It is quite coincidental that the monetary cum credit review/policy came exactly one month after the grand re-monetisation scheme was announced on the 8 November, which literally shook the edifice of our economy and everyday lives.
Broadly ten thoughts come to mind when we look back over the last 30 days or so.
First, it was comforting to know that the Reserve Bank of India (RBI) has stated that it was in the loop all the time; and the entire plan was a joint effort and hence it was not the case of the central bank being involved after the decision was taken. The fact that this was overtly stated by the RBI is significant as there have been discussions on whether the RBI was part of the plan or was just told to implement the same from the top.
Second, the way this story has played out does make one infer that when the decision was taken no one knew of the problems at the ground level in handling the ATM issue. When we were told that banks and ATMs would be closed for two days, it was assumed that 48 hours were all that was needed to get them ticking. Thirty days down the line, a large number are non-operational even in a place like Mumbai. Further, the calibration process was too slow and it looks like that it was not quite thought through as the size of the notes issue had to also be addressed. The absence of queues in front of the ATMs is more because of there being no cash available (and when ticking, dispersing Rs 2,000 notes which have low transaction utility).
Third, the way the new notes had been rolled out was quite puzzling as releasing Rs 2,000 denomination before Rs 500 appeared to be either a major slip up or there was a strong undisclosed reason for the same. If it is the latter, then it should be spelt out. Also, the RBI has stated in the press conference after the credit policy that they were not considering printing Rs 1,000 notes while at the time of the announcement of demonetisation, it was stated that the Rs 1,000 denomination would be considered in course of time.
Fourth, the fine tuning of policies relating to exchange and withdrawal appeared to give the impression that the authority did not quite anticipate the way in which their system could be gamed. Allowing Rs 4,000, Rs 4,500 and Rs 2,000 exchanges per day, which was laced with the indelible ink by the end of the scheme, was addressed by the black money holders by keeping agents in lines through the day across various branches. Finally, the exchange scheme was withdrawn. The gamers were always several steps ahead and used jewelry purchases and agents to beat the system. The most astonishing move was to get to activate dormant ‘Jan Dhan’ accounts which were an innovation in the art of dodging the tax authority. The government will have a challenge on hand in addressing this issue.
Fifth, the public has been running amok trying to understand these rules. At times one can withdraw Rs 20,000 from a branch while on others it is Rs 24,000 per week. But at the ground level most banks do not allow this and ration out amounts. Further, after assuring the people that deposits of up to Rs 2.5 lakhs will not be questioned, the government has gone three steps back and warned that no one can take this for granted. Hence, there is fear of undue harassment from the tax authority at a later date.
Sixth, almost as a threat with undertones of a plea, the government has got in another income disclosure scheme and after initially floating the idea of 90 percent tax cum fine has brought it down to 50 percent. This is another desperate measure to get the money out and have people disclose black money.
Seventh, while almost everyone who works in air conditioned offices have praised the scheme and projected that we will all go digital and this is the only way to do so, there have been dissenters. Hence, all corporate honchos have backed this to the hilt and have given their examples of how they use cards, internet and the ‘famous’ e-wallet to pay their maids, vegetable vendors, etc. The clan of economists have spoilt the party by calling this an exaggeration and have drawn up their estimates of how output will be affected as spending has stopped, manufacturing affected and several workers have been laid off. The net result can be a fall of between 0.5-2 percent in gross domestic product (GDP). This debate still goes on, but at times the twist in the argument is that this re-monetization is to make the country go digital and away from cash with assault on black money being a secondary effect.
Eight, the banking system and RBI was caught off-guard as the flurry of deposits led to surpluses with banks with no avenues for deployment. When business is down, no one borrows. The RBI did not have enough securities to sell in the reverse repo auctions and in a panic situation increased incremental CRR to 100 percent. While banks squealed as a default would mean loss of license, the idea of MSS bonds came up to provide support which will restore equilibrium.
Nine, the RBI has set to rest the debate on what would happen when money gets stuck in the system. It was conjectured by critics and analysts that it would get transferred to the government as surplus. But the RBI has clarified that this will not be so and the amount will reside on its balance sheet without status of legal tender.
Ten, even after one month, people struggle to get money from banks. When it is possible, it is a Rs 2,000 note which is hard to exchange. However, surprisingly there has been no protest and the true Indian spirit has taken it in the stride. As it has been projected as being a scheme that attacks black money which has been eroding our economic fabric, people are willing to be inconvenienced if it means that a larger good is achieved in future. This is a big positive considering that the majority does believe in this measure and are prepared for this sacrifice.
But two things need to be seen. First is: How would we evaluate the success of the scheme? Will it be in terms of the gains in revenue relative to loss of GDP? Or will it be the measure of currency lost in the system? Or is it the time taken to get back on our feet. This would be an interesting analysis after December-end.
The second is a concern. With the flow of deposits increasing and the sense being that not much currency will actually slip out of the system, there is a fear that the taxman could harass several tax payers asking for proof of money out in the bank. There is already some talk of the government gunning for gold with households.
(The writer is chief economist, CARE Ratings. Views are personal)
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Updated Date: Dec 08, 2016 12:27:55 IST