Consider some of these observations after the demonetisation scheme was announced.
First, as when one visited holy family hospital in Bandra, one could see several patients facing a conundrum. The patient was in distress but the hospital insisted that payment be made by plastic and not the Rs 500 and 1000 notes. The people here were from middle class but never used cards and had cash.
Second, several eateries saw sharp fall in business as they do not use cards and insist on cash. Business was low as they had to keep customers away.
Third, one saw vegetable and fruit dealers were sitting without wares because they could neither buy nor sell. The former because the mandis insisted on non-demonetised notes. The latter because they could not tender change even in case they had some goods.
Four, business for small shops slumped even as they gave goods on credit. Doctors had a serious problem on taking fees in non-cash as they could not be paid Rs 1,000 as fees, which is at specialists charge. Some asked for cheques and took the risk of them bouncing.
These are real instances in Mumbai after conversations with some of them.The government announced that banks would close on 9 November and ATMs would generally function from 11 November while some could open on 10 November. The picture here was predictable. Banks had long queues and had different interpretation of the rules.
While the RBI circular says that one can exchange Rs 4,000 a day, banks say that their branches can do so only once in a time band. Next you wait for 1.5 to 2 hours, which the author did, and you are provided with two Rs 2,000 notes. Are these notes useful? Definitely not now as there are no takers for the same as people need change which is not available. (It has to be noted the limits have changed on Sunday night. Read about it here.)
The crowd here is generally from the lower and middle income groups as they need this more than the affluent who can wait. Further while the RBI web site and government notification has a form appended, you cannot use it as banks have their own versions which added some more details and hence one cannot go prepared for the same. Some insist on writing the number of the notes as well as providing your phone numbers while others do not. Quite clearly this has not been thought of when the circular was issued.
There are separate queues for deposits and withdrawals. At present, bankers say that there are no Rs 500 notes (as of Sunday 13 November) provided and hence a withdrawal of Rs 10,000 could be meaningless with only Rs 2,000 notes being dispensed.
The deposits queue have the more affluent who come with stacks of notes and these queues move faster than the exchange ones. The latter runs the risk of coming to an end anytime money is exhausted. One has not come across bank branches which admit a fixed number of people through a system which ensures that you do not stand for two hours and asked to go without the money. It is hence a matter of chance.
The ATM story is still bizarre. On the 11 November one moved in a radius of 4 kms between Andheri East and Vile Parle East (in Mumbai), which houses around 25 ATMs. Several ATMs of Kotak Bank and YES Bank were closed with shutters down. The security guard said that cash was not received.
SBI was taking only deposits. ICICI Bank claimed money was exhausted while HDFC Bank had no one to talk to as the main shutter was down and locked. PNB, Canara, Karnataka bank, OBC and United Bank had not received stock of money. The only ATM which could give cash at 11 pm was IDBI Bank which probably had currency as it is located in a quiet place.
What are the issues here? A talk with bankers and security personnel reveal the following. All banks do not have currency chests and do not have access to money. They need to get from the RBI these bundles and the central bank appears not to have the stock which means that there is shortage of currency notes.
Second, once a bank gets the money it should have the wherewithal to handle it and disburse to branches. All do not have these facilities. Third, the ATMs need to be reprogrammed to dispense specific denomination notes of fixed quantity and also ensure that the same card cannot be used twice in a day.
There is a limit to it as it involves a physical exercise. There are over 2 lakh machines that need such attention. The outcome is also that once these machines are to provide a larger quantity after a pre-specified date, then they have to be reprogrammed. It is not surprising that these notes do not fit and the result is long queues.
The people in these lines are definitely from the lower income groups. Hence even these bold measures which serve the larger good has to be supported by the lower income people.
The problem with India and the schemes implemented is that most of them are formulated in the precincts of institutions with less knowledge of reality. Let us see some evident shortcomings.
Printing Rs 2,000 notes without having lower denomination currency is a losing proposition as it is quite meaningless. All those receiving them have to wait for the Rs 500 notes to come as there are no takers for the same.
Second announcing limits on withdrawals at ATMs or exchanging of currency sends out panic messages that the system does not have money today. If an equivalent amount was made available within the normal limits, there would be no panic.
Third, banks have their own interpretation of the RBI rules which creates confusion for customers. For example, ICICI bank told me that if I exchanged money today I could do the next one after 23rd November, but I could do successive transactions in Corporation Bank after enquiring about this issue and the officials saw no objection.
What does this all mean? Execution has always been our Achilles heel, and the attitude is always one of jugaad. It works actually because we feel that let us roll out something and then address issues as they come as we can never think of all contingencies. There is merit here and as and when an equilibrium finally comes things are forgotten. But there is a cost to this exercise. Let us try and impute the cost of such an exercise. There are around 290 million households of which two-thirds would be affected fully assuming the balance are very poor.
Each household would spend at least 12 hours standing in queues for exchanging, depositing and withdrawing money in the period up to December end. It could be higher too. This would be around 300 million working days assuming that a working day is 8 hours and one spends one-and-half days of time. What is the cost of this time? At the most basic level the per capita income of Rs 8,000 per month for the country implies a daily salary of Rs 360 which work s to Rs 540 for one-and-half days which comes to Rs 540x30 or around Rs 16,200 crore.
To this should be added the cost for banks where the pure salary bill is around Rs 400 crore a day (annual wage bill of Rs 1.2 lakh crore which implies Rs 10,000 crore a month or Rs 416 crore a day assuming 24 working days) where a multiple of one-and-half days can be added for other expenses that go with operations.
Now depending the number of days that banks have to put in terms of additional hours one can guess the overall cost. Assuming again that altogether banks will be working for at least 10 additional days the value will be between Rs 4,000 crore and Rs 6,000 crore. Hence the total imputed cost of operations would be a minimum of Rs 20,000-22,000 crore at the minimum. Add to this the cost of realigning ATMs, transportation of cash, security, besides the printing of new notes and destruction of old mites, the overall cost could run to anywhere between Rs 30,000 crore and Rs 40,000 crore. This excludes the loss of GDP which cannot be made up like in services.
Consumer goods would always see a revival once things settle down. Therefore, unearthing black money through demonetisation can be an expensive exercise if birth direct and direct costs are included.
Hopefully, the returns will justify this expense. This will be known on 1 January, whether the exercise has been worth the effort.
The author is chief economist, CARE Ratings. Views are personal