Demonetisation: It’s Going to Take a While

Image credit: Agastya Chandrakant (Own work), CC BY-SA 4.0, via Wikimedia Commons

Many people are waiting for 30th December, when all the demonetisation rush dies down and life returns to normal. But did you know that it’s actually going to take a lot longer than that?

The last time notes were demonetised in this country was in 1978, when the ₹1000, ₹5000, and ₹10,000 notes were announced to be invalid. At this time, the reactions of most people would have been “What? Those notes exist‽”. Most people had never even seen these notes — except for the people who were actually using them to hoard money. But now, the situation is different. ₹500 and ₹1000 notes account for about 83% of the cash in circulation, and almost everybody has at least one of them.

Exchanging those notes is going to be a big operation. Let’s try to find out just how big.

Looking at this RBI annual report, we can calculate that there are just over 22 billion ₹500 and ₹1000 notes in circulation. And statistics from the Ministry of Finance and the Postal Department say that there are about 1 lakh and 1.5 lakh bank branches and post-offices respectively. The bank data is 3 years old, but let’s bump that up to 1.2 lakh and we should be safe.

So we have a grand total of 2.7 lakh outlets in the country to deposit cash, and 22 billion notes to deposit. (For comparison: the 2014 Lok Sabha elections had about 9.3 lakh polling stations, and the election was held in stages over a period of nine days.) That’s about 81,480 notes per deposit-point, with 50 days to deposit them. Assuming a 5-day work-week and working hours of 9 AM to 5 PM, this amounts to 291 notes an hour, or about 1 note every 12 seconds.

To summarise: each of the 2.7 lakh banks and post-offices in the country has to be taking in 1 note every 12 seconds for all the cash to be taken in by 30th December!

Of course, there are many things that could change this estimate. The Postal Department is deploying currency disbursement vans that set up camp in different places and allow people to exchange their notes. A few people seem to be throwing their money into the river rather than handing it in and coming under the scanner of the Income Tax Department. Many notes are in custody of courts as they are a part of disputes that haven’t been settled yet. People in neighbouring countries like Nepal and Bangladesh have some rupee-notes as well, and they won’t be able to access these banks very easily. There may also be some people who only exchange their notes after the 30th December deadline, as they can still change them at special RBI offices until March 2017. And finally, don’t forget the notes which are already in the banks.

So the estimate may be a bit off, but also don’t forget all the people queuing up at the banks to take out money rather that put more in, and the people who came to the banks and post-offices on regular business not related to the demonetisation. (And don’t forget my local postmaster who’s more likely to open his office at nine to five rather than from nine to five). The main point is that the banks have a lot of work ahead for them.

Actually, wait. That’s a point, but it’s not the main one. Depositing is only part of the problem. And the other part of the problem is going to last much, much longer.

Many people are wondering why the government decided to print ₹2000 notes, after demonetising the other ones. The rationale for demonetising large notes was that it’s easy for people to use them to store cash illegally. A huge stack of 100-rupee notes would be much more noticeable than a small bundle of 1000-rupee ones. So wouldn’t the ₹2000 notes make it even easier for people to hide and hoard cash?

While that may be true, the ₹2000 notes probably still had to be created for practical reasons. Now that the old notes are no longer valid, new ones have to be created to replace them. This is going to take a long time, and if it wasn’t for the ₹2000s it would take even longer.

The RBI record, which I mentioned earlier, shows that the total value of the demonetised notes in circulation is about ₹14,179,430,000,000, or 14,179 billion. If all these are to be replaced with ₹2000 notes, then they would have to print (14,179 billion÷2000) = 7.09 billion notes. How long will it take to print all these notes?

Everyone’s reporting that the printing presses are working at full capacity to print the notes. But nobody’s mentioning exactly how fast that “full capacity” is. So let’s check it ourselves….

The RBI document says that they have printed 21.2 billion notes in the last session (April 2015—March 2016). Now, they have planned for 24.5 billion notes, but let’s say 24 billion since they’ve usually been getting a bit less than they asked for.

24 billion notes a year means 2 billion notes a month. So they’ll take over three and a half months to print 7.09 billion notes, assuming every single one of them is a ₹2000.

The thing is that the notes cannot be all ₹2000s, because that would make them unusable. There are already many people who have ₹2000 notes, but find them useless because nobody has change to give them. If someone buys something for ₹200 and pays with a ₹500 note, the shop can usually give them three ₹100s back. But if that same person tried to pay with a ₹2000 note instead, the shop would have to pay back with eighteen ₹100 notes. Clearly, the change would soon run out!

The government has already thought of that. That’s why they’re also releasing the new ₹500 note. So let’s revise our calculations.

There are currently about 7,854 billion rupees in ₹500 notes, and 6,326 billion in ₹1000s. If all the ₹500s were replaced by new ₹500s and all the ₹1000s by ₹2000s, that would be about 18.9 billion new notes to print. That’s nine and a half months.

If we also count the 10 billion or so soiled notes discarded each year, which will have to be replaced, it may take well over a year before all the demonetised notes are replaced. Until then, there’s going to be a shortage of cash, simply because that much cash will not even exist, let alone be in circulation.

Some people have been asking the question: surely the government would have thought of this before? Surely they must have started printing notes in advance, before the demonetisation was announced? They probably have. But if you look at any of the new notes with you, take a look at the governor’s signature. They are signed by Dr. Urjit Patel, who only became the governor of RBI in September 2016—about two months before the announcement. While a head-start of two months is good, we’ll still need many more months before we catch up.

But is there really going to be a cash shortage? Now that people have put their money in the bank, won’t they be able to just leave it there?

The answer is that no, that would be impossible. Everyone in this country depends on cash, except perhaps if they happen to live in a major city or something. Most of the country’s workforce is employed in India’s “informal sector”, which means they usually depend on cash for their income. If you want numbers, you can use this report from the Indian Economic Service to figure out that this is over 91% of the workforce. And of course, the children, parents and grandparents, who are not employed at all, will be dependent on that cash, too.

It’s true that many people still keep their life savings at home, in cash. But a large part of the cash is circulating only because it is actually in use.

Don’t discount the life savings, either. There is a rule that you need to have a PAN card to make deposits of over ₹50,000. But a lot of the people depositing their savings are farmers, who, being tax-exempt, don’t have PAN cards. The quick-fix solution is to “borrow” the account of someone else who has a PAN card, and naturally, they will want to get the money back into their own hands as soon as possible. But that is a side issue. Let us return to the in-use cash.

People use cash for their day-to-day transactions, such as buying food and supplies. If cash goes, it will have a cascading effect. My grocer is still willing to give me things on credit, for a while. But if I don’t have cash to pay my grocer, how will he be able to pay his dealer? If the grocer doesn’t have enough cash to pay his dealer, how will the dealer get money to pay his supplier? And how will the suppliers get the cash to pay the farmers they buy the supplies from?

Problems like this are already happening on a large scale, with the largest fish market in the country shutting down along with the the second-largest jaggery market. The crisis has also made it impossible for newspapers to come out in Manipur, because the distributors were not able to procure notes to pay the newspaper offices. Small businesses pay their daily or monthly wages using cash. Now, they have no way to pay, which means they have no choice but to shut down. Hundreds of daily workers in places like the bangle factories of Firozabad are now out of work. Suddenly, they won’t know where their money’s going to come from the next day, and perhaps find themselves slipping below the poverty line in what is called welfare shock. It’s not just small businesses that are hit: the whole Tamil movie industry is now struggling.

Things are working out for now, using a combination of trust and credit. But as we near 30th December, and people realise the money’s not going to come any time soon, more things will begin to shut down. Things may become kind of like the cash crisis in Greece a year or so ago. Kind of, but not quite.

It could be that all the buses in your city stop running due to lack of change. Or it could be the food supply, or the newspaper, or the cellphone recharge counter. Whatever it is, be prepared.

30th December is not going to be the end of the crisis. In fact, it’ll be just the beginning.

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Update [21 Nov 2016]: Some people have been mentioning that the RBI must have started printing notes much earlier to have the supply ready in time for demonetisation. A paragraph has been added explaining why this could have given the government a head-start of only 2 months or less.

Correction [21 Nov 2016]: The percentage share of the unemployed sector was described as being “a third of the population”. This statement is misleading, as the unemployed sector actually compromises about 91% of the workforce.This in turn is about 35–45% of the total population, because the rest are either retired, too young to work, or unemployed. The paragraph has been modified to clarify this statement.