Priyadarshi Dutta
More than 15 billion pieces of Rs 500 notes and six billion pieces of Rs 1,000 (March 31, 2016 figures) got cancelled due to Prime Minister Narendra Modi’s surprise demonetisation announcement on November 8. They constituted a quarter of the notes in circulation, according to the Reserve Bank of India, but worth 86.4 per cent of the currency basket. India is one of the ‘cash heavy’ nations. Its cash-in-circulation to GDP ratio is 13 per cent, one of the highest in the world.
Therefore, the economy is down to prosthetic limb of 14 per cent. While cashless economy remains a pipedream, the immediate challenge for the Government is to replenish the cash. Otherwise the liquidity crush might hurt the GDP.
Now to print back 15 billion notes of Rs500 may take a whole year. There are four currency printing presses in India. The ones at Dewas (Madhya Pradesh) and Nashik (Maharashtra), which come under Security Printing & Minting Corporation of India Limited (SPMCIL) produced 8.3 billion pieces of currency notes in FY 2015-16. Those at Mysore (Karnataka) and Salboni (West Bengal), coming under Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), have a production capacity of 16 billion pieces across all denominations – if they work in two shifts. These, however, produced 14.75 billion pieces last financial year.
Thus, in FY 2015-16 around 23 billion pieces of currency (across denominations) were produced, slightly more than the total number of pieces cancelled by demonetisation. Therefore, to say the current shortfall in currency circulation will be made good in six to seven weeks, is statistically untenable.
But speed is not the only problem with re-monetisation. The Rs2,000 note is a good economic decision – but only for the REserve Bank of India. They wanted to economise on cost and time while doubling and quadrupling monetary worth of cancelled notes in print. But for the currency users, the Rs2,000 note comes with a set of complications. It’s a pity if the Government had not foreseen it. In the short run, when the demand is muted, the Rs2,000 will perform worse. People would like to save money rather than spend.
With connecting denominations like Rs1,000 is out, and the new Rs500 in short supply, the Rs2,000 note could be a liability rather than an asset. The new currency configurations and corresponding availability will severely reduce the ‘velocity of money’. Velocity is defined as the rate at which money changes hand for purchasing goods and services. A reduced velocity indicates poor vibrancy of the economy. A significant part of the cash economy might be severely hit.
Does the Government have a credible ‘cash doctrine’? The Prime Minister, in his November 8 message, said, “The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways. The poor have to bear the brunt of this. It has a direct effect on the purchasing power of the poor and the middle class.” Is this merely his personal musing, or will it be adopted as a policy?
If it were a new policy statement, one is interested in knowing details its thereof. What is the level of cash that the Government thinks optimal for the nation? In what ratios should the different denominations like Rs10, Rs20, Rs50, Rs100, Rs500 and Rs2,000 be printed? There seems to be a complete policy vacuum on cash.
I see the demonetisation as a departure from the policy pursued until now. Here is why. Until now, the focus was on pushing the growth rate up, through easy availability of liquidity. The Government wanted the RBI to cut rates at the first available instance. The object had been to infuse more cash into the system to invigorate industry and business. The RBI did oblige several times, including with the repo rate cut by 50 bps in October to kick start economic activities. But savings got dis-incentived. The growth rate of saving deposit in public sector banks stood at 4.6 in March, 2016 down from 13.1 in March 2014.
There is much talk on shifting to a cashless economy. But has the NDA Government been hostile to cash? Not really. The RBI in the last two years of the NDA indented significantly more number of currency notes in Rs500 and Rs1,000 denominations with the SPMCIL and the BRBNMPL. Some 4,839 million pieces of Rs500 had been indented during FY 2013-14. It rose to 5,400 million pieces during FY.2014-15, 5,600 million pieces during FY 2015-16 and 5,725 million during FY 2016-17.
The now abolished Rs1,000 notes also followed a similar trend. It implies that until November 8, the NDA Government’s cash policy was a linear extension of the UPA’s. But suddenly it discovered the virtues of a having less cash in circulation. There is no problem with this view either. But it must be backed up by a policy document.
(The writer is a freelance commentator)