A tempestuous season

It is surely incorrect to view India's demonetization exercise as an instance of monetary policy. Monetary policy à la economics addresses issues linked to gross domestic product, unemployment, inflation and so on. India demonetized, however, to curb corruption. The policy may well find success, in which case the government will rightfully deserve to be praised.

Unfortunately though, the exercise has produced adverse side effects for the entire economy, involving matters quite unrelated to the policy goals. A great deal has been written on the matter already and hardly any purpose will be served by reproducing them. Suffice it to say that the problems have led to an economic slowdown. The slowdown has come about mainly on account of a fall in demand for commodities caused by the severe scarcity of currency, which happens to be the commonly preferred medium of transaction in India. The government has been trying to remonetize by issuing new currency, but on account of inadequate infrastructural facilities, the process is turning out to be painfully slow. As a result, markets too may take a while to recover. And slow market revival has undesirable implications for employment, both in the formal and informal sectors. To this extent, even if demonetization turns out to be successful in achieving its goals, the government, in its enthusiasm, may end up throwing out the baby with the bathwater.

To address corruption as well as the currency shortage problem, the government began to advocate digital transactions simultaneously with a push towards universal banking. How soon digital banking can spread across the country, including in remote rural areas, is still unclear. Quite apart from the poor penetration of mobile connectivity and the internet beyond metropolitan areas, questions have been raised about the very ability of a major section of the population, both rural and urban, to turn tech-savvy at short notice. Many are still reluctant to part company with cash, whether lacking in education or not. However, even those who are willing to rely primarily on digital transactions are not finding it easy to do so. And this in well-connected urban areas.

A true life example illustrates the point. A gentleman visited a well-known supermarket in Calcutta recently to purchase groceries. He paid a sum of around Rs 4,000 with a debit card issued by a much trusted nationalized bank. The card was swiped and the pin number correctly punched in. To his surprise, the EDC machine came up with the embarrassing message,"Payment Declined", when the person knew perfectly well that his savings bank deposit was adequately large to cover the payment. To avoid further uneasiness, he produced yet another debit card, issued by a private bank and the transaction went through smoothly. Within seconds, a message arrived on his smartphone that the necessary sum had been debited from his account and he came back home a happy man, though not completely so, since the rejection of his perfectly healthy first card continued to linger in his mind. And it was then that a second message arrived on his phone, around 45 minutes after he had left the shop. The nationalized bank was telling him that the value of his purchase had been duly debited from his account.

He had ended up paying Rs 8,000 for buying commodities worth Rs 4,000. To leave nothing to doubt however, he checked both his accounts online and found that the same sum had indeed been deducted from both accounts. The man rushed to the bank next morning, where the branch manager asked him to write a letter describing the incident and passed it on to a junior officer. The latter came up with additional information. This was a routine affair, she explained, and that customers are expected to produce a document signed by the merchant confirming the rejection of the card. He then rushed back to the supermarket therefore and requested it to certify that it had not received any payment through the card in question. The merchant too agreed that this was no isolated incident and even produced supporting documents, that is, carbon copies of a large number of such slips issued to its clients. The merchant explained that the money had not reached his organization and that it was probably lying in the bank's own suspense account. Normally, the man was further told, it takes at least 21 days for the money to be refunded. The harassed gentleman brought back the slip of paper to the bank, which notified him in turn that his account was likely to be credited within the next 45 days. Whether the money will be reverted back at all is anybody's guess at this point of time, since the bank manager was convinced that the merchant had received double payment.

The person clearly faces a dilemma now. Whether or not he receives back his money, he will be wary of using the nationalized bank's debit card in future. He will surely postpone many of his planned purchases, and either revert to cash transactions or use the private bank's debit card. Given the government's general disapproval of cash transactions though, he may even forgo the cash route, except for negligible expenditures. For larger expenses, he is likely to use the private bank's card alone, provided of course that his deposit in the bank is sufficiently high. And since the nationalized bank as well as the merchant confirmed that his case constituted the rule rather than the exception, there are many others who must have found themselves in similar predicament, some losing perhaps significantly larger sums of money. Worse, the rejections could have occurred in hospitals instead of grocery stores, with patients waiting to be admitted, and everyone does not carry a second debit card, especially daily wage earners, the size of whose bank deposits will be paltry at best.

Why should cards issued by nationalized banks be rejected while those issued by private banks, or at least most of them, be safely usable? Nationalized banks obviously have a much larger customer base compared to private banks. The erratic rejection of cards issued by public sector banks suggests that their servers have been under acute pressure since the day currency and corruption turned indistinguishable. A private bank is unlikely to face this difficulty since its server space per customer is doubtlessly large. The gentleman's experience suggests then that the banking sector does not have adequate infrastructure to deal with digitization. Matters are unlikely to improve with the government's decision to universalize banking habits. Unless the banks' digital infrastructure expands in tandem, keeping cash transactions on a tight leash will not be easy. And the inadequacy of elementary education in large pockets of the country cannot make matters any easier.

The government assures us that the problems associated with demonetization are temporary at worst. They will disappear in the so-called long run. This reminds one of John Maynard Keynes' observation in A Tract on Monetary Reform. "Economists set themselves too easy, too useless a task," he had written, "if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again." One wonders if Keynes' thoughts might not apply mutatis mutandis to non-economists as well.

The author is visiting professor of economics, Ashoka University