Why RBI, Modi government can't answer for demonetisation

The note ban dilemma seems to inspire more intrigue than ever. And Reserve Bank of India (RBI) governor Urjit Patel has been unable to effectively respond to the parliamentary standing committee on finance or the Public Accounts Committee (PAC) on the actual amount of cash deposited in banks following the demonetisation drive, and by when the supply of funds is likely to ease.

In his response to the PAC today, he was apparently unable to supply the necessary and highly important details. It is ludicrous that Prime Minister Narendra Modi, finance minister Arun Jaitley and the RBI are unable to educate the people and their representatives about the reckless gamble they have collectively taken with the Indian economy.

A Bloomberg report showed that as much as 97 per cent of the demonetised currency was deposited in the RBI - this was an embarrassment to the government, as it exploded the theory that the note ban was necessary to expose black money.

Once Arun Jaitley and other BJP leaders realised their phenomenal gaffe, the RBI was ordered to recount the demonetised money with the banks. But the RBI chief has yet to give a "correct" count of the demonetised currency, which suits the confused and blundering government.

When the media tries to pose queries to Patel, he literally runs away from them. Surely, this isn't the behaviour expected from an RBI governor.

Another problem will surface in the coming months -Arjun Ram Meghwal, the minister of state, finance, has announced that the Union government will soon produce "lower denomination" currency notes in a new design.

The government has already cleared the import of 27, 500 metric tonne of currency paper from eight foreign firms. While the media has not highlighted this issue, this is likely to confound all stakeholders.

This will make 10- and 100-rupee notes available in the economy after several months, on top of the old-design currency notes of the same denomination.

So, do we expect partial demonetisation of the existing Rs 100 and Rs 10 notes, once the new "lower denomination" notes are introduced?

This would be another example of the belated Modi government policy causing confusion and even financial turmoil.

About two-and-a-half months have passed since the drive was announced. PM Modi has exceeded his promised deadline of 50 days and in order to wriggle out, he has shifted his sales pitch to aiming for a "cashless" economy and digital exchanges.

But the bulk of the population does not have access to "plastic", for example credit/debit cards/PayTMs, POS, et al.

In any case, credit has to be repaid eventually in cash. The arbitrary curbs on cash withdrawn from individual accounts persist.

Reports on the economic conditions of the rural population show that the quality of life has deteriorated. Even rich farmers are unable to get profitable prices for their products, which they could until last year.

The informal economy that generates the most employment, and is based overwhelmingly on cash dealings, has been hit by low prices, lower wages for employment, and diminished sales.

For most Indians, the economic situation remains grim, and even worse for the poor and lower middle class. Any hope on the horizon? Surely, our people deserve better than that.

Once the cash crisis ends, the economy will begin to pick up slowly. But creditors' as well as foreign investors' confidence in the Indian economy will take quite some time to recover.

If the same actors run the economy, the credibility of the economic correctness will be doubted and foreign investors will remain wary.

The process will take time and the recovery will depend on the speed and extent of remonetisation, and fiscal controls in the economy.

Given the history of the Sangh Parivar and PM Modi, these corrections will be slow and delayed as neither Modi, nor the Sangh Parivar will be willing to accept responsibility for the gamble.

Also read: Modi has crippled India's growth story with demonetisation