Note ban: Centre didn't plan properly

In a surprise move, the government last week derecognised the existing Rs 500 and Rs 1,000 notes, and while policymakers and senior Reserve Bank officials were preparing for this for a long time, it was kept secret from the public to take away any advantage that hoarders of unaccounted money, terrorist financiers, counterfeit operators, money launderers and the like, might have had. The government has vigorously defended this move as a bold step to counter black money and promote digital payments, and is certain of its net positive impact on the economy in the long term. At the same time, critics of the move have denounced it, pointing out that black money is not a stock problem, as most of it does not actually remain stashed in cash, but is likely to be invested through front companies, in benami real estate, gold, and is thus unlikely to be recovered to any significant extent through the ongoing exercise.

This discussion on the long-term economic impact has overtaken the narrative, with the challenges being faced by honest taxpayers and law-abiding consumers to obtain the new currency notes getting pushed to the background and appearing to be nobody’s business. Such concerns are being summarily brushed aside as teething problems or a minor inconvenience that consumers are expected to bear in the larger interest of the health of the economy. Such apathy to the difficulties faced by the common man is not new and appears to be an inherent feature of government policy decisions that often look at the larger long-term picture, but ignore the short and medium-term impact on different sections of society. This points to a larger systemic malaise of inadequate planning and preparation to deal with implementation-linked challenges of policy decisions.

As a result, despite the government’s claims of banks, post offices and ATMs being flush with new currency notes within days of this decision, the reality is starkly different. Banks have been repeatedly suspending all exchange operations temporarily to manage crowds. Long serpentine queues are visible outside bank branches as well as ATMs, with the latter frequently getting dry of cash in little to no time. Shortage of staff to load ATMs is adding to the misery. Several ATMs are facing technical glitches, being unable to dispense notes of less than Rs 100 or the new Rs 500 and Rs 2,000 notes. Hospitals and medical shops are not accepting the old currency notes and the latter are often shutting down before their usual time, resulting in lack of proper medical care. Low-income consumers without any valid identify proofs and bank accounts are the worst hit, and are often left with no avenues of currency exchange. Those who are fortunate enough to have the new '2,000 notes are facing difficulties in using them due to the lack of adequate legal change in the market.

A lack of focus on transition and implementation-related challenges is not unique to the ongoing demonetisation exercise, but has been a common feature of all major reform measures in the past. Many residents of Delhi will remember the long queues for compressed natural gas after the mandatory shift of public vehicles from polluting diesel to CNG, and with insufficient outlets available to dispense the new fuel. Another example is that of the Goods and Services Tax. While a consensus appears on the long-term positive impact of GST on the economy, the limited focus on sensitisation of consumers and SMEs, and on building capacity to address implementation-related chal-lenges could do unintended harm. Similarly, while all agree that the Insolvency and Bankruptcy Code is expected to facilitate exit and unlock capital, lack of engagement with the public on issues like debt mediation, addressing infrastructure and capacity constraints at debt recovery tribunals could pose difficulties in achieving its objectives.

On the same lines, while the government claims to have taken several measures to facilitate the ease of doing business and access to credit for small and medium enter-prises, in spite of our sugges-tions no structured mechani-sm to take stakeholder feedback and measure perfor-mance of entry and middle-level government officials could result in sub-optimal outcomes. Going back to the demoneti-sation scheme, the only places chosen for currency exchange are RBI offices, bank branches and post offices. While the first two do not have enough touch points in rural India, it seems that adequate cash is yet to reach the post offices. Recognised non-bank players (some of whom have obtained payment banks and small banks licences) have offered to operate as currency exchange, deposit and withdrawal points after necessary KYC checks. It seems that the government has not yet warmed up to this idea. As a result, the poor are being forced to get the currency exchanged from moneylenders and hoarders at a loss on account of the commission that is being charged.

It is essential for the government to think through all the implementation-related challenges of its policies. It must periodically take stakeholder feedback and conduct mid-course correction to ensure benefits reach the intended beneficiaries. For instance, the government could have planned for dedicated touch points in this case at places like schools and hospitals. There should be no problem in co-opting non-bank financial service providers in this initiative. Further, it should be remembered that if consumers are expected to bear the inconvenience during the transition period, they expect the government to come clean with the impact of this move on the economy. The government must proactively declare the extent of black money and counterfeit currency seized as a result of this initiative and how it plans to curb similar illegal activities in the future.