By Gyan Pathak
Indians have been suffering in the grinding mill of Modi’s monetary policy misadventure for one-and-half years, which began in November 2016 with the announcement of demonetization. Mismanagement of currency notes and coins created a severe “cash crunch” on the one hand, and excessive supply of coins in the market has created the problem of plenty on the other. There are no takers for the smaller coin of Re 1 denomination in several parts of the country. Government policies, Reserve Bank of India, and other banks are responsible for this. They also have failed to check the menace of counterfeit notes and coins, the entry of which in the banking system has broken all the records in 2017.
In recent months, millions of ATMs in several states were dispensing notes only for a few hours, and thousands of them remained dry for several days. The reported reason was short supply of Rs 2000 notes from the Reserve Bank of India to the banks. The machines were mostly supplying notes of lower denomination exhausting their capacity within a few hours. This sudden outbreak of the “Cash Crunch” has put people in great difficulty. The government blamed “hoarders” and “political conspirators” for this in a bid to conceal their own mismanagement.
This highly disturbing reality has been damaging the economy and is potentially more damaging in the future, but the Modi government has been totally unconcerned about the problems of the common people. At the time of demonetization, neither the government nor the RBI was fully prepared to provide money even in smaller doses. This situation remained for over two or three months. The process of remonetisation was very slow, which continued until June-July 2017. It slowed the economic growth, resulting in great hardship to the poor and the working class, many of whom went jobless. The two major objectives – unearthing of black money, and checking the menace of counterfeit notes – have miserably failed according the latest reports.
Millions of ATMs were calibrated to make new slots for the new notes of Rs 2000 and Rs 500, and to remove old slots for old illegalised notes of Rs 1000 and Rs 500. However, within a few months Rs 2000 notes started disappearing from the market triggering a rumour that the government would soon discontinue the Rs 2000 notes. The issue even surfaced in Parliament, but the Ministry of Finance denied any such move. A game was being played by the government to push cashless transactions and digitalisation in what was termed as a move towards a ‘cashless economy’. Cash flow into the economy has been regulated since then in favour of the ‘game’. Even RBI was reported to have decided to cut down printing of new Rs 2000 notes in June 2017.
A shortage of Rs 2,000 notes was thus created not only by the hoarders, but also by the RBI. It is because of this that there has never been a time after demonetization when ATM operators were not grappling with cash shortage. Even in July last year several bankers and ATM service providers said there had been a sharp drop in the number of Rs 2,000 notes in circulation. Supply of new notes from the central bank had plummeted, which smacked of a deliberate strategy to restrict the flow of Rs 2000 notes. Millions of ATMs were recalibrated for placing more Rs 500 notes in place of Rs 2000 notes. This fact proves that something has been done deliberately.
Preference for cash over digital transaction is the way of life for most Indians. The government, even by creating artificial shortage of cash, could not change this preference. Officials took people for granted and perhaps forgot about an alternative monetization plan in case their push to cashless economy failed. Even if people are keeping more cash in their home, all of them cannot be accused as ‘hoarders’. People need cash and they have been losing faith in the banking system in the wake of the latest bank crisis. The government policy that only Rs 1 lakh deposit is insured in banks has made people suspicious of the government’s intention. They are wondering as to what will happen if they would be denied their own money deposited with banks, or they would be allowed to withdraw only in small doses at the time when they need it most. Currency withdrawals have therefore gone up to 1.4 trillion during January-March 2018 up from 1.1 trillion in the corresponding period of 2016. The figure of 2017 was much less because of rationing of withdrawal after demonetization, and is therefore not comparable.
Demand for cash usually increases during marriage and election seasons. It is also not new that high demand of cash is usually noticed in March-April. However, the government seems not prepared to meet the demand. It had stopped printing Rs 2,000 notes in the last few months. The reason, an official statement said, it had adequate stock worth Rs 6.7 lakh crore of these notes. Secretary Economic Affairs says the government has stepped up printing of notes to meet the demand.
In the beginning of the second week of this month, the level of cash, according to the central bank, was close to the pre-demonetisation level at Rs 18.4 lakh crore. But in terms of cash-to-GDP ratio, it was still lower at 10.9 percent compared to 12 percent before the note ban. Cash in hand with banks, which comprises cash supplied by the RBI, from which banks stock up their ATMs with currency notes, fell to around Rs 604.8 billion as of March 30, from Rs 710 billion at the end of December 2017.
There are also other problems with banks. Most of the banks refuse to deposit notes of smaller denominations and coins. Surplus quantities of coins are lying with shopkeeper, vendors, and even common people. Banks have been pushing coins and notes of smaller denominations in the market, but they are not easily taking them back from depositors.
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