarded wealth is not just kept as dead investment, but one that fetches good returns.
It is a good chance that such personages – like politicians or government officers who cannot explain their wealth – have ploughed it into gold and real estate or other kind of activities. So in real terms, the amount of money coming back into the banking system may not be as large as imagined. Under the circumstances, for the whole country to be put on tenterhooks for a measly 3 per cent of the corrupt at the top, seems to be like swatting a fly with a giant sword.