From dad to maid - Why some are panicking

Devadeep Purohit, TT, Calcutta, Nov. 8: A Calcuttan in his late forties recounted what his father had blurted out after former Prime Minister Morarji Desai abolished Rs 1,000 notes in 1978 and compared it with what the family's domestic help wondered aloud after she came to know of Narendra Modi's announcement tonight.

"I have never seen a Rs 1,000 note. I am not bothered," the private sector employee recalled the reaction of his father who was a government employee."Dada, all my savings are in Rs 500 or Rs 1,000 notes.... What will happen to the money I have saved?" the domestic help asked the resident of south Calcutta this evening.

The woman was unaware that the Prime Minister had tried to dispel her fears, nor did she realise that the top guns of the country's financial bureaucracy - who hit the TV screens after what Amit Shah called Modi's "surgical strike" - were telling her not to panic.

She was, however, panicking and her worry captured how times have changed - a Rs 1,000 note was a rarity in 1978 whereas Rs 500 or Rs 1,000 notes are ubiquitous in 2016.

Estimates suggest that out of the total currency circulation of about Rs 17 lakh crore, currencies in these two denominations account for over 55 per cent or Rs 10 lakh crore.

After Modi's speech, long queues were seen outside ATMs with customers trying to withdraw as many Rs 100 notes as possible.

Worried wives were calling up their husbands to tell them about shortage of Rs 100 notes at home and were asking what to do with the Rs 500 and Rs 1,000 denomination notes lying in the cupboard. Friends at restaurants were discussing how to navigate through a phase of cash crunch as Rs 500 and Rs 1,000 denominations sank into obsolescence this evening.

Modi and his men are probably right - these worries are unlikely to last long and, after a brief transition phase, it is likely to be business as usual for most people who watched the Prime Minister's address live.

But there are other worries about the possible fallout of the decision whose stated objective is to tackle hoarded black money and counterfeit notes.

Take the case of the domestic help at the south Calcutta home. Despite the tremendous breadth of the Prime Minister's Jan Dhan Yojana, the woman doesn't have a bank account. For her, the question is how she would exchange the savings that she had squirrelled away.

The question in her mind is likely to resonate through a country in which over 70 per cent people live in rural areas and where the economy is all about cash transactions. Whatever be the propensity for thrift in vast rural stretches across the country, savings - mostly precautionary in nature - are made in cash and in higher denomination notes.

The jury is still out on the likely impact of the demonetisation on the rural economy.

Some economists were also not certain about the effectiveness of the move in unearthing black money, a mission Modi had rolled out before the electorate in the run-up to the 2014 Lok Sabha polls.

"It is naïve to believe that all black money is hoarded in currency notes of higher denominations.... Real estate, land, gold and investments abroad are the options that the super rich use to park their unaccounted money. My question is what would the PM do to tap these sources?" asked Left economist Prasenjit Bose.

Bose also stressed that if the people with hoarded black money do not come forward to exchange their higher denomination notes with Rs 100 notes, the government's plan to recover black money would go awry.

Besides, the fight against black money has to be a continuous one and cannot end by discontinuing higher denomination notes from the night of November 8.

As Rs 2,000 denomination notes would soon be available, the chances of these notes being used to hoard black money from now on cannot be ruled out. Then the question: will the government discontinue Rs 2,000 notes and the new-generation Rs 500 notes after a few years?

"Do we have to believe that Rs 500 and Rs 1,000 notes are the reasons behind black money in the country?" asked a Delhi-based economist who did not wish to be named.

"Black money gets generated because of detection issues and structural problems in the economy.... Stamp duty and registration fees are more than six to seven per cent of the property value in our country, which tempt property buyers to carry out transactions in black. The rates are as low as less than one per cent in countries like the US. Can't we change the structure?" he asked.

These questions remained unanswered in the immediate aftermath of the announcement as supporters of the ruling party were busy congratulating the Prime Minister for the "bold move" while the Opposition tore into the decision and threatened a full-fledged protest.

A political scientist said that the decision would have political impact as well because of the sudden feeling of despondency among the poor in rural areas.

"There is likely to be discontent among rural people who would feel that their savings are gone. There is bound to be a political cost," said the political scientist.

The cost to the economy would also have to be calculated, but that would be known only after a time lag. Some bankers this newspaper spoke to said that if all the money, in Rs 500 and Rs 1,000 notes, do not get exchanged, the total money in circulation would fall, resulting in a squeezing of the economy.

That would surely not be good news for the government.