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Demonetization, How Well Was It Planned?

The Gov has been saying that the demonetization is a planned exercise and implementation was thought through. On the first day of demonetization, following rules were set:

  1. Limit of 4000 cash exchange per day for an individual against any valid Government ID proof e.g. election card, Aadhaar card, PAN etc.
  • Ask any banker and he will give a wry smile!. This was non implementable from Day 1 itself. Forget about across banks, even for a single bank to ensure above across its all branches, is in itself a humongous task and nearly impossible as a person can go to multiple branches & show different I Cards. Only after 2/3 days of initial chaos, did the bank & RBI started to put across a database which could help in implementing this rule partially (PAN & Aadhaar based). Government was late in realizing this problem and hence came up with indelible ink much later into the process. The request was so sudden, that it took a couple of days for this ink to reach banks. Many branches went with permanent marker etc. in-between
  1. No more 1000s but new 2000 Re notes: The Revenue secretary ‘Mr Saktikanta Das’ made a remark during the 8th night declaration (post PM’s speech) that they have come up with 2000 as that will help in dealing with fewer notes by the bank while exchanging 500 & 1000 and hence will reduce the exchange challenge. 500 notes were expected to reach the bank much later as 2000 notes printing was initiated by the RBI & Government earlier
  • The revenue secretary was probably oblivious of the fact that what will a person do with 2000 note in the market as 500’s will be out off market and 100’s are in extreme short supply. This exactly what pained most people who ended with 2000 notes, it was a good selfie for a few but practically useless for most of other cash transactions (generally these are of lower values). This is going to remain a challenge till 500 note circulations become more prevalent in the system. There does not seem to be any rationale that can justify replacing 1000 note with a 2000 note. Higher security features could have been put into new 1000 note. Anyway the FM has ruled out new 1000 note in near future
  • The pressure on easing the cash supply has been so huge that 500 notes which were not qualified to get into market (quality issues) also got released into the market leading to a few people seeing 2 slightly different type of 500 notes
  1. ATM to start functioning & distribute new notes from 11th Nov
  • It took nearly a week after that for the first ATMs to start even minimal functioning. Shortage of cash was one issue but the bigger problem was technical. All the ATMs were needed to be recalibrated to the new 2000 rupee note as the size specification of it differed from the existing notes (the new 500 & 2000 rupee notes are slightly smaller in size and hence not only software but also hardware- cassette & railings will need to be recalibrated). The TAT was set to 2-3 weeks for recalibration to be completed and cash to be available

 

There have been a few news reports which quotes some unnamed RBI officials who are unhappy with the implementation process & the corresponding cash crunch affecting the normal functioning of the bank & ATMs despite printing press running full time. At the same time, on 24th/ 25th newspapers quoted a senior Government minister claiming that the demonetization was a RBI proposal which Government just acceded to. To add to these confusing remarks, the RBI Governor had chosen to be silent till today which has only added more fuel to fire. Some opposition parties are claiming him to be lame duck and some sections are saying that former RBI Governor was shown the door primarily because of his differing views on demonetization as a tool to handle black money.

Economists differ in their views among themselves and what is required more is political will to stand by & implement hard decision. The current government has surely taken a bold decision and shows political will to bring in some changes but what remains a mystery is ‘how planned was this!’

Obviously it could not have been too planned as that would have given away the surprise which was absolutely necessary, but the above also shows that there was some amount of hastiness and lack of understanding of ground reality on the part of the planning authority.

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