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 Around 1.03 lakh crore was withdrawn from banks and another Rs 33,006 crore exchanged, which means around Rs 1.36 lakh crore has returned to the economy.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.
