Demonetisation Chaos: We Are Paying The Price For Loving Cash Too Much

Let it be stated upfront: big moves like demonetisation cannot work if they must be planned to the last detail. If so much planning goes into it, too many people would have known about it in advance and there is little doubt that the news would have leaked and the anti-black money measure would have failed.

So the critics of government, from politicians to media persons, are wrong to presume that there would have been no chaos at bank counters or that ATMs would not run dry in the days immediately following the announcement. The reason for the chaos is the obvious shortage of printed cash, and the lack of infrastructure to replenish ATMs every few hours. The system is not designed to replenish every ATM twice a day.

The critics are wrong to criticise the government for causing inconvenience to the public. Their argument runs thus: if you want to target black money holders, why penalise ordinary people by making them stand in queues for hours?

The point is simple: no macroeconomic move can target only one class of people. If you subsidise some things, even crooks will benefit. If you raise interest rates, it is not only crony capitalists who will be hit. Your home loans will be impacted too. If there is a requirement that all bank accounts need KYC, more poor people will be impacted even though it is the mafia or benami agents who are the targets of this law. A few terrorists may use smartphones for their nefarious purposes, but millions owning a mobile phone are forced to comply with stringent verification rules.

Surgical strikes targeting only a few are simply not possible in such situations.

There are lessons to be learnt. Though it is unlikely that demonetisation can ever become a frequent activity – it would disrupt the economy too often to be useful – when such top-down moves are planned in any sphere (Jan Dhan, Aadhaar, etc), contingency plans for collateral damage must be in place. They cannot be an after-thought, as is the case now, when the deadline for cash exchange has been extended by three days, among other things.

However, the lessons are not only for governments, but also for ‘we, the people’. Despite a quarter century of reforms since 1991, we have not gotten out of our “shortage mentality”. We tend to hoard and buy things that we think are going to be short. A rumour about a water cut makes us fill 20 buckets – only to throw it away when the rumour turns out to be false. If dal prices rise, we buy five kilos instead of the usual two, instead of making a small short-term shift in eating habits in case we run out of it. By hoarding more than we need, we make the problems worse for the poor.

This time it is cash that we think is in short supply – which is true. But even people who don’t need cash immediately are queuing up to convert their Rs 500 and Rs 1,000 notes when there is another seven weeks to go for it. Petrol bunks were chock-a-block on 9 November in Bengaluru when it was announced that they would accept the old notes. Even people who normally used cards for payments used cash.

The truth is we tend to use too much cash in our daily transactions even when there is no need to. Given the technologies now available to so many middle class people – which means around 300 million people at various levels of income - we still use too much cash. Speaking from personal experience, I know I can almost do without any cash; the bulk of my usage relates to payments to hired help and vendors – from maids to drivers to newspaper-wallahs to milk delivery boys. And small-time purchases in kirana shops, not to speak of payment of bus fares and autorickshaws. My personal resolve after this demonetisation epiphany is to encourage everyone I am in contact with to open bank accounts or operate the ones that lie dormant in their names.

If I were to name the specific failures of the NDA government, I would put two on top of the list:

One, having opened 250 million Jan Dhan accounts, it failed miserably – and has not even attempted – to educate people to use them through financial education and creating the conditions for regular usage of ATMs or RuPay cards. This is unforgivable.

Two, it is unlikely that demonetisation was something the Modi government thought up on the morning of 8 November. Modi did not wake up thinking this is a good day for the speech. He would have been thinking about it months in advance. While the specifics of the actual dates and plans would have been decided closer to D-Day, what stopped the government from promoting e-wallets and mobile money, the infrastructure for which was ready six months ago? Why does it require only commercial operators like PayTM or private banks to entice people into digital money? If millions of Africans can use mobile phones for their daily transactions, it beggars the imagination that we are so slow to push the idea.

India’s problem is cash – too much of it is being used both at the top and bottom ends of the pyramid. The top end uses it for storing ill-gotten wealth (though real estate and gold are more important here), and at the bottom end, the use of coins and low-value notes is costing the country big. It costs Re 1 to print a Rs 10 note. What a waste! Bus fares, train tickets, kirana stores are autorickshaws are simply soaking up too much low-denomination cash – this is the main reason why so many people have to queue up to exchange their old notes – when mobile money is so easy to adopt.

The call to action is simple: the NDA government must use the current cash chaos to start a six-month campaign to shift small payments to the phone. The enticement could include exemption from the levy of any fees on such transactions for a year.

Freebies are anathema. But if there is one freebie one can suggest that would save the government more money than it loses, it is the gifting of a free smartphone to every household. At an average cost of Rs 3,000, the cost of giving one smartphone to every Jan Dhan account holder would be around Rs 75,000 crore. The savings in the cost of printing notes and coins can more than justify this freebie. The direct cost of printing notes every year is more than Rs 3,500 crore, and there are more costs in handling the issue of new notes and their destruction. A side-benefit, if the condition for receiving this free smartphone is the use of these accounts at least twice in the last few months, you may also be able to push financial literacy to a wider population.

Another thought: if demonetisation ends up swelling the coffers of Arun Jaitley’s finance ministry, it would make sense to put some of this money in Jan Dhan accounts – as part of Modi’s promise to return some of the ill-gotten cash hoards back to the people.

Top-down schemes need more monitoring and more push and awareness to succeed. This is where the Modi government has been found wanting. There have been too many top-down schemes and too little follow-up action.

Time to rectify this before demonetisation ends up as a public relations disaster.