Five reasons why demonetisation has turned into a policy quicksand

When Prime Minister Narendra Modi addressed the nation on November 8 evening to announce the demonetisation of Rs 500 and Rs 1,000 denominations, it was hailed as a historic move to curb black money and circulation of fake currency.

But in the last six days since the declaration, the public mood has started to shift.

Millions across the country have been forced to queue up before banks to change the now useless notes. Taken by surprise, banks are struggling to keep pace with the huge surge in demand. Ration shops have been looted, bank branches have been attacked and people have had difficulty paying for important medical treatment, labour to plough their farms or even just buying a meal.

All of this prompts a question: Why did something the government hoped would boost its anti-corruption image be superseded by the narrative of a logistical nightmare?

Lack of preparation

Neither Prime Minister Narendra Modi nor Finance Minister Arun Jaitley has told us exactly how long ago the planning for this demonetisation began. A report without any attribution in the Times of India claims that the government started work on this “around six months ago,” and included “meticulous planning” of operations.

The policy decision had to be kept secret, various ministers and Bharatiya Janata Party spokespersons have claimed, or else the government’s entire aim of cracking down on black money would have been lost. But all that meticulous planning seems to have not gone very far. Instead, most people across the country, including the bank managers who have had to bear the brunt of the decision, knew nothing about it until it was publicly announced. In other words, harping on secrecy meant the infrastructure to handle such a massive operation was not created.

Even the BJP’s own Subramanian Swamy did not miss pointing out the distress such an unplanned policy initiative has created. He of course blamed it all on the ministry of finance and wanted to know why the banks did not set up kiosks across the country to disburse cash or have a viable contingency plan for such a scenario.

Banking on it

Even in the best of times, India’s banking system isn’t equipped to handle something this massive. The Reserve Bank of India data states that there are 1,32,587 bank branches in the country. That is one branch for every 9,500 citizens. But the banks aren’t spread evenly across India. As many as 250 districts have less than 100 branches. Of these, only 49, 902 branches are in the rural areas whereas 62% of all Indians live in villages.

Even if the network of post offices is taken into account, the infrastructure looks grossly inadequate. Unlike the big cities where the people have other cashless means to fulfil transactions, the villages depend heavily on cash. Moving cash to remote areas take time since it involved tight security measures.

Mistimed warnings

Prime Minister Modi claimed that the demonetisation was a move to flush out hoarded black money in currency notes thriving in the economy. The idea was that hoarders would put the banned denomination notes into the formal system once it was clear the notes were otherwise useless pieces of paper, as they had ceased to be legal tender. The government said it would levy tax plus 200% penalty if the deposited money did not match the declared income, leaving most people confused.

This announcement was clearly mistimed. It would be hard to believe that such punitive threats could get people to quietly deposit money in banks. Income tax officials are at a loss how to go about imposing 200% penalty, the Economic Times reported on November 14. It quoted taxmen in several cities having “told their superiors that there is no provision in the law to automatically slap penalty on such cash being deposited in banks”.

In typical rhetoric, Modi said he wouldn’t hesitate to check records since independence to find violators. The government also said all deposits of over Rs 2.5 lakh would be scrutinised.

But the reality is that the Income Tax Department currently doesn’t possess the manpower to verify even the income declarations made in a single financial year. The department has been doing random verification of Permanent Account Numbers to find tax evaders.

Higher denominations

If the move to demonetise Rs 500 and Rs 1,000 currency notes was pegged as the remedy to cure the black money menace, the government is yet to provide any logical reasons for why it would re-introduce notes of these higher denominations so soon. The Reserve Bank of India has already printed new Rs 500 notes and they are expected to come into circulation in the next few days. Business Standard reported on Friday that even the Rs 1,000 notes would soon be back with added security features. Thus, the demonetisation move seems to be a temporary measure to target cash already hoarded and not a systemic measure to tackle the creation of black money.

The bigger absurdity was releasing Rs 2,000 notes, the highest denomination currently in circulation. The Opposition has questioned the logic behind such a move since a higher denomination note would make it even more easier to hoard black money in the future. Plus, The Hindu reported on November 12 that the designers of the new Rs 2,000 notes did not have enough time to add new security features, compromising the fight against counterfeit currency.

Further, when the 500s and 1,000s are not in circulation, how could the people be expected to change the 2000s to meet expenses? Since commercial establishments themselves have run out of cash, not many would be willing to take the Rs 2000 notes.

Unprepared ATMs

Union Finance Minister Arun Jaitley nonchalantly declared on November 12 that it would take “two to three weeks” for the Automatic Teller Machines to be calibrated to dispense the new Rs 2,000 notes. This was because the notes were smaller in size compared to the existing denominations. Essentially, he confessed to the utter failure of the government in preparing for the big demonetisation decision.

The secrecy around printing this new note was justifiable since it would have given hints to the seasoned eye about possible demonetisation. But should not the government carefully design the notes in such a way that they could seamlessly be introduced into the existing ATM system without any delay? And it was still not clear if the ATMs would need another round of calibration to dispense the new Rs 500 notes.

If the ATMs cannot dispense higher denominations, they would depend on Rs 100 notes alone, of which there is a shortage compared to the high demand. This was underlined when the RBI decided to circulate soiled notes to meet the surging demand. The ATMs have never dispensed cash of lower denominations like Rs 50.

The machines also dry up quickly when they depend only on lower denominations, as there is only so many physical notes each machine can accommodate. Across the country, most ATMs have remained cash less for the last last six days, making bank branches the best way to exchange the notes. Transferring cash to all ATMs was also a monumental task given the security issues involved. As per RBI statistics, the country had 2,01,867 ATMs in July 2016 with an estimated 70% in urban areas.