On 8th November 2016, something unexpected happened, and it was even more strange as for the rest of evening Hillary vs Trump didn’t dominate Indian News channels. Rather it was the Indian PM and his crusade against black money that swayed the nation attention away from the biggest soap opera on television that is the US Presidential Election. It was this day that Mr Modi decided to scrap all Rs 500 and 1000 Rs currency notes as legal tender effective midnight, Yes that’s correct in a couple of hours billions upon billions of rupees suddenly weren’t worth a dime(technically a grace period is being offered for people to exchange old notes).
As of October 2016, the total M1 money supply(liquid money and short-term deposits) totalled approx $409 Billion and the actual cash in circulation around $256 Billion.The below chart highlights the growth of the M1 supply over the last 10 years. The chart serves as an eye-opener for the real demand for ‘Cash’ in the Indian economy at a time when Baltic countries are experimenting with going completely cashless as a society.
While the demand for cash has risen it is also prudent to see how India has managed to bring its population into the banking net. Some of the statistics
- The number of ATMs per million at the end of 2015 was 185 and is planned to be increased to 300 by end 2017. The comparative numbers for australia is 1400, Canada 1820 and Brazil has around 1000 ATM per million of its population.
- The Prime minister Jan Dhan Yojna, an ambitious plan to bring financial services to all members of society could manage a handsome 220 million accounts but only $5.7 Billion in deposits as of 1st June 2016.
Although it has assumed the mantle of the fastest growing major economy in the world, Agriculture still constitutes about 16% of India’s $2.25 Trillion GDP. This $360 Billion sector is still predominantly rural in nature characterised by small farmers and workers who are barely literate let alone internet and finance savvy. In rural India cash is still the king and if anyone who visits the typical ‘Sabzi Mandi'(think of it as a regional aggregator and forwarding centre) would understand that cash is basically the only mode of transaction.
A typical Indian farmer or for that matter 276 Million Indians who live below $1.25 per day would typically have his life saving either in form of cash or gold or land, any exchange between these is again via cash, cash which is often with the person for several years(if he/she has built up any moderate amount of savings) or in the farmer’s case, cash which he will use to buy seeds for the next season or pay the fees of his child’s education. The point is cash stays with the person, a portion of it gets recycled back into the money system based on his daily expenditure, the life savings remain snuck in his home.
So what happens when the life savings for millions goes poof! , Chaos is but just a word. And this is where I see the biggest threat to this bold move. While the decision and the intent behind scrapping of the Rs 500 and Rs 1000 notes to curb corruption is commendable both for the audacity and impact, we must be conscious of the fact that this is a very dangerous decision as well. A decision that puts the most weakest section of the society in harm’s way and unfortunately without much of a safety net.
So what has the government got to ensure
- Ensure there is enough liquidity in the market to cover the sudden shortage of M1. Approximately $200 Billion needs to be pumped in to cover the sudden crunch.
- Banks should have access to continuous money supply to cover the demand.
- Clear and precise government communication.
- Keep a tab on loan sharks and profiteers who would like to exploit the situation.
- Easier access to microfinance especially to the needy.
- Keep a tab on any Inflationary pressures.
- Constant Borrowing rates to provide a sense of stability.
This might perhaps be the boldest move of Prime Minister Modi’s tenure and indeed is hard to find a precedent but an Idea can only be as good as its execution and on this tight rope, sway just a little and the fall is indeed very deep.