COMMENT: Govt, RBI flip-flops on cash ban reflect a cat-and-mouse game

It’s also evident now that demonetisation was not thought through to the end by either the government or the RBI. As the recent RTI data proves the central bank had only Rs 4.94 lakh crore of Rs 2,000 notes on the day demonetisation was announced, woefully short to replace the roughly Rs 15.44 lakh crore of high denomination money in circulation.

As all hell broke loose on November 9 and panic-stricken members of the public rushed to the banks, the central bank announced a new set of rules. There were three kinds of people who rushed to the bank in the initial days. First were the ones who rushed to deposit money that was stashed at home, second were those who wanted to exchange old currency into new and third were those who wanted to withdraw money, mainly in new and small denominations, either from the bank or ATMs. For each kind, the government had a restriction or a rule that had to be followed.

There was, of course, the fourth type of people, which did not rush to the banks but waited it out to let the dust settle and plan their strategy.

For the first type of depositors, individual account was restricted to Rs 2.5 lakh, currency exchange limits were put in place and so were withdrawal limits. For emergencies like hospitalisation and marriages, limits were relaxed but with more stringent rules.

But as they say rules are meant to be broken. In the case of demonetisation, it was broken more than once. As rules were broken, RBI and the government were forced to change the rules. Take the case of Rs 2.5 lakh deposit limit. It has been reported that people with hoards of cash used multiple accounts to deposit the money. These people moved from one bank to another depositing their mostly unaccounted wealth. A sudden spurt in Jan Dhan Accounts which were normally zero balance accounts triggered the government into action. Government asked banks to preserve CCTV footage at branches to spot currency hoarders.

The currency exchange limit was reduced from Rs 4,000 to Rs 2,000 because many cases of panic hoarding was reported. The government reacted by introducing the indelible ink, which saw lines receding.

Among the recent change of rules is bringing forward the deposit deadline from December 30 to December 19 and limiting the deposit to Rs 5,000 in scrapped notes. Deposits greater than Rs 5,000 will be permitted only once per account that too after explaining to bank officials. This move is seen as a big setback to the government, especially against those people who trusted the government when it said in the initial days of demonetisation that there is no need to rush to the banks to deposit their cash. The move reportedly led to a sudden rush in bank branches as consumers rushed to deposit their money.

This change in rule is supposedly meant to flush out the fourth type of individuals mentioned above who patiently waited for the dust to settle while they made ‘arrangements’ to get rid of the cash. RBI had on December 10^th said that out of the Rs 15.44 lakh crore of Rs 500 and Rs 1,000 in circulation only Rs 12.44 lakh crore has been deposited. This still leaves around 20 per cent of higher denominations out in the open. The government wants its hands on this money as big deposits that the government expected have been fewer than expected.

A little bit of “our jugaad counters your jugaad” by the government is acceptable. But the impression created is of an exercise that’s been more improvisation than planned execution.