Last week, I wanted to withdraw money at a mall in Mumbai and felt a sense of déjà vu seeing an Automated Teller Machine garlanded by a “No Cash” sign. I did finally find a machine willing to spit out a few currency notes, but the experience backed up what I’d read in a couple of articles in the inside pages of newspapers. Now, as ATMs in many states have run as dry as shallow watering holes in peak summer, the shortage is making frontpage headlines.
This cash drought is an uncomfortable echo of the chaotic weeks following Narendra Modi’s infamous proclamation in late 2016 of a ban on high-value currency notes. There’s more cash in circulation today than on the day the note ban was announced – Rs 18.17 lakh crore at the last count in early April as against Rs 17.9 lakh crore on November 8, 2016. How can it be that there’s more cash than ever sloshing around the system and yet citizens are having a tough time getting their hands on it through devices that promise Any Time Money?
The answer is that the Modi government might be creating the monster it feared. The note ban demonised cash and targeted hoarders of banknotes, even as experts pointed out that only a small percentage of illegally obtained wealth was retained as paper currency. The weeks-long denial of access to their hard-earned savings appears to have eroded people’s trust in banks. A woman who would have reasoned, “Let me store my savings in a bank account, keeping only the bare minimum I need, because it’s much safer in the bank and earns a bit of interest” is now likelier to think, “Let me keep more cash at home, since being robbed seems unlikelier than the government preventing me from withdrawing savings from institutions.”
The reasons for the present cash shortage are complex, and probably involve evasion of the Goods and Services Tax, the arrival of a large supply of foodgrain in procurement markets, the upcoming festive season, elections scheduled in the next 12 months and rumours surrounding the Financial Resolution and Deposit Insurance Bill passed last year. At the root of the crisis, however, lies the broken trust between banks and their customers, underlined by the glacial pace of deposit growth in the past year.
Shortages tend to spur hoarding, and widespread insecurity regarding deposits can become a self-fulfilling prophecy. To prevent a potential run on the banks, the government has sent out its troops to television channels and is trying its best to assuage citizens’ fears. Its strategy included the announcement of a sharp escalation in the pace of printing Rs 500 notes, from notes valued at Rs 500 crore per day to Rs 2,500 crore a day. So much for the vaunted “less cash” philosophy pushed by the administration during the note ban days.
Publicity of this kind, however, has its limitations. A traumatic event can change attitudes for years or even decades in ways no propaganda can reverse. Germany’s experience of hyperinflation in the early 1920s continues to inform government policies and the beliefs of citizens though few who lived through that era are alive today. One world-record downpour in Bombay has transformed how its residents respond to heavy rainfall. Instead of battling through as they used to do, most now stay home, leaving streets empty during downpours. The evidence clearly suggests that demonetisation was counterproductive.
On cue, Raghuram Rajan has again expressed his reservations regarding the note swap. Speaking at the Harvard Kennedy School, the former governor of the Reserve Bank of India said, “Demonetisation I think was not a well-planned, well thought-out useful exercise. And I told the government that when the idea was first mooted.” He is being diplomatic. The truth is that it was a crazy idea dismissed by serious economists and advocated only by batty fringe groups. To push demonetisation as a cure for black money was the equivalent in economics of claiming cow urine cures cancer. We need to repeat this on every relevant occasion, because advocates of the process defended it as producing immediate pain but later gain. We now have the benefit of hindsight, and it is evident the gains are minimal, while the pain was not only immediate but continued in different forms for months. The denial of cash that had patients dying for want of care, parents unable to fund weddings of their sons and daughters, tourists crying on roadsides in towns where only expensive establishments accepted credit cards gave way to the loss of tens of thousands of jobs in the informal economy and a slowdown in India’s GDP growth at a time when the world economy had turned a corner.
The harshest criticism of the Modi government during its four years in power has come from people who reject its divisive, religion-based agenda. That is my primary objection to it as well, and I’ve written frequently against Hindutva in past columns. Only a relatively small core of Modi’s support, however, is driven by bigotry. The bulk of his support comes from individuals who view him as as an efficient, incorruptible leader committed to a stronger India. That image is at the root of the TINA attitude – there is no alternative – common among middle class and affluent Indians who do not subscribe to the Bharatiya Janata Party’s Hindu fundamentalism. The image, however, is a sham. Rahul Gandhi may not be the brightest bulb in the room, but I find it hard to believe he would ever promulgate a policy as idiotic as the note ban. Demonetisation is Exhibit A in making a case for the Modi administration’s fundamental incompetence. I will present further evidence in my columns in the coming weeks.