Demonetization – Lack of readiness

The following article is based on my own interpretation of the said events and/ or publicly available information. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Susmitha Vagolu, MBA 2016-18, Vinod Gupta School of Management, IIT Kharagpur

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PM Narendra Modi launched a surprise in  November, demonetization of 500 and 1000 Rs notes.This initiative resulted in a huge disorder and confusion as government took out 86% or 15 lakh crore of the circulating cash. 98% of transactions in India are based on cash, which were almost stopped at one go.

The first criticism that came out is the lack of readiness of the entire exercise. From statistics, the amount of cash that is there in India and digital penetration in India do not directly point to readiness of  economy or of the people. The ratio of money held in notes and  coins to the amount that is held in savings and demand drafts was 51% which is high when compared to other emerging economies. Secondly, the value of notes and coins as percentage of GDP was 12.04%. Less than 3% of the value transactions include card payments in the year ending March 2014. Fewer than 2% of Indians have used a mobile phone to send or receive money compared to 60% of Kenyans. So, practically there is a significant usage of cash in the economy and though the digital penetration is high, usage of digital modes for transfer of funds has been low. On the supply side, the capacity of 3 printing presses in India is not enough to print the banned amount. Also, the circulation of money has come down as there are less notes of lower denomination in market.

These statistics reveal that neither the government was  prepared to immediately pump in deficit cash nor the country was prepared to migrate to a new system. Lack of readiness has resulted in a sudden economic slow down. The human productivity was also affected in terms of people waiting in queues at the ATM’s. There has been reports of people loosing lives. Lack of digital literacy in terms of security is the main reason why people are reluctant to migrate to online platforms like Paytm, mobikwik for money related transactions even in such critical situations. Government should take up more initiatives like BHIM , SBI buddy to improve awareness and trust among people.

 

References

https://hbr.org/2016/12/indias-botched-war-on-cash

http://www.internetlivestats.com/internet-users/india/

https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/0RBIAR2016CD93589EC2C4467793892C79FD05555D.PDF

 

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