Cash remains the king in India, wears mostly black

Baba Ramdev’s ten-point charter of demands to usher in a new India freed from the vice-like grip of black money has only been cursorily dealt with in the media, with the man behind it stealing all the limelight.

Of Ramdev’s demands, at least one — the removal of high denomination currency notes from the economy to prevent internal black money generation — is too important to be dismissed out of hand. In a land where currency is still king and small transactions a legion, the policy tilt towards issue of bank notes of Rs500 and Rs1,000 and whether this fosters the climate for illicit transactions need a critical look.

US and UK have done it,
let’s consider the situation in the US and the UK, whose currencies also are global reserve currencies.

In the US, the highest denomination bank note is $100 and in the UK, it is 50 pound sterling. As a multiple of the basic currency unit, it is 100 in the US and 50 in Britain. In India, however, the highest value bank note is 1,000 times the basic currency unit — a rupee. These two nations have avoided higher denomination only because they facilitate corruption, money laundering, and other acts of malfeasance.

With advanced payment settlements in place, the use of cash is restricted to small transactions. Clearly, the monetary authorities in the US and UK have found a link between high value bank notes and clandestine dealings, and this has influenced their approach to printing security notes.  In India, too, we have seen in recent years shady dealings of this sort, and Parliament itself saw a display of huge chunks of currency.

Getting back to Ramdev’s charter, it goes on to observe in a language that economists might be proud of, “Today, we have Rs100 lakh crore of black money inside our economy and that’s because Rs1000, Rs500 notes make it easier for corrupt people to transport, carry and store large sums of money for purpose of illegal and corrupt dealings. These notes should be removed immediately. There is no use of these notes when 80 crore + people in our country live on a daily income of Rs20 and never get the luxury of even seeing a Rs500 note.”

There is an element of truth here. Because of the short life span of smaller denomination notes, they have been coinised. (By the end of this month, even the 25 paise coin will cease to be legal tender). This means more demand for notes in the denomination of Rs10, 20, 50 and 100. But even the availability of these notes — as a proportion of the total notes issued in value terms — has shrunk. The Reserve Bank of India says that its policy in this regard is influenced by the demand for notes of various denominations, the replacement of soiled notes and reserve requirements. Of course, economic growth is also one deciding factor. But it is still difficult to accept that the demand for smaller value notes has abated and hence the drop in both their value and volume in
relation to the total over time.

The ATM factor
More probably, practical considerations have come to the fore. Printing high value security notes is economical. As the RBI has noted in its last annual report, the cost incurred in this respect has nearly doubled to Rs.2,754 crore in 2009-10, from Rs1,440 crore in 2004-05. A new factor was the widespread use of ATMs. Started in a small way in the late eighties, now the use of ATMs is widespread, and the use is largely confined to withdrawals of cash.

Here, stocking these machines with higher denomination notes makes sense, as the need for replenishment at longer intervals helps banks save both operational and capital costs. Thus, the bias towards Rs500 and Rs1,000 notes is technology- driven - the spreading network of ATMs. The irony is that while the rich can avail of modern modes of payment, the common man’s cash needs are rather small. Yet, the pattern of bank notes in circulation favours the former at the expense of the latter.