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 Several other commentators have pointed out that if the value of all currency notes withdrawn from the economy are to be replenished, it would take a minimum of six months given the capacity of the currency printing presses.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.