On Sunday, Prime Minister Narendra Modi appealed to the people to support his government’s decision to scrap high-value notes of Rs 500 and Rs 1000, asking them to bear the pain for 50 days so that he could deliver the “India of your dreams”. That appeal came in the backdrop of reports from across the country of people scrambling for cash. Reports of long queues, both to exchange old currency notes and to take out money from ATMs, and frustration and anger in many places, have forced the government to revise the cash withdrawal limits. Clearly, a decision as important as this one was bound to be disruptive given the challenges of ensuring secrecy and to immobilise cash. There was also the logistical nightmare of stacking cash in lakhs of ATMs and bank branches overnight. Questions are now being raised about whether better planning or co-ordination at the back end could have mitigated some of the suffering, especially in India’s smaller towns and villages. That’s because the blow is harder for smaller firms, the unorganised sector and for labour in a country with a cash to GDP ratio of over 12 per cent and a sizeable informal economy. The longer there is a squeeze on cash and economic and business activities, the pain will endure.
Having said that, the government, especially Prime Minister Modi, has staked much on this move. That’s why it is important for the government, the central bank, other banks and stakeholders to come together to quickly address the issue of recalibration of cash-dispensing machines and of ensuring adequate liquidity to not just individuals but also firms. The RBI has already announced a task force for enabling dispensation of the new series of notes and recalibration of all ATMs and cash-handling machines involving multiple agencies. Over the last 48 hours, the cash logistics industry, which employs over 40,000 people in the country to refill over 2.2 lakh ATMs, has been at work, apart from bankers, to meet the challenge. This process is bound to take a couple of weeks or more given the scale of operations. If this disruption of liquidity is eased over the next few days, at least in the country’s bigger cities and towns, and is followed up by the progressive easing of withdrawal limits and restrictions, there may be greater acceptance of what could potentially be a game-changing move.
But for that, the government will have to go beyond demonetisation. The proof of that will be in the form of prosecution of those engaged in generating black money and attachment of their assets, a greater push to universal banking access and other electronic forms of payment. This will reflect in lower transaction costs and an audit trail, besides providing a boost to the economy. The end objective of a cashless economy is laudable. But it is a rocky path.