Don’t hoard currency, sufficient notes in supply: RBI

Parallel economy operators will now rue not having taken more seriously the prime minister’s warnings that penal action would await those who failed to declare their unaccounted wealth under the Income Declaration Scheme, which lapsed on 30 September 2016. The Bloomberg View, titled, “India’s Great Rupee Fail” underlines, “In seafood-mad West Bengal, for example, the fishing industry is in a state of near-collapse; in the wheat-growing states of the northwest, farmers halfway through the sowing season have run out of cash to buy seeds”.

The new notes, for example, are slightly smaller than existing ones and thus don’t work with an estimated 200,000 ATMs now in operation across the country. And it has no Plan B. Instead, it is simply lying to the people about how this is a temporary pain for getting rid of black money. Black or unaccounted money has always been suspected of being steered into the construction sector and inflating real estate prices. Some economists believe it’s just bad economics. A sick newborn was refused treatment in Mumbai after the parents couldn’t provide money in new currency bills.

Basu, also a professor of Economics at Cornell, means that the ban is, at best, a one-time flushing out of the system and the return of the black money is likely if not inevitable.

“I feel cheated, “she says“. Overwhelmed banks have been unable to ensure that people don’t line up a few times, since IDs such as drivers’ licenses and passports are not linked to bank or tax accounts.

A New Delhi businessman with connections to underground currency traders said it was still fairly easy to exchange the withdrawn currency – as long as you’re willing to pay twice the legitimate exchange rate to get rid of the old notes. One luxury watch outlet in north-west Mumbai saw 45 units of Rolex watches sold on a single day, according to a representative of a watchmaker, who was present when the sales took place.

This may give rise to a black market that can fulfil these demands of the secretly wealthy, as the noose tightens on their domestic cash holdings. Modi in a surprise move last week made a decision to withdraw 500-rupee and 1,000-rupee notes, which accounted for 86 percent of money in circulation, in a bid to flush out unaccounted income, locally known as black money.

There are other problems with the assumptions behind the drive. It was created to stamp out the black economy and in a sop to nationalists was sold as an anti-terrorism measure. Banks can use these funds for addressing their liquidity requirements. And all cash is not black money. The deposits of large pools of high-value denominated cash will ultimately help the banks to lend more.

But as Jayati Gosh writes in The Guardian, “only a small proportion of the funds received from illicit tax-evading activities is kept in the form of cash, and nearly never by large players”. Even the most comprehensive statistical models might not be able to see all the sides of this emerging catastrophe.

The unexpected and widely-praised announcement by Prime Minister Narendra Modi’s got all the Indian banks by surprise. Let’s consider the timing.

Not everyone opposes the move.

With each post-demonetisation day passing by, what is as disturbing as its impact on the common people is the complete lack of preparedness and anticipation of consequences by the central government, and that is becoming more and more evident.

According to information, all the seven ATMs of State Bank of India (SBI) Bistupur main branch today started dispensing the new Rs 2,000 currency notes alongwith Rs 100 notes. The ECB in May said it would stop printing the 500-euro banknote but the note would remain legal tender. This measure is a game changer and puts the Indian economy on a radically different trajectory.

Indeed it is ironic that the same government which is assuring foreign capital that India will be the most “liberal economy” in the world, meaning that foreign capitalists would have complete “freedom” in their economic operations within India, is forcing at the very same time millions of its own impoverished citizens to go “cashless” for weeks on end. Despite much hyped claims of fast economic growth, revenue mobilisation has hardly shown signs of improvement. China is establishing a similar city called Qianhai in Shenzhen, where pilot policies can be tested before being rolled out nationally.

Meanwhile, trucks transporting goods are coming to a halt.