Cost of Demonetisation

This week has been intriguing – Donald Trump’s win and demonetisation of Indian Rupee. Remember we had Brexit this year? I am not particularly penning down anything on Brexit or the U. S. presidential elections. Just wanted to take count of situation here in India and put a word of caution on INR demonetisation. According to Investopedia, Demonetisation is the act of stripping a currency unit of its status as legal tender. Demonetisation is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit. Common people around here in India are unhappy only because they can’t get the currency notes as the ‘older’ notes of Rs. 500 and Rs.1,000 ceased to be legal tender from midnight on Tuesday, 8 November 2016. The existing Rs. 500 or Rs. 1,000 notes can be deposited in an individual’s bank or post office accounts between November 10 and December 30. Currency value of up to Rs. 4,000 can be exchanged from any bank or post office a day till November 24 by showing a government identity card. This obviously leads to loads of black money hoardings useless. In addition, deposit of over Rs 250000 attracts tax as well as questions on source of income. There is so much of patriotism and celebration about the act of demonetisation. I like all of these, and the Government even assured agriculture income continues to be tax free and cash deposits will be hassle free. So far so good, if someone has un accounted money, it is illegal and hence let them face some music.
However, the Government also launched higher denomination currency note of Rs 2000! This is where people are celebrating unknowingly. I vaguely remember the introduction of Rs 1000 note, and I am of the camp that a country needs higher denomination notes only when the real value of money depreciates. It appears to be true and hence we have Rs 2000 note. Meanwhile, I have no interest to compare Indian currency in FOREX market. Even though the exchange rate of the Indian rupee (or INR) is determined by market conditions, in order to maintain effective exchange rates, the RBI actively trades in the USD/INR currency market. The RBI intervenes in the currency markets to maintain low volatility in exchange rates and remove excess liquidity from the economy. All that I am looking to know is , how aforesaid changes affect my livelihood.
Apart from possible operational hazard I have no further information on why Rs 1000 note was not reinstated immediately. In a hypothetical world, India may simply have abolished two top tier denominated notes and re-instated with differently designed new notes at the same denominations. And all other action points to curb corruption and black money may still have worked, people had to get the new notes, and banking transactions to ensure money supply is smooth – just like what is being done now. But with higher denominations, and expected interest rate reduction we are embracing higher money supply and thereby potentially an inflationary economy. Most common example is Zimbabwe, where money can barely buy goods based on denominations, instead volume of notes is used to determine value – give me one Kilogram of pulses I will give you 200 grams of Zimbabwean Dollar!
If we look at developed economies the lowest currency measurement (Penny/Cents) can buy some goods, while I remember spending money by paise only in my childhood. If cost of coin becomes greater than face value of coin itself, coins are smuggled out & melted. Hence coins of 1 paisa, 2 paise and 5 paise were discontinued. In 1980s stainless steel coins of 25, 50 and 1 rupee coins were introduced. Slowly and gradually even 10 paise went out of circulation in the market. When inflation increases, the value of money goes down. This means that the same Rs. 100 which was thought as considerable amount, 10 years later, the same Rs. 100 is thought as relatively less considerable. What was once available for Rs. 10 now either costs more than Rs. 10 or less quantity of it is given in the same amount. Inflation, over the time, becomes so high that some types of denominations become redundant.
In general terms, a country with an endemic liquidity problem (that is, unrestrained cash availability) will ultimately experience an uncomfortably high level of inflation as productivity will inevitably lag sluggishly behind the propensity for monetary expansion. In other words, you will have too much money chasing too few goods and one would require larger sums of money to make dwindling purchases. The present government wants to be business friendly, and one the most important way is to reduce interest rates. Which helps to inject more cash to the system. Now more cash and higher denomination notes! In other words, a rapidly depreciating currency will require higher denominations of currency to avoid the need to use a wheelbarrow to carry cash for such mundane activities as shopping for domestic grocery. 1 Chinese yuan = 10 Indian Rupees and you only get 100 Renminbi as the highest denomination! With increasing population, Indians will have to fight for livelihoods more as the resources get scarce.
Demonetisation and inflationary economy mean my savings worth less today than yesterday! So increased income is not helping me to have a better lifestyle. A breakfast cost Rs20 in 2005, but now Rs 50 – that means either my savings had to grow by 2.5x or I earn 2.5x more just make approximately same ends meet that of 2005! Word about salaried people, for whom the income reaches after tax to spend. In 2005, a fresh out of college graduate would get a job with starting salary of Rs 250000. And today’s job market is still offering similar salary for freshers. However, in 2005 a tea would cost Rs 4, while today it costs Rs 15. How about the sky high college fees, rents, transport or household expenditure that all have gone up more than what our inflation figures suggest? If the money I saved can buy lesser goods over time, should we consume today more by taking debt? I thought that was well and truly tested already – western economies are credit card debt ridden for years. Raghuram Rajan did not like to cut interest rates soon? Get rid off him – call him anti-Indian. A hungry lion has no choice but to figure out its prey every time. However, humans figured out something called currency or money. That is supposed to help me eat food and have lifestyle even on the days I am not productive per se. I hope we do not end up becoming animals – fight out to earn every day because yesterday’s/yesteryear’s earnings aren’t worthy anymore!