Understanding Demonetization

While experiencing the effects of demonetization  I also devoted some time trying to understand what it is and the associated  terms linked to the field of economics. Probably like many others I also learn from the electronic media and the search engines.

What I heard from different distinguished panelists appearing on television programs  may be put in the following lines.

  1. The parallel economy is 5 times higher than the real economy. Even if one fifth of the black money returns to the real economy economic boom will take place.
  2. The black money by way of Rs1000 and Rs500 notes are used by anti national networks.
  3. The demonetization drive is a 8 lac crore scam just to bail out ailing PSU banks.
  4. Rs1000/ and Rs500/ notes constitute 86% of the total money circulation(white ?) and it works out be approximately  Rs14 lac crores.
  5. To replace old Rs1000/ and Rs500/ notes with new ones three different panelists on three different channels gave three different time frames: 5 months, 1 year and many years.
  6. Half the population in the country does not have bank accounts.
  7. We are missing Raghuram Rajan.

First let’s understand the 14 lac crores figure. As per media reports the amount deposited with banks after the demonetization is 5 lac crores till now. Less than 50 thousand crore is exchanged and 1 lac crore is already withdrawn.  Assuming that deposits of old notes continue for some more time it is unlikely that total deposits would reach the estimated figure of 14 lac crores.

Why learned people differ so much on the time frame to replace old notes with new ones is beyond our understanding. Even surprising is the government’s silence on the subject. At this crucial juncture Reserve Bank of India and Department of Financial Services should have come up with clear statements on the real scenario and way forward.

The 8 lac crores scam is no less puzzling. How white money in circulation, temporarily deposited due to a government measure  can bail out ailing banks requires thorough explanation. Also if black money comes back to the system to save PSU banks, we can not readily oppose, though money is required to do other productive works also.

If lack of bank  accounts has created  problems, then we must say that PMJDY has failed despite huge publicity and efforts put by PSU banks. The PM keeps talking about 22 crores PMJDY accounts that are expected to ensure at least one bank account per household. However no research agency seems to have confirmed or contested the figure.

While all India news channels devoted long hours talking about demonetization and its impact the local media here almost ignored it. Perhaps this region not being an economic activity hub, the impact of demonetization was minimal except for individual inconveniences.  While a particular nationalist news channel termed it as the important economic reform after independence, another news channel very close to the power center in Delhi has started opposing it.

At a personal level difficulties faced by me are bearable till date. Sorry to see that Rs100/ note is so precious and I have to do prolonged strategies to get some of them. 24 hr ATMs continue to be out of order for weeks. In the market places I visit, do not see activities getting subdued as highlighted by many. Rather I could buy vegetables at reduced prices in the last couple of day, not sure whether it is at the cost of the farmer, the trader or the middleman.

With my limited knowledge of trading practices, I can tell with conviction that “kaccha selling” or tax evasion is almost a routine practice by small and big traders in India which results in accumulation of black money. We presumed that this class would be the first to be affected by demonetization. But after 12 days there is no visible impact and it seems business as usual. Perhaps they have already found the way out.

Personally I am ready to wait and watch hoping that the scarcity of Rs100/ notes will be over in next two days and the economy will boom six months down the line. But I have no hesitation in saying that the government supposed to be  run by sharp minds did not even do basic home work before initiating the move.


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