Remonetise, fast

Govt must import currency notes to avoid an economic shock

If the long queues for cash in ATMs and bank branches across the country are any evidence, the government seems to have surprised even itself by last week’s move to demonetise currency notes of Rs 500 and Rs 1,000. Between the two of them, these notes accounted for about 86 per cent of the total circulating currency in value terms and more than 11 per cent of the money supply (M3) in the country. The decision, while aimed at hurting the black economy, has thrown the whole cash economy out of gear because currency worth more than 10 per cent of India’s annual gross domestic product (GDP), and more than 100 per cent of its monthly GDP has been declared invalid. The main concern now is to quickly address the sharp drop in currency in circulation. This requires the remonetisation of the economy with – to use a term the current government loves – surgical precision. That is because in this case effective and timely remonetisation will be the key difference between a bold policy success and a colossal folly.

The trouble is that not only are the older notes invalid, the newer ones are not available quickly enough. This is happening at a time when there is also a marked shift in demand to notes of lower denomination, such as those of Rs 100, given the substitution of higher denomination notes. Moreover, the perceived lack of currency incentivises hoarding of cash. Broadly speaking, there are two key challenges. One, having enough new currency to supply to the banking system. Two, the rapid distribution of new currency to the common man so that the damage to economic activity is minimised. 

It is not known whether the Reserve Bank of India (RBI) has enough notes of Rs 2,000, Rs 500 and Rs 100 denominations available in its treasury chests. Nor is it known whether it can print adequate amounts of these notes in the coming days. The task ahead is rather stiff. Even if only half the value of the denotified notes is remonetised in the next seven weeks, the government would require to re-introduce new currency of about Rs 1 lakh crore every week. Moreover, as mentioned, a larger proportion of this value needs to be in Rs 500 and Rs 100 notes than was the case before. If such notes are not available in its kitty, the government needs to immediately order the printing of currency in foreign printing presses. There is enough printing capacity available globally, both from private and public sources, and it would be more than adequate to meet India’s needs.

The second, and equally critical, challenge is the distribution of new currency. Banks are already overburdened with dispensing large amounts of cash that is stretching their storage and logistic capacity. In this context, handling the old, and now illegal, cash is slowing down banks further and will continue to do so in the coming days. The RBI is unlikely to have the capacity to destroy such large amounts of cash at a few centralised locations. As such, measures for decentralised cash destruction and record-keeping also need to be put in place urgently. The government should also focus on all potential non-bank avenues for remonetisation, such as partial cash payments to government and public sector employees, and expansion of the cash component of the MGNREGA.