Demonetisation and after

Updated - December 03, 2021 05:04 pm IST

Published - November 15, 2016 01:48 am IST

The long, anxious, and frustrating wait by people outside banks and ATMs across the country over the last five days is an inevitable consequence of the >decision to demonetise notes of Rs.500 and Rs.1,000 . When 86 per cent of the value of notes in circulation turns suddenly invalid, as it did with Prime Minister Modi’s ‘surgical strike’ last week, a certain degree of disruption and pain is unavoidable. But the question is whether this chaos could have >been anticipated and managed better than it has been . Replacement of the demonetised notes is a time-consuming exercise that requires planning of the highest order. The experience of the last few days shows that preparation was lacking and the transition could have been handled much better. ATMs are running out of cash quickly while banks are dispensing more of the Rs.2,000 notes than those of lower denominations. What use is a high-value note if there is not enough smaller currency to make an exchange? Of course, it was never an easy task for the Reserve Bank of India and the Centre to strike the right balance between secrecy and storing adequate quantity of notes for quick distribution. All the same, there are at least a couple of issues that could have been addressed differently.

The new Rs.500 notes that hit the market on Monday could have been released immediately after the announcement last week. Putting out new Rs.500 notes along the Rs.2,000 notes would have placed much less strain on those of the Rs.100 denomination, which are anyway in short supply. Second, it appears that officials woke up a little late to the issue of recalibrating ATMs. At least a day, if not more, was lost as banks realised the ATMs would not be able to dispense the new notes. The communication with the public, who were in a state of panic, could have been better, too. Thankfully, the Centre has woken up to ease the pressure on the system by increasing withdrawal limits, allowing for petroleum outlets and hospitals to accept the old series of notes until November 24 and pushing more cash through post offices. The worst-affected are people in rural areas and villages where cash is king and the banking system’s penetration is poor. The decision to relax cash-holding limits for banking correspondents, the crucial link between banks and villages, to Rs.50,000 and allowing them to replenish multiple times a day should help in faster distribution. This ought to have been done much earlier. The cash crunch of the last few days is certain to have an adverse impact on consumption spending, especially in the rural areas, with the resultant effect on the economy in the third quarter.

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