Deadly disruption

The chaos following the move to remove notes from circulation exposes the country’s lack of preparedness in the bid to shift to a cashless economy.

Published : Nov 23, 2016 12:30 IST

WAS the move to take the Rs.500 and Rs.1,000 notes out of circulation and replace them with new notes carefully considered in light of the existing infrastructure? Are there any alternatives?

The decision to remove Rs.500 and Rs.1,000 notes has left most Indians in the lurch because 86 per cent of all the currency printed by the government was in the form of Rs.500 and Rs.1,000 notes (by value). According to the annual report of the Reserve Bank of India (RBI) dated August 29, 2016, as of March 2016 the currency notes in circulation had a total value of Rs.16.42 lakh crore. Of these, 86.4 per cent, or Rs.14.18 lakh crore, was in Rs.500 and Rs.1,000 notes. This was the amount sucked out of the system from November 8 midnight. It was estimated that of this amount, about 25 per cent, or Rs.3.5 lakh crore, was black, meaning that people possessing it would not deposit it in the bank for fear of attracting huge penalties or jail time. That would mean that the amount of money in circulation that would now need to be deposited in banks and exchanged for new notes is approximately Rs.10.64 lakh crore. This is to be done entirely through bank branches and ATMs.

In press interactions since the demonetisation move was taken, Finance Minister Arun Jaitley informed the people that this move was part of a larger plan to move to a cashless economy and urged them to start using electronic banking, mobile payment, and credit and debit cards. The attempts by people to exchange their money for new, usable notes hit another roadblock as ATMs needed to be recalibrated to accept the new notes, a process Jaitley estimated will need another three weeks. In an interaction, Prime Minister Narendra Modi informed the nation that he expected the hardship to continue until December 30 at the latest.

But is this realistic? Are the two major legs on which the demonetisation scheme stands, viz., for citizens to deposit old notes in banks and withdraw their money through bank account or ATM withdrawals, or the transition to a cashless economy for 50 days, relying only on ATMs, bank branches, smartphones, credit and debit cards, realistic at this time? What percentage of Indians actually have access to these options?

Data from the Global Financial Inclusion report prepared by the World Bank show that while things are improving, they are nowhere near where they need to be.

For instance, the percentage of people aged 15 years or above who had a bank account rose from 35 per cent in 2011 to 53 per cent in 2014.

The number of ATMs per 100,000 Indians, on average, was around 18. This compares unfavourably with other countries such as South Africa (66), Brazil (129), and Russia (184).

Clearly, India is a lot more unprepared to deal with a situation where 86 per cent of the cash vanishes overnight than any of these nations.

Credit and debit card usage does not fare much better either. The report says that in 2014, only 11 per cent of Indians aged 15 years or above made a payment using a debit card, and only 3.4 per cent used a credit card, only 2.2 per cent used a mobile phone to make payments. Further, it says that in 2014, only 6.4 per cent borrowed from a financial institution, whereas 12.6 per cent borrowed from a private lender; 6.6 per cent borrowed from a store by buying on credit; 5.4 per cent borrowed from an employer; and 32.3 per cent borrowed from family or friends. The Indian economy is, therefore, dominated by cash and unaccounted transactions and most people are quite unfamiliar with electronic means of payment and withdrawal. Only 20 per cent received their wages through a bank account. Fewer than 0.2 per cent of Indians used a mobile phone to pay utility bills; just over 4 per cent of all citizens used a bank account for business purposes; just under 4 per cent of Indians used a bank account to receive government transfers; and only 6.7 per cent used cheques to make payments.

Banking exclusion What is very clear from these figures is that a large majority of Indians are not even in the formal banking/financial net, let alone specialised forms of it such as Internet banking and mobile banking using smartphones. Further, it should be kept in mind that these figures, dismal as they are, do not reflect the true desperation of the current situation because they are average figures for India and do not reflect the urban/rural divide.

The Reserve Bank of India’s “Report of the Committee on Medium-Term Path on Financial Inclusion”, dated December 28, 2015, shows that the bank branch density in rural areas is less than half of what it is in urban areas. Rural India is largely cash-driven. One reason for this is that agricultural income is exempt from income tax, and a lot of transactions are done with cash alone. This is not black money. So the irony of the situation is that bank branches and ATMs are far fewer in rural areas, but the percentage of wealth that is held in cash in rural India is much greater than in urban India, where people use banks to store their money. Now these rural Indians will have to contend with getting their larger stores of money in and out of banks, with little experience in doing so, and this during a liquidity crisis.

The Jan Dhan Yojana created a lot of new bank accounts in India but a lot of them are zero-balance accounts and people have not yet taken to using them.

It is clear that rural India was woefully unprepared for the shock of the withdrawal of 86 per cent of liquid currency on November 8 and is unlikely to recover from this situation any time soon.

One of the main thrusts of the economic policy of this government is the JAM troika, standing for the Jan Dhan Yojana, Aadhaar unique identification, and mobile. The RBI’s Economic Survey of India 2015-2016 discusses, in Chapter 3, the JAM approach in detail and presents a JAM preparedness index, which measures how ready India is for a world in which benefits will be transmitted electronically to bank accounts, verified by Aadhaar cards and accessed by mobile phones—in other words a cashless economy of the kind that people have been forced to confront themselves today.

A JAM preparedness index of 100 per cent indicates full preparation while 0 per cent indicates complete unpreparedness. Maps 1 and 2 show that India, especially rural India, neither is ready for a JAM world nor was ready for the world of November 9.

This is going to lead to unbelievable suffering in the next 50 days. People are going to starve and die—many already have; people are going to continue to be refused medical treatment for life-threatening illnesses and pregnancies for lack of liquid cash; and farmers are going to suffer as they cannot sell their produce or buy seeds. Business is going to come to a standstill in both rural and urban India. The worst effects of this measure will be felt by those with the least capacity to absorb these shocks.


1. World Bank Data on Financial Inclusion.

2. RBI Report on Financial Inclusion.

3. Economic Survey of India 2015-16. Kumar is an R&D Chemical Engineer with a B.Tech from IIT Bombay and an M.S. and a PhD from the University of Utah, U.S. He writes regularly on political, social, economic, and cultural affairs at

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