This is one of those rare occasions where a monetary
policy is being made up as we move along. We do
have a Reserve Bank Of India (RBI), which should
have foreseen the havoc that demonetisation of 85
per cent of the currency would wreak on the country,
but it did not. Apparently, Urjit Patel is not Raghuram Rajan
and that is why a senior leader of the largest confederation of
bank officers has called for his resignation. D Thomas Franco,
senior vice president, All India Bank Officers Confederation
has said Patel must accept moral responsibility for the chaos
and quit. So desperate is the situation that the RBI has started
distributing soiled notes which were slated for destruction.
According to figures released by the RBI less than 10 per cent
of the currency that was rendered useless has been pumped
in by various banks and it could take nearly two months for
the cash crunch to ease. The total value of the currency that
was scrapped by the government was Rs 14 lakh crore. Around
1.03 lakh crore was withdrawn from
banks and another Rs 33,006 crore
exchanged, which means around
Rs 1.36 lakh crore has returned to
the economy. Even if one assumes
that a percentage of the money is
black and will not return to the
economy, the RBI still has to bring
the level of money in circulation
to Rs 10 lakh crore and that could
take at least seven weeks at the
present rate.
Since no one in the government or the RBI thought this
through, policy changes are effected every day to suit the situation.
When it became known that the wedding season was
on, the government allowed withdrawal of Rs 2.5 lakh for the
purpose of getting married. A day later a list of conditions
were laid and suddenly withdrawing cash to get married has
become more difficult than finding the right girl or boy to get
married to. In the last 10 days, the government realised that
the rabi season was upon us and farmers had no cash to buy
seeds. Farmers have now been allowed to buy seeds with old
notes. Then it was realised that the 60-day deadline for repayment
of loans would become a problem so the RBI has instructed
lenders, read banks, to give them 60 additional days
to repay loans.
The transport sector has survived only because petrol
pumps have been allowed to accept old notes till 24 November.
It looks like this deadline will have to be extended in order
to keep the wheels of the economy rolling. The government is
still groping in the dark and the prognosis is that it’s going to
get worse before it gets better.
