How is the government estimating India’s paper currency requirement?

As the government goes about printing new currency notes to replace the invalidated 500/1000 rupee notes, one wonders how this is being done. On one hand, the Reserve Bank of India (RBI) claims that there is “enough” currency in the system. On the other hand, government spokespersons claim that not all currency notes would be replenished because they expect people to adopt cashless payment modes. Several other commentators have pointed out that if the value of all currency notes withdrawn from the economy are to be replenished, it would take a minimum of six months given the capacity of the currency printing presses.

All of the above cannot be true at the same time. The starting point for any discussion on the time required to replenish currency notes has to be an estimate of how much of the Rs.15 lakh crore is going to be put back in the economy in cash. A few different theories are floating around. Many of these theories are in fact just arguments crafted to help see the government through another day (or evening of prime time news), and not the result of any robust research. Most figures put out by the government have crumbled when exposed to sunlight. The magnanimous estimates of the proportion of currency notes being held illegally (unaccounted cash savings) have proven to be false, with the mountain the deposits landing up with the banking system in the last forty-odd days. The estimates of counterfeit currency too, seem to have fallen by the wayside. The latest I heard was that the Ministry of Finance suspected the RBI’s ‘bank deposits since 8th November’ to be wrong. Well then…

One prominent theory seems to be that the government can just print lesser cash since a lot of cash was held in mattresses and not really required in the economy, right? This is theoretically plausible, but only in a world where there is reasonably accurate information on what that proportion of cash is. As with much else related to demonetisation, it is quite apparent that the RBI and the government have no clue if the idle savings in cash is 5% or 35%.

First of all though, it is inaccurate to term these savings ‘idle’, since for those who store away cash, these deposits serve very specific purposes. For instance, the oft-quoted case of the wife who keeps deposits away from the prying eyes of an alcoholic husband, or vice versa. People who like to feel secure (like my parents do) about having some cash kept away for times of need, or when there is a sudden urge to splurge on something the monthly budget doesn’t allow for. There are probably a whole host of social and cultural reasons behind why money was saved in this manner – but quite obviously in India, that is the norm. Yes, these monies are less productive than they would be in bank accounts, but that transition cannot be rushed through, let alone be forced on people.

Before we destroy that stock of money by eroding confidence in the currency as a whole, did anyone look into what impact it would have on the ‘confidence’ of, say, a poor woman who is used to saving money for a rainy day? What would it mean to know that her emergency stockpile no longer exists? What about health emergencies, which can be devastating for those who have no means to access insurance or bank deposits? In the absence of any specific intelligence on how much cash would be enough to restore the economy to its earlier normal state, the government will obviously do what it is doing now – which is to release money as they print it and watch for cues on the ground.

The other factor is the pattern of distribution of this household saving, and the manner in which that might change, say, next year. Consider this thought experiment, where a million families have hoarded about 50% of their monies in mattresses and never used them. Another million families have no such reserves. If in this country of two million families, the government decides to reduce the supply of currency notes by say 20%, it will not impact the former group, but will have harsh negative consequences on the latter group.

Another frequently mentioned theory, currently finding favour with assorted government spokespersons, is that as more people go cashless, the need for paper currency will go down and so the government just will not have to print as many currency notes as before. But by how much? I am not sure anyone has a clue. Those who are using cashless transaction options out of compulsion now may revert back to using cash.

In the midst of all this, the RBI has other urgent priorities too that cannot be ignored. When the Prime Minister decides to go speak at a public meeting some place, the RBI would have no factor that into their plans to ensure there is adequate supply of cash there. Just so there aren’t any unexpected protests which might result in the speaker having to cancel or alternately, address people through a mobile phone, perched away somewhere in safety. As the RBI does all of this, and goes about the unfinished task of reconfiguring ATMs and importing paper to print currency notes, they are fervently hoping they wouldn’t have to replenish currency notes to the same extent as before. I am not sure we can run on hope alone.

Germans rallied behind their cash; we must take note

Personally, I try to go cashless as far as possible. From paying for coffee using my card to net banking to recharge my prepaid phones, and using m-pesa as much as I can, I must be a model ‘digital’ citizen. It’s a different matter that my data (digital footprint) is strewn all over the internet, freely available for anyone to use/misuse/abuse if they wanted (oops!).

Yet, I get the resistance to being ‘forced’ to go cashless. My parents for example, ardently prefer cash. They are highly educated and have no black money hoarded away (to my knowledge, at least!). But they are not tech savvy, and in India at least, that is not contradictory in the least.

So when Modi and co try to sell us this ‘cashless utopia’, we need to stop and ask: “but why?”, just like the Germans do. In Germany, 79% of payments are made in cash, and they have a good reason for they prefer their payments in cash:

In addition to the nation’s economic trauma between the two world wars, Germans who lived under the communist surveillance state in East Germany until reunification in 1989 tended to use only cash so they would leave as few traces of their financial dealings as possible. Recent revelations of controversies over snooping by the National Security Agency and domestic spy scandals have fueled distrust of keeping electronic financial records.

Those concerns explain why Germany’s privacy laws are among the strictest in the world.

“The main reason people give for preferring cash is anonymity compared to card payments. People are just more cautious in Germany,” said Helmut Hammes, head of the German Central Bank’s cash department.

Savelsberg said he doesn’t trust credit card companies or other middlemen to keep his transactions private. “Germans are much more private and cautious of technology,” he said.

In addition to the above, there is also apparently an aversion to debt.

But yes, some of these reasons are peculiar to Germans, and more and more people are beginning to opt for cashless modes of payment. But for regular (and mostly small transactions) this matters in India. And we certainly should not be going cashless to satisfy someone’s whim. Foremost, is the question of choice. We cannot claim to be a modern society if we are literally coercing people to adopt cashless methods. Then there is the issue of privacy. On one hand, you have Germans demanding to reserve their right to use cash in order to protect their privacy, but on the other, countries like say, Sweden are genuinely a cashless utopia. But I don’t have to tell you the differences between Sweden and a poor country like India in terms of physical, financial and digital infrastructure, as well as the legal framework, that enable cashless transactions, and protect consumers.

It should be obvious that we cannot have one without the other. In India, security of online transactions remains weak. Our debit cards get hacked. Mobile wallets misbehave with little (or long-drawn) grievance redressal processes. And all this, only in places that have internet coverage in the first place. So technological advances are great, and they matter. But they are no substitute for either basic human capability, or intent. Digital payment apps for instance, require a fair degree of financial and tech literacy. Not just to operate those apps, but to be able to decide when to use the app and when not to. For instance, when I make payments and have to choose between using my credit card, debit card, and a mobile wallet, I need to know the costs associated with each to identify the appropriate one to use. I believe I am not being patronising when I say that a large section of our population lack the skills, at the moment, to make those decisions. Also, the information isn’t all there in a clear and digestible format either.

Then there is the question of state capability and intent. That’s where the legal framework comes in. States can electronically transmit welfare payments to people’s bank accounts, and in the absence of robust legal protection, can as easily deny them their rights. But we did all switch to Electronic Voting Machines, didn’t we? Yes, we did, and for that reason, I am not beginning this with a blanket distrust of the state (as compelling an argument that might be, with state power currently in the hands of the the insidious RSS and their cronies). But that does not mean we walk into this without a watertight regulatory framework.

Then there is convenience – which links back to the issue of ‘choice’. Those who find it convenient, should be free to go cashless. And those who don’t, should be free to remain as they are. The same holds for privacy. Sounds simple enough to me!

An important transfer of power in Ghana

Ghana has been different from many of its contemporary African nations especially in terms of its ability to see through peaceful transitions of power since 1992. Often, the credit for this is given to former President JJ Rawlings, who after being responsible for two military coups (1979, 1981), stood for democratic elections in 1992, and organised the next presidential election in 2000. But greater credit must go to the Ghanaian people who cherish this ‘difference’ enough to ensure that in every subsequent election, the outcome was democratically determined, and acknowledged by the main contenders to power.

Over the last two decades, the NDC and NPP have established themselves as the chief contenders in what is essentially a two-party system in Ghana. Prof. John Atta Mills (NDC) took power in 2008, passed away just before he was up for re-election in 2012. John Mahama, then the Vice President, took over the office and later, won the 2012 presidential race over Nana Akufo Addo (NPP). Anyway…the tale of presidential contenders in Ghana is slightly repetitive one, as you can see below.


Having lived in Ghana for two years from 2009 to 2011, I have a massive soft corner for the country and its people. In 2009, buoyed by the promise of oil revenues, Ghana was seen to be doing quite well. Although experts cautioned Ghana against the pitfalls of over-reliance on oil revenues and that infamous ‘Dutch disease’, there was hope all around that continued into 2012.

In 2016, Ghana was clearly in trouble. The exchange rate stood at about 4 GH Cedis to 1 US$, down from 1.7 in 2011. Corruption scandals had erupted in recent years, and while the opposition’s campaign had been relatively muted (primarily because they were starved of resources), public discontent was reportedly widespread.

While Ghana has witnessed tightly contested elections, with both principal political parties respecting the popular mandate, this system is prone to other forms of mal-governance – the most prominent of which is a tacit consensus between the main contenders regarding the appropriation of state power (and resources). There is indeed very little that is different in the stated policies of the two parties, and the popular experience of the functioning of the two governments led by them respectively (2000 – 2008 and 2008 – 2016).

However, the NPP has been out of power for two terms and in terms of its economy and resource revenue potential, Ghana is finds itself in 2016/17 in a vastly different from the situation from that in the 2000s. Having come back to power after eight years in the wilderness, hopes are high from President-elect Nana Akufo Addo and the NPP. 2016 has been a depressing year if you try to frame the narrative in terms of elections around the world.

As Ghana voted on 7th December, it was an opportunity for Ghanaians to usher in their version of ‘change’ and they have succeeded in effecting a transfer of power. Unsurprisingly, Nana has two major promises: Jobs and an anti-corruption drive. We will be watching.


The battle against corruption should not end here

Since the 8th of November when the government declared that 500 and 1000 rupee notes were no longer legal tender, there has been much talk about the need for ordinary citizens to join the battle against corruption. Rather dramatically, Prime Minister Narendra Modi too announced from the pulpit, his resolve to continue battling corruption even if he is destroyed, or burnt alive. While failing to fathom why the Prime Minister must fan conspiracy theories about sinister enemies waiting to hurt him, I do think that we must respect the overall sentiment he has expressed, and support the government in taking forward this battle against corruption.

More importantly, now that crores of Indian citizens have borne the “minor inconveniences” towards this cause by waiting up in bank queues and rationing consumption, we need to make sure those sacrifices count for something. This battle against corruption should be a fight to the finish. Surely, no one can argue that a battle against corruption is the sole preserve of a conservative right-wing party – it is something in which we all must take part.

So here, I suggest seven steps that will irrefutably signal that India’s fight against corruption is one with serious long-term intent:

  1. Scrutinise all large transactions, including bank deposits: Tax authorities should be routinely checking all large cash transactions or bank deposits made by individuals, businesses and political parties. Since we expect large transactions to take place through inter-bank transactions, outliers must be investigated. This tax scrutiny should be prompted by a standing policy at the banks where information is shared regularly with tax authorities. Alongside, tough consumer protection laws should apply that punish any tax authority that unduly harasses an innocent citizen. As a follow-up to the current currency swap scheme (misleadingly now known in popular parlance as ‘demonetisation’), all large bank deposits in the large six months must be immediately scrutinised. We already know of the land purchases by the BJP in Bihar, and the large deposits in West Bengal. Could the Income Tax officials raid those establishments?
  2. Go after the big fish next: Starting from the biggest defaulters to our public sector banks, to tax offenders who have illegal assets stashed away abroad, the big fish are still out there, almost completely untouched by this ongoing demonetisation drive. In order to demonstrate its seriousness, Government of India must go after them, irrespective of how powerful they may be. Getting Vijay Mallya back would be a good start. The trails from those Panama papers and the HSBC accounts that seem to have gone cold need to be revived, pronto. The Prime Minister should prove that he means business.
  3. Strengthen the Right to Information (RTI) and Whistle blower Protection acts: In a fight against corruption, as was amply demonstrated during UPA 2, the RTI is absolutely critical. Prime Minister Modi must act to strengthen these acts. The RTI compels governments to be transparent, by putting responses to questions from citizens in the public domain. Whistle blowers do the same, from within government and outside, and their government must step up to protect them from the dangers they face. The Government of India should consider making a start to this with the Vyapam disclosures in Madhya Pradesh. Needless to say, political parties should not be exempt from RTI for even one more day. A midnight announcement to that effect would be best, so that culprits don’t have a chance to make amends before the deadline.
  4. Make data on natural resource deals public: Following a Supreme Court order, the new government was forced to conduct open auctions for the allocation of national resources – minerals, spectrum, etc. In order to take forward the emphasis on transparency, governments – both at the centre and the states – should make public, in an easy to understand format, all deals involving natural resources. This would also be the natural and well-intentioned follow-up to the Supreme Court’s orders to conduct open auctions for allocating natural resources that offer potential for extractive rents. These disclosures should start from the deals involving coastal lands in Gujarat, and extend to the mining contracts in Chhattisgarh and Odisha.
  5. Make election finances transparent and strictly regulated: All cash contributions to political parties should be considered contributions to the Consolidated Fund of India. Any contribution above INR 2,000 should be made by cheque, bank transfer, or a mobile wallet. If this threshold is considered acceptable for daily ATM withdrawals, and since many Indians just don’t have 500/1000 rupee notes in their possession, mass contributions of those amounts are bound to be a miniscule portion of the total contributions anyway. The BJP and Congress could do well to open up their books for independent audits of their massive election finances.
  6. Disqualify election candidates with pending corruption cases: This would be the most path-breaking step of them all. Prime Minister Modi is committed to cleaning corruption from India, and his party should be ready to embody the message. My humble suggestion is that starting with the upcoming state assembly polls, BJP should set an example and not nominate for party tickets, anyone with a pending corruption case. This might lead to some electoral setbacks, but will be widely lauded as the greatest act of self-sacrifice by a political party in seventy years of independent India.
  7. Investigate income declarations of politicians and prosecute rapidly: Extending the effort to clean up the electoral process, all pre-election affidavit declarations must be investigated by a national investigative agency. One often laments that the affidavits mean little unless the data is used beyond generating infographics for the media. Candidates must face legal consequences if they indulge in under-reporting income or assets. Any unexplained spike from one election year to the other should attract the investigator’s attention.

I am confident that Prime Minister Narendra Modi will not stop in his mission to eliminate corruption. There is another huge advantage – they will give people a chance to take genuine pride in being honest, without having to endure the public chaos and personal inconvenience caused schemes such as the ongoing currency mop-up drive. Not only will people – especially the poor – bless the government, but also the brave men guarding our borders will be proud of us.