Tuesday, November 15, 2016

How Demonetisation affected rural areas

How Demonetisation affected rural areas

By any standards and by all means demonetisation of 86% Indian Currency that affects the valets of 1250mn population is no ordinary decision. Union Government sent shock waves among not just the hoarders of unaccounted money but also among the state governments and the huge political constituency. The measure may have precedence but the dimension of the effect has no precedence and therefore, economic historians are watching in gaze for generating a new script.

Cash is dirty; banks keep Dettol or soap for their staff handling cash to wash off their hands because of the bacteria that causes pneumonia, or viruses or skin infections. Yet we would love to hold them. Most drug dealers, casinos or prostitutes or casual farm workers prefer to receive cash for they only receive small remunerations for their day’s labour or night’s pleasure. Under-ground economy does not stop these few known. Waste and scrap dealers, many steel merchants join the gang.


Large farm owners in India who indulge in unaccounted leasing of their farm lands invest their incomes in films or tourism industry or clandestine drug pedalling as agricultural income is non-taxable. The vote bank politics have all along distanced this clan from being taxed for their income. The tenants, small and marginal farmers part their sweat for such indulgence.

Many of the shocked quickly turned to gold shops. Several gold merchants, as a few persons narrated, seem to have billed for one and half tulas (approximately 11grams) giving only one tula and billed on dates preceding the D-day. Institutions and individuals behave the same way in crisis. One of the prominent dealers told me that it would not be difficult to handle raids by the tax men!! He said that it is a win-win for him, his buyer and the taxman.

My instant praise for the PM on this daring feat has taken a U-turn on witnessing the events during the last three days. Hollow planning of the massive effort effecting masses is unfolding day by day. ATMs stopped functioning even on day one after the two day recess. Strange that the Banks and the Finance Minister sing the song that the technology of ATMs without systemic correction cannot roll out new currencies!! Should not they know this before announcing the opening of ATMs to public?
Serpentine ques that were distanced after computerization are seen in front of every bank. Banks cannot handle any other business for months to come as the process of readjustment to the new currencies and holding operations. Credit business will suffer for want of personnel as all the persons are busy in handling only cash and cash for exchange operations.

Strange indeed that banks like the SBI is speaking of huge accretion of deposits at the end of three days! After all when you withhold withdrawal and allow only deposits would not the later swell? RBI failed to pump in equal exchange in smaller denominations for Rs.4000 per person and in exchange is Rs.2000 denomination currency that fails to get in exchange the goods and services a common man needs.

RBI knows for sure that the rural areas lack infrastructure to handle the demonetisation analytics. Cooperative Banks, Local Area Banks, Primary Agricultural Cooperative Credit Societies, Regional Rural Banks and even commercial banks operating with as thin a staff complement as two persons do not have capacities to handle cash exchange required by the persons – customers and non-customers – living in their areas of operation. There are not so many ATMs either. Business Correspondents and Business Facilitators, the new clan of intermediaries in the Financial Inclusion engine of the RBI nowhere figure in the exercise. By any stretch of imagination, the infrastructure for this massive operation just does not exist.

Yes; the government may come up with the argument that till December 30, 2016 people have option to deposit their currency. But where is the cash for their day to day operations when there is still large scale illiteracy and not to talk of digital illiteracy.

In a recession economy, piles of cash could turn ordinary flooring to ceramic or marble flooring. But in demonetisation, that option is totally ruled out. My maid and driver tell me a different story. Both subscribe to an informal chit fund group, where the needy among the group bid for the chit amount at a small discount. Since all the members are of the same economic clan, they invariably put their bids within bounds. They say that their accumulated chit savings are all in Rs.500 denomination that lost its value. They plan to cash it within the boundaries fixed by the Government before December 2016. They resolved at no bid gains.

Barter is another option that suddenly sprung up post demonetisation. The retail shop keepers in my locality offer liberal credit for the next one month. They are promised similar line of credit from the wholesaler of grains and pulses. Here there are only promises and not promissory notes. But the promises are credible. The moot point is, will they survive the entry of FDI in retail? These trade on credit cards and debit cards, net banking and digital banking.

A few questions arise in my mind: will RBI continue to be the monetary authority? Will alternate currencies like the Bitcoin or other innovations by mobile and digital traders overwhelm the governments? Can money move to the realm of public utility whereby the elected representatives take seize of the financial and monetary systems?

World Bank may have lauded the participatory budgetary process of Brazil that resulted in improvement of the standard of living of many communities where government could issue money directly to communities as a part of democratic process. But can it succeed in India where the local bodies in villages and panchayats are not trusted with cheque drawing powers till date in spite of legislative sanction embedded in 73rd  & 74th Amendments to the Constitution?

It is strange that the FM should ask the people to bear the hardship for a few more days! Can the labourer who received Rs.500 on the 8th November buy his loaf of bread or packet of milk next morning as he used to do otherwise? No. And there are millions in this group in rural areas. There can be no two opinions on the need for a overnight decision to clean up the economy. But the PM could have set up a confidential think-tank on planning for the event and planned it better. The well-intentioned move is having road blocks and pot holes all the way.