Podcast | Did we just witness a redux of demonetisation?

The RBI and finance ministry say they’re not to blame. The lay the blame for this situation on factors beyond them.– like cash withdrawals being higher at some bank branches and their ATMs due to regional elections. A recent analysis by the RBI, submitted to the finance ministry, found that the rate of cash withdrawal was more than cash deposits in banks in states where cash issues are being reported. The finance ministry issued a formal statement that “there has been unusual spurt in currency demand in the country in last three months”.
The finance ministry also noted that after the introduction of the all new Rs 200 notes, there were some issues related to recalibration of ATMs and banks have been instructed to address the issue immediately.
Multiple reports about the paucity of 2000-rupee notes have also added to the nationwide anxiety attack. There is a shortage of Rs 2,000 denomination currency notes because they are neither being supplied by the RBI to banks since last September nor are these notes coming back into circulation from customers in the form of deposits. Meaning, hoarding.

Finance Minister Arun Jaitley was forced to issue a statement. He tweeted, “Have reviewed the currency situation in the country. Over all there is more than adequate currency in circulation and also available with the Banks. The temporary shortage caused by ‘sudden and unusual increase’ in some areas is being tackled quickly.”

What’s the story outside of official quarters?

The Economic Times reported that, in the last 10 days, some ATMs received only 30% of the cash in that they are meant to dispense. This statement came from the Confederation of ATM Industry or CATMI. India really does have a lot of organizations and fascinating acronyms, doesn’t it?

A major voice in the ATM segment, Navroze Dastur, MD of largest ATM manager in the country - NCR, said supply of currency has failed to match the demand and expansion of the economy. “We have been seeing a gradual increase in ATM transactions and average ticket size which we believe is linked to higher demand and also some hoarding of cash. All this is now hitting when supply has not kept pace.”
He added that average ATM withdrawals have grown from Rs 2,500-Rs 2,800 to Rs 3,500-Rs 3,800 over the last three months.

V Balasubramanian, board member of CATMI and managing director of payments company FSS, said “Until the end of March, banks used to give us 90% of the indent we raise. Since the start of this month, it has dropped to 30%. States like Maharashtra, Madhya Pradesh, Gujarat, Karnataka and Telangana are facing an acute shortage. We are yet to ascertain the reasons for the crunch but it looks like banks are not getting enough cash from the RBI,”

Dastur of NCR added that “The economy has expanded in the 18 months since demonetisation but the cash in circulation at Rs 18 lakh crore is still just near pre-demonetisation levels. Also digital transactions have increased but not enough to replace cash. This being the agriculture sowing season, the need for cash is also higher. All these factors are playing out in the shortage.”

Also, back in March, the government's Financial Resolution and Deposit Insurance (FRDI) bill triggered a bank run in two southern states. Due to fears of losing hard earned money, caused by a bail-in clause in the FRDI Bill, people in Andhra Pradesh and Telangana lined up to withdraw large amounts of cash. The salaried class , who typically withdraw only Rs 5,000 to Rs 10,000 during start of the month, was seen queuing up to draw the much larger amounts from ATMs immediately after their salary was credited, according to media reports.

Meanwhile, Minister of State for Finance SP Shukla said the Centre needs three days to fix the problem. The RBI is reportedly printing more currency notes to end the ATM crisis.

Hmm, all this reminds me of demonetisation. The Déjà vu is just a bit too strong, isn’t it?

For a country that has still not forgotten the queues we stood in during demonetization, from 8th November to 30th December 2016, this is quite an exasperating flashback. We all have demonetisation stories of how we got lucky with cash at an ATM nobody knew existed or woke up early to draw cash, only to find 37 other people had the very same bright idea. The last time people in India stood in a queue at 530 am was when Air Deccan sold those flight tickets at Rs 221. That at least helped us travel 4 months after buying the tickets. Demonetisation was a lot less fun.

And for a day, it did seem like we’d again have to stand in lines outside ATMs. Or use PayTM. And we all know we stopped using PayTM the day their Aadhar deadline expired. The only way this could get worse is if they asked us to show our Aadhar card before withdrawing cash.

Some news outlets have claimed that this cash crunch is a consequence of demonetisation. Is that true?  Maybe examining demonetisation and its causes will help clarify.

At 8 pm on November 8, 2016, the country fell into a shock - Prime Minister Narendra Modi had just announced one of the most ground breaking changes in the Indian economy. The Pradhan mantra announced a ban on all old Rs 500 and Rs 1000 notes, for several reason, and kickstarted India’s struggle with demonetization. Frankly, right now, you’d be forgiven if you have forgotten what the 1000 rupee note looked like. Remember that red-maroon-orange Gandhi note?

What were Mr Modi’s reasons for such a drastic move? The motives the govt claimed were – locating and blocking black money in India, pushing people to pay taxes for unaccounted piles of cash, curbing terrorism, promoting the digital India movement and making India a cashless economy.

To be fair to Modi, his popularity and reputation for personal integrity meant that the start of demonetization was not a deal breaker. Most people, i.e. other than the most inveterate anti-Modi individuals, appreciated the bold move to track illegal monies. Nobody expected a miracle, realistically speaking, but it was grandstanding and would need to pay off big time or it would backfire.

And it led to a frenzy. Long lines outside ATMs that stretched for entire blocks. I remember one guy selling tea and biscuits to people who had gathered since 530am on a Sunday morning. Security guards who manned ATM kiosks had to double up as enforcers and keep a check on people lined up outside in long queues throughout the day. Sometimes, even late into the night.

Shyam Kumar Singh who manned an ATM kiosk on MG road in Gurgaon recalls that, in what was a relatively relaxed bank branch, “there was suddenly a swarm of people who had queued-up to withdraw cash. I had no clue why there was such a huge crowd. Later I found out that Rs 500 and Rs 1000 rupee notes had been banned and banks and ATMs were to remain closed the next day. It was not long before the ATM machine ran out of cash that night. I saw people on motorcycles desperately looking for cash. There was chaos.”

Singh recalls that a couple of days after the announcement, there would be long queues outside the bank and the ATM. Poor and clueless individuals used to come with cash to deposit in the bank where people had no idea how to go about things. Most were daily wage labourers who did not have bank accounts.
Interestingly, there was a distinct set of people that he recalls seeing those days. These were domestic helps and office boys. Their employers would send them with their cash to be deposited in the bank, claimed the guard. These individuals received a certain amount of their owner’s money that they would deposit in their own accounts. This was a well-known problem during the demonetisation days because of the two-lakh rupee limit on deposits.

At hospital, similar scenes played out. Media reports with testimonials from hospital employees stated that any ATM machine in hospital premises were shut regularly because cash vans failed to deliver currency. Families of patients had to get cash from ATMs outside, which was already a challenge. It is worth noting here that many merchants across India simply did not have POS machines at the time. However, as many guards have noted, there were no fights or arguments because the public believed hospitals require silence.

All in all, people were patient but that patience was beginning to run thin.

Prime Minister Modi promoted digital wallets as a secure substitute for payments. Especially PayTM. The small e-wallet company, which was till then drifting along largely ignored, received a shot in the arm. All of a sudden, we had a popular serving Prime Minister endorsing a company. This was unprecedented, to say the least. This was the time the phrase PayTM Karo went viral. Of course, mostly because they had all of our money. We had to PayTM Karo multiple times a day. Within no time, everybody had PayTM - the sabzi wala, auto drivers who otherwise won’t even deign to talk to us, nariyal paani sellers, chaat and golgappa sellers – it was all pretty surreal for a while there. Very sci-fi but with a hint of dystopia. I, personally, was disappointed nobody was caught transferring dowry over PayTM. Sure, PayTM has a limit of 20k per month of expenditure but let’s not beat around the bush – dowry was – is - a big black money hoard.

Anyway, there was daily news of someone or the other getting caught with hard cash with crores and crores. Remember that scene from Narcos where Escobar has wads and wads of dollar bills stashed away, buried in all kinds of places?  Yeah, demonetisation made a lot of people in India look like Escobar rolling downhill.  Eventually, the consensus is nobody of consequence actually got caught. One of the most important reasons people supported demonetization was to put an end to the black money problem. And yet, nearly 99% of the money was deposited back to RBI. The data showed that the hoarders had found ways to legitimize their black money and/or did not hold them in the form of cash.

Demonetisation also had an effect on MSMEs. Many Medium, Small and Micro Enterprises turned towards digitalization, but micro industries were hit the worst. Micro industry owners were not part of the black economy and were visibly unprepared for the sudden effects of demonetization. Many micro industry workers returned to their villages and the growth rate of these companies dropped as low as 1%.

The biggest adverse effect of demonetisation was the reduction in the GDP. The gross domestic product for the April-June quarter slipped to to 5.7% and the reality of economic slowdown could no longer be ignored. The World Bank reduced India’s GDP forecast to 7% for 2017-18 , largely due to demonetization and, later,  GST. The slowdown was singled out by the World Bank as a delayed consequence of demonetization.

One success for demonetisation was dealing a crippling blow to terrorism funding. Terrorist organizations were known to use fake Indian currency notes for funding purposes. The government believed this could be contained with the help of demonetization. Overnight, the cash that terrorists used became invalid. The Income Tax department seized Rs. 474.37 crore in new and old currency between November 9 2016 and January 4, 2017.

Demonetisation was not a failure but it certainly wasn’t the revolutionary success the govt was hoping for. There was available evidence, including real world case studies, to examine before going in for such a drastic measure.
Countries like Nigeria, Ghana, Pakistan, Zimbabwe and North Korea had taken this step. Now, without disrespect, it would be a fair statement to say India isn’t aspiring to the economic stature of those nations. I could get into the details but maybe it should ring a few bells, - at least a yellow alert on the bridge of the NDA starship ISS Demonetisation, if not a full red alert - if you found yourself, as a country, in an economic list sharing space with North Korea and Zimbabwe. Zimbabwe, whose currency dropped so much that it printed currency notes for a 100 trillion Zimbabwean dollars! That’s 1 followed by 14 zeros. ON one currency note. That note couldn’t buy you a loaf of bread. Conversion rates put the value of that 100 trillion Zimbabwe dollars at 40 US cents.

Ok, I’m not saying we were headed there but, mitron, I’d think we’re in the wrong club here. Kyun, Modi ji?

Anyway, are we really in the second phase of demonetisation? Probably not. Bank-notes in circulation reached their pre-demonetisation levels in February 2018. Some experts say it’s just a logistical issue because of hoarding. Let’s look at what some leading analysts have to add to this.

Abizer Diwanji of EY India says it is much ado about nothing. A logistical issue. “If you see this happening in too many cities at the same time, then it is worrying. It could be unusual withdrawals. It gives the wrong impression though. We could have done a better job, having had the benefit of learning from demonetisation. But categorising this as DeMo II is an overstatement. Supply is not the issue, but there is unprecedented demand. Any speculation will aggravate the situation further.”

Pratip Chaudhuri, former Chairman of the SBI, thinks the most counterproductive thing in such a situation is to be in denial. The data is available with the RBI as of Friday, April 13. Ah, so it’s a Friday the 13th thing?
No, he says. The RBI know exactly which currency chest holds how much cash in what denomination. Immediately stock up the ATMs, he advises the Reserve Bank. During demonetisation, new currency denominations came in but the ATMs were not calibrated to handle these new notes. But today, that is not the situation. The response from the RBI has to be quick.”

What does Rama Subramaniam Gandhi, former Deputy Governor of the RBI, thave to say?

He sounds a word of caution for the powers that be: Demand for cash from the public cannot be foreseen. Different parts of the country need currency notes of different denomination. There are always surprises. Now we know there is a sudden demand from particular pockets. Moving currency to these areas requires time. Have we brought in any behavioural change in terms of non-cash holding? The expected behaviour change has not happened. The economy has expanded considerably in the past two quarters. When the economic activity picks up, people will require more cash. If people have gone back to their pre-demonetisation cash preferences, the existing supply of cash would not be enough to meet the demand,“ he said. He also seemed to criticise the earlier demonetisation move, adding that currency in circulation should have been Rs 5 trillion more than what it is today had demonetisation not taken place.

SIS India's Group MD Rituraj Sinha said that the crux of the present problem is the dominance of Rs 2,000 currency notes in overall cash in circulation. "Rs 2,000 notes tend to be hoarded," said Mr Sinha. SIS is the country's second largest cash logistics company. So what is the solution?  “Supply of Rs 100 and Rs 200 denomination notes have to be increased on express basis," Sinha replied. He also says it will be four or five days before we get back to normal.

Meanwhile, to deal with the widespread panic, the printing of Rs. 500 notes will be increased five-fold by the Reserve Bank of India. Economic Affairs Secretary Subhash Chandra Garg said, “We have taken steps to increase the supply of currency in case demand goes up... The currency printing (will increase) from Rs. 500 crore to Rs. 2,500 crore per day of Rs. 500 note. So in a month, we will be printing about Rs. 70,000-Rs. 75,000 crore. This should give you assurance that we are geared up to meet the rising demand."