5 ways Modi could have avoided demonetisation chaos
Early last week, in value terms 86 per cent of the currency in circulation in India comprised Rs 500 and Rs 1,000 notes.
Today, 20 per cent of these high-value notes have been deposited back into banks. One expects that up to 30-50 per cent of these notes could finally be tendered and hopefully destroyed. Though there are lower estimates by some analysts (10 per cent).
All of the black money economy is in high value cash, jewellery, real estate, gold, luxury goods, etc. So one can argue that in one shot, much of this high-value cash stash or the "stock" part at least stands denotified (pretty much in line with estimates of the size of the black cash component).
Though this hoovering up of the cash horde or stock is a "necessary evil", it's execution is like any great Indian wedding - designed for chaos!
In the immediate term, one expects to see a dip and flux till one gets back to a level of adequate "normal" liquidity in the predominantly cash economy. It is this failure to quickly reinject adequate liquidity at the lowest part of the supply chain that has created chaos.
Nothing that a few smart MBAs couldn't have fixed! - the smart undergraduate economist would say. If the stock of currency is sucked out in the short term, then velocity of money has to be high with existing denominations and new notes to maintain same level of output and economic activity, and mitigate the negative impact on GDP.
The MBA would say, whoa! wait a minute! We need to look at the supply chain, distribution points and hyper-local model. After all, new economy companies excel in efficient supply chain management, matching demand to supply, handling reverse logistics for marketplaces, electronic payment channels, etc. Roping some of that expertise post the announcement would have helped.
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| Evidence indicates a drop in daily earnings ranging from 50-95 per cent in urban areas in the wake of demonetisation. (Photo: India Today) |
This is where the government could coordinate better. Here are five ways:
1) The ratio of Rs 500 to Rs 2,000 notes should have been of the order of at least 3x. And Rs 100 notes should have been infused by a factor of 5, partially as a short-term substitute for some proportion of the new Rs 500 notes out today. This is to facilitate tendering change for the high denomination Rs 2,000 notes, and create an unhesitating acceptance and velocity for them.
2) The choice of new note design – the problem of not fitting into ATM trays could have been solved by using old 500 and 1,000 dimensions and weight specs (but with all the new security features). Though the secrecy factor could have played a part in queering this fix.
3) Using the established edifice of 3,00,000 business correspondents (BCs) all over the country to play a "facilitation role" for banks and use them to (a) mop-up and exchange the denotified notes in the rural hinterland, and (b) thereafter using these same agents to squeeze back the new currency into the predominantly cash economy.
With some minor tinkering of the existing model on risk and liability, data capture procedures in core banking system, limits on deposit size/disbursals/ frequency, liquidity can be quickly reintroduced into the rural economy.
4) Odd interpretation by some banks of the earlier cap of Rs 20,000 per week withdrawal to mean that even online net banking and debit card payments from one's accounts to another account electronically, without any cash changing hands, is self-defeating.
Govt should not have any caps on payments and transfers from one's account using any end-to-end electronic channels. In fact, online payments should be encouraged and incentivised.
5) Banks should allow for accepted branded third party prepaid cards and wallets to be directly loaded from customers' accounts via their debit card along with their own in-house cards and wallets.
The more the wallet is loaded directly from bank accounts or debit cards through say, net banking, the more the redemption is electronic, the less the demand for high value currency in circulation and problems of tendering exact change.
Winners and Losers
Who are the winners and losers? Yes, the little guy who probably constitutes 80 per cent of the affected economy. They definitely get badly hit as they (a) struggle to exchange, deposit and withdraw their hard-earned savings/earnings from banks. Which of course, as one would know, they wouldn't have access to, or find a whole lot convenient (b) plying their trade has become that much more difficult.
Micro-businesses such as taxi/auto drivers, sundry pavement dwellers, flower sellers to people who run street food stalls, chai and pan shops, beggars, electricians, artisans, etc. all are affected.
Anecdotal evidence indicates a drop in daily earnings ranging from 50-95 per cent in urban areas in the wake of demonetisation. The rural situation could be worse. No doubt this is an unintended consequence of this action.
But the bigger and longer-term impact would be for small and medium traders and sundry "big fish" (20 per cent, towards whom the drive is targeted).
For those, it won't be just business-as-usual in a few weeks or months even when adequate and proportionate distribution of liquidity (across all denomination types) is reinfused into the system.