Why I blame this government of 'two-and-a-half persons' for cash crunch

Ask Arun Shourie to understand the reasons for demonetisation 2.0, the cash crunch that has left ATMs dry. Recall what he said about the Narendra Modi government. It’s a “government of two-and-a-half persons”.

In a comment on sliding economic growth and job losses after demonetisation, Shourie had said, "This is a government by ‘ilhaam’ (revelation). The Prime Minister has the ‘ilhaam’ one night that demonetisation should be done and he does it."

Let’s not get confused. The cash crunch is not about currency ban. It’s not about any executive order of the government. But it’s a consequence of the note ban and more. 

It’s about inefficiency of the government. The government of two-and-a-half persons is responsible for the cash shortage. Because a government short on talent, a government that has total disregard for advice and collective decision-making can’t be expected to perform better than it has.

Besides inefficiency and incompetence, there is another characteristic that defines the government - its penchant for conspiracy theory and inability to take preemptive measures against a crisis in the making. The government also fails to squash rumours when it must.

The shortage of cash was noticed at least 10 days before it hit the crisis level. First to be affected were small towns and areas outside big cities. But neither banks nor administration took note. High value currency notes of Rs 2,000 denomination were especially in short supply.

The demand for currency notes has been rising since the uptick in the GDP growth. There was a sharp increase in withdrawals from ATMs in Karnataka, which is going to poll in May, Andhra Pradesh and Telangana at least since November.

According to RBI data, total withdrawal from ATMs was Rs 36, 518 crore in November last year that increased to Rs 41,102 crore in January this year. However, the withdrawal tapered to Rs 37,126 crore by February as supplies of currency notes from RBI began to go down. The RBI had begun squeezing supply of Rs 2,000 notes as it concentrated on printing and supplying notes of Rs 500 and Rs 200 denominations.

The extent of squeeze can be gauged from the fact whereas Rs 10,000 crore a day was in circulation in the post-demonetisation months, it fell to Rs 6,000-Rs 5,000 crore later. That volume came down to Rs 1,500 crore a day in the last few months, reflecting a severe shortage.

The data proves that both the increase in withdrawal from ATMs and the shortage of supply of cash were not sudden. Banks, which experienced the crunch at their ATMs, had apprised the RBI of the situation.

There was no reason why the RBI as well as the government shouldn’t have woken up to the situation earlier, at least a couple of months before the crisis became unmanageable.

The explanation of the finance minister Arun Jaitley, therefore, that the “temporary shortage was caused by sudden and unusual increase” in some areas doesn’t bear scrutiny. Neither the shortage nor the increased in withdrawal was sudden, though it might have been unusual.

In fact, the finance ministry itself said in a statement: "There has been unusual spurt in currency demand in the country in last three months."

It also said, "In the current month, in the first 13 days itself, the currency supply increased by Rs 45,000 crore. This unusual spurt in demand is seen more in some parts of the country like Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar."

The failure of the RBI as well as the finance ministry to respond to the crisis that was in the making for months only proves the government’s ineptness and incompetence. It exposes complete lack of coordination between the RBI and the finance ministry.

One also wonders where was the all-powerful, know-all and do-all Prime Minister’s Office amid all this? Having forced Modi’s voodoo economic idea of demonetisation, the PMO should have known that people’s wounds of being deprived of their cash haven’t yet healed.

Former RBI governor Raghuram Rajan punctured Modi’s voodoo economics. Rajan broke his silence on demonetisation revealing that he had opposed the exercise. “Demonetisation I think was not a well-planned, well thought-out useful exercise. And I told the government that when the idea was first mooted.”

Having revealed that he was consulted and he had indeed opposed the note ban, Rajan challenged the people who had propounded that note ban would spur the growth in the long term. “You would have to find a new economic theory to explain how it helped the economy,” Rajan said.

On top of the government's incompetence came allegations of conspiracy theory by BJP leaders. Madhya Pradesh chief minister Shivraj Singh Chouhan said, "Some people are hoarding Rs 2,000 notes to cause a cash crunch."

Chouhan should know that if people are hoarding high denomination notes it’s because their trust in the banking system has taken a hit following demonetisation. Series of banking scandals and fear that they would lose their precious cash deposits if FRDI becomes a reality have exacerbated people’s erosion of faith in the banking system.

The crux of the matter is what Shourie had said about a government of two-and-a half persons. To quote Shourie again, “They don’t have the expertise and they have surrounded themselves by persons who don’t have the expertise.

"They are now in a sealed echo-chamber. They don’t hear what is happening."

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