Demonetisation explained in numbers: Why India's cash crunch is such a big deal

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Did PM Modi even pay heed to each and every one of these really upsetting figures?

November 8, 2016 will always be remembered in Indian history. The reason for remembering it may vary depending on what happens in the next few months. Narendra Modi, on that day, made one of the biggest announcements the BJP government had made so far: demonetisation. 

The high-value currency notes of Rs 500 and Rs 1,000 would henceforth not remain legal tender and two new currency notes would be introduced: the all new Rs 2,000 and a newer Rs 500 note. These drastic steps were taken in an attempt to fight black money, a problem that has stumped every government that has attempted to tackle it so far.

The success of this measure has so far, not been evident (thought it is altogether too soon to tell). What have been evident are the immediate effects that have attacked the citizens of this country like the common cold.

But how is it to break down this staggering exercise in monetary reconfiguration into plain old numbers? How does the data stack up? Were the figures - such as the numbers of banks/ATMs per person, the number of persons with bank accounts, the extent of currency in circulation, the size of the cash economy, the impact on GDP, the effect on the poor, etc - factored in at all?

Let's take a look. 

Removing two currency notes of these huge values is of course, a questionable move in itself. The Indian cash economy is hugely dependent of these two denominations. In fact, they make up 86 per cent of the Indian currency that amounts to Rs 14 lakh crore approximately.

 

Taking away that huge a chunk of the cash away from the population is bound to have adverse effects. There have been innumerable reports of serpentine queues forming at banks and ATMs. The lack of hard cash in the hands of the people, especially the poor, has been nothing short of a Greek tragedy.

The demonetisation – whether actively or not – has caused more than 55 deaths so far. Whether it is because of the stress of paying debts, or the physical strain of standing in queues for hours, or just simply the lack of medical services because of a shortage of cash, people – even infants – have died. 

 

A key criticism of this move – by the media, as well as economists – has been that in a country as huge (population wise) as India, especially with a sizeable chunk of that being essentially rural, was it wise to have attacked two denominations that play an active role in the cash economy of our nation? 

 
 

A Scroll.in report suggests that in 2015, India’s unbanked population was 233 million. The Pradhan Mantri Jan Dhan Yojana, by November 9, had reportedly ensured that a further 68 million new bank accounts were opened. While, that figure itself is impressive, the disturbing part is that there still exist about 165 million people who are unbanked. 

 

A noteworthy result of this acute cashlessness is that the urban population in India has suddenly started resorting to e-services that were otherwise more of a niche market (comparatively) till now. Among the companies that have benefitted from this move, the most prominent one is Paytm.

Although mobile wallets are neither a new service in India, nor are they limited to a handful of companies (there are about 40), Paytm has somehow managed to milk the demonetisation cow the most. While, the company has  been called out by some for it’s rather insensitive advertising stunts (apathy towards the underprivileged), it has still managed to touch a record number of seven million transactions amounting to Rs 12 crore, post the Modi government’s move.

 

A digital, cashless economy is obviously a good idea, but no matter how much you advocate it, you have to remember one simple thing: Rome wasn’t built in a day. The Modi government has literally coerced the population of this country to go cashless and that has been a huge problem. You cannot just expect everything to fall into place, all at one. There is a learning curve involved and we’ve just not had enough time to adapt.

Even if you do consider the fact that you can manage your day-to-day expenses with the measly Rs 2,000 you can get from an ATM vestibule, you have to bring into consideration the sheer number of people who would be trying to do so. The number of ATMs in our country is woefully low. And thus we see and stand in long queues.

 

And even if we did have enough ATMs, there is also the question of replacing that big an amount of cash. This "surgical strike" on black money was a hush-hush affair. So obviously, no one was ready or prepared to adapt to it.

An interesting point, that one has to look at, is the launch of the new Rs 2,000 note. It's an obnoxiously high value currency note. In fact, it is so high value, that it has practically very little use, given that the next denomination, for the better part of the last two weeks, has been the Rs 100 note. 

The obvious inference to why this note was created, is that it is an easier way to fill up the cash vacuum. It takes a month to print 300 crore currency notes. The cash in the economy would, of course, be more easily replaced with a higher value currency note.

 

Attack on black money or not, demonetisation does take a heavy toll on resources. In terms of cost, the expenditure involved in printing new currency, recalibrating ATMs and exchanging the old currency comes down to an astounding Rs 1.28 lakh crore.

 

And at the end of all of this, one has to also consider what would happen to all the old - now unusable - currency. It is estimated that just between the Rs 500 and the Rs 1,000 notes, we will have 23 billion unusable banknotes. It has been said that if one were to invest time in the futile exercise of stacking all this currency together, the pile would end up being taller than 300 Mt Everests

 
 

The financial cost is not the only thing we should be worried about.

According to the former Prime Minister of India, Dr Manmohan Singh, the country’s gross domestic product (GDP) could fall by about 2 per cent. Alternatively, a Deutsche Bank report suggests that the GDP growth may slow down to 6.5 per cent in the current fiscal, while muted inflation may open room for additional rate cuts.

A decline in the GDP would mean slow economic activity across all sectors including agriculture, manufacturing and services, which will have a direct impact on millions of jobs, retail consumption, corporate earnings, real estate and construction activity. 

 

The only saving grace, at present, may just be the fact that a lot of people, thanks to the fear of having unusable currency, have deposited them in banks. This also serves the additional purpose of making everyone's money accountable (the whole point of this move).

The State Bank of India has reported deposits worth Rs 1.2 trillion. That itself is an astounding figure. And guess what, that's the same as the transaction cost of demonetisation, according to Centre for Monitoring Indian Economy.

Combine it with other public sector banks and private banks, and we have a sizeable chunk of the Indian cash economy accountable for all.

 

(With inputs from various reports and agencies. All photos: Reuters)

Also read - War on ordinary citizens or black money? Demonetisation divides economists