The demonetisation puzzle is getting murkier with every passing day. All economic and political reasons behind the move are now getting lost in the continuing mess it has created. The unpreparedness of the government which decided to scrap more than 85% of the country’s monetary base is baffling. Many earlier cases of demonetisation, for example in the former Soviet Union, North Korea, Ghana, Nigeria and Myanmar, were from those countries which were struggling to come out of serious economic disequilibrium. India is going to be a standard textbook case where policy makers, with their own actions, destabilised a perfectly stable and one of the fastest growing economies in the world.
Anyone who took this decision must have known that changing 16.5 billion Rs 500 notes and 6.7 billion Rs 1000 notes was going to be a huge logistical exercise. We are not sure if any internal study was carried out to find out how much preparation and time it will take to make all these transactions. There must have been some rationale when the government started with very low initial figures of note change as well as bank and ATM withdrawals. As these guidelines are changing almost every day, it seems that the government is simply trying to learn through the trial and error method. The government which came to power with the slogan of minimum government is now threatening all kinds of income tax provisions to citizens.
In recent history, a very successful currency changeover operation was carried out in Europe when twelve EU countries introduced their single currency, the euro, on January 1, 2002. In the first few days of 2002, participating countries distributed about eight billion notes and 38 billion coins through 218,000 banks and post offices and 2.8 million sales outlets. During the same period, authorities also collected a large proportion of the nine billion national notes and 107 billion national coins.
Although the context is entirely different, it shows how much preparation is needed in case of massive currency changeover. The European Central Bank prepared for almost three years with everyone fully knowing about the changeover on a particular day. Printing new notes and minting of new coins had already started in mid-1998.
Frontloading banks with new notes and coins started almost three months in advance. By December 31, 2001, banks were already frontloaded with almost two-thirds of the cash needed in the next few weeks. About 96% of coins in value terms were also already in banks. All ATMs were preloaded with new cassettes and were activated at midnight. Most ATMs were designed to provide maximum 10 and 20 euro notes, as it was thought that large denominations would create a change shortage during the changeover. Except a few in Italy, most other ATMs worked as expected. Despite the fact that most Europeans normally use cards, it was expected that during the initial period, people will use more bank notes.
Despite all these preparations, many countries still permitted their legacy currency to remain in circulation for almost two months. The European example shows that how much advance preparation is required if we were looking for the successful and convenient changeover to new currency notes.
After ten days of demonetisation woes, any talk of ‘limited inconvenience’ looks shallow. The information campaign by the government may be useful to stop panic among citizens. However, media management will be of little help as almost every citizen has his or her own experience with banks, ATMs and markets.
People are now gearing up for less economic activities for the next few months. Some postponed economic activities may materialise after a gap of a few months. However, the loss of other economic activities could be permanent. It will have its own implications for consumer expectations, GDP figures, revenue collection and so on.
After ten days, it has become clear that our financial system is simply not prepared for this massive changeover. So either we wait for the next few months for things to become reasonably normal, while the public continues to suffer. Or the government should think seriously of extending exemptions for the use of old currency to as many sectors as possible for the next few months. With this, we may not be able to achieve the government’s intended objectives concerning black money, terror funding and counterfeit currency. However, this may still be a better situation than the turmoil we are in now.
Gulshan Sachdeva is professor at the school of international studies, JNU