Our family cook, Sarfroz, from Kudar village, Giridih district, Jharkhand, has been complaining that his wife Arbi Khatun, has made several trips to the local extension bank over the last few weeks but has been turned away as there is no money. Arbi tried to beat the system by making a 2 hour bus journey to the ‘block’ town of Bagodar, but drew a blank there too with the ATMs.
Lack of cash is being reported in driblets, but it has now taken crisis proportions with metros like Delhi and cities like Vadodara and Patna too running out of cash. For people like Arbi Khatun, trapped without being able to spend their own money, the pain comes with a sense of déjà vu, having barely recovered from the November 2016 demonetization.
After an initial attempt to wish away the problem with the “there-is-more-than-adequate-currency-in circulation” tweet by Finance Minister Arun Jaitley, the government is now acknowledging that there is a serious crisis. Lack of cash may even trigger a slowdown in the rural economy.
VILLAIN OF THE PIECE
The villain of the piece emerging is the Rs 2,000 note. About Rs 7 lakh crore (Rs 7 trillion) or a little more than one-third of the value of the total currency in circulation is in that denomination.
The Department of Revenue has now launched an official probe into suspected hoarding of the pink tender, and why it is disappearing from the system.
Currency circulating in the system was around Rs 1.9 lakh crore less than it should have been in March this year, according to a State Bank of India (SBI) report released on 18 April. With optimum currency circulation valued at Rs 18 lakh crore, this is a fairly large shortfall of 10 percent. Telengana, which has been suffereing a cash shortage for months, is an interesting study.
IndiaSpend.Org, quoting a portal ‘Factly’ which had accessed RTI replies from the State Bank (SBI), showed that in the period September 2017 to January 2018, cash supply by the Reserve Bank to the state was Rs 629 crore, or just one-third of the previous 10 months. No new Rs 2,000 notes were supplied by RBI to the State Bank’s chests in Telengana between April and November of 2017.
Have the Rs 2,000 notes being sucked out of the system by hoarders? And, as a knee-jerk reaction, is the RBI deliberately suppressing the circulation of the Rs 2,000 notes? The fact that RBI had stopped printing Rs 2,000 notes is well known, and tangentially proves that this denomination had been black-listed.
BANKING SYSTEM TAKES A KNOCK
The question everyone is asking is: why did the RBI and government, at the time of demonetization 15 months ago, decide to go with the pink note? It is easy to hoard, and is difficult to circulate.
One of the reasons cited in favour of the Rs 2,000 note was that a higher denomination was faster to print and circulate when the cash shortage at the time of demonetization was back-breaking.
But All India Bank Employees Association General Secretary C H Venkatachalam summed it up well: “The problem started with the Government’s decision to print Rs.2000 notes. If withdrawing of Rs. 1,000 notes was to prevent hoarding of black money, it is only obvious that hoarding will become easier with Rs. 2,000 notes.”
The much bigger problem is the fast eroding credibility of the banking system. With the multitude of scams, people have become wary, and are withdrawing and stashing cash as an insurance against a rainy day. Moving the Financial Resolution and Deposit Insurance Bill, 2017 couldn’t have been more inopportune. It has a clause which allows the government to utilise the bank deposits of customers to offset a financial emergency. This has added to the fear of banking money. Bank deposits grew at just 6.7 percent in FY2018, the slowest in 54 years. It tells a story.
What is the roadmap ahead to resolve the crisis? No one has a clue! Senior ideologues of the ruling party said at the time of demonetization that the Rs 2,000 note was only a stop-gap arrangement, and it will be will be phased out over 4-5 years. Others are predicting another ‘surgical strike’ – the selective demonetization of the Rs 2,000 note and the return of the Rs 1,000 tender.
It is time the government stem the rot, and tell us what it has in mind.