500, 1000 Rupee note ban: Know both sides of demonetisation here

Crowds outside a Bank of India branch in Mumbai. (Image credit: Manaal Bhombal) 

On Tuesday, November 8, 2016, the Prime Minister announced that currency notes of Rs 500 and 1000 denomination would no longer be valid. This decision triggered a whirlwind week for Indians. Amidst the chaos, PaGaLGuY brings you an analysis of the how banning currency has affected a cross section of our society.

The objective behind demonetisation, as stated by the Government in its communication through the Reserve Bank of India (RBI) are as follows:

  • Checking counterfeit / fake Indian currency notes which are used in financing terrorist activities.
  • Tackling problem of black money. A World Bank report published in 2007 estimated the size of parallel economy in India at 23.7%. 

Problems with Demonetisation

  • Agriculture is a major source of livelihood for people across the country. Cash comes into play at two level. Firstly, labourers who work in the sector are paid in cash as most of them don’t have bank accounts. Even large and small farmers purchase seeds, fertilizers etc with cash because of its high liquidity. Also, income from agriculture is not taxed; so all of it is not recorded anywhere. Thus, cash-based transactions are a ‘structural’ feature of Indian economy. 
  • The Informal sector accounts for 45 % of Gross Domestic Product and 80 % of employment. The Informal sector includes services rendered by housemaids, construction workers etc. Indians employed in the informal sector are from the lower strata of the society. Percentage of Indians having access to financial institution varies from 28%-32%.
  •  Poor Penetration of rural banking infrastructure. Of the 1,38,626 bank branches in the country, about 33 % are in 60 Tier 1 and Tier 2 cities. For example, Koylibeda in Chhattisgarh has one ICICI bank branch which caters to 55 villages in 17 panchayats and over 20,000 people. Other initiative like Banking Correspondents employed to spread banking in rural hinterlands are either ‘untraceable’ or have been scrapped because such program was ‘unviable’
  • Small portion of black money is in cash. As per data released by tax authorities, tax evasion investigated for the year 2015-16 was about Rs 7,700 crores. Out of this, tax recovered in the form of cash was Rs 408 crore, that is, about 5 % (Approx.) 

Inconvenience

The inconvenience caused by the demonetisation decision is mostly administrative and logistic in nature. 

  • Considering the humongous logistics involved in providing new notes in 2 Lakh ATMs across the country, banks should have been stocked with these notes before making the announcement.
  •  The suddenness of the announcement though made to ‘shock and awe’ hoarders, also caught banks unaware leading to chaos as banks ran out of cash within a few hours every day since banks reopened on November 11. So, banks and  ATMs were closed for two days following the announcement. 
  •   There are 2 Lakh ATMs in the country which must be reprogrammed to dispense the new notes notes of fixed quantity. This is no small task and it is estimated to take more than three weeks.  
  • With lower denomination notes (the new Rs 500 note) still not available, the new Rs 2000 note is causing problems for smaller transactions as people are reluctant to provide change. 
  • Considering that not all people standing in line outside banks are money hoarders, genuine people stuck with old notes especially labourers and workers are the worst affected. Firstly, their income and savings are in cash, so notes they have are worthless. Secondly, waiting outside banks, they are losing daily wage which ensures their bread and butter.
  • District Cooperative banks are not part of this exercise. Cooperative banks have a fair network of branches in rural areas so much so that nationalised banks reach out to them for business relations. Leaving Cooperative banks out has caused discomfort to people in rural areas.

Unless the population left out of banking system is included, any effort to effectively tackle black money may not reap intended results and end up hurting the intended beneficiaries. Moving towards a cashless economy is the ideal, but it should be done after structural issues like financial inclusion are addressed and plastic currency is encouraged. 

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