People are hoarding small currency notes, trust in banking is at lowest

Prof. Rajat Datta

Tucked away in one of the inside pages of a daily was a news item saying we have now started hoarding small denomination cash, and that banks are finding it increasingly difficult to cope with withdrawals. There are not enough notes in the new currency, and people are just not depositing money in new currency notes. Therefore replacement money is shrinking in real terms.

Quite apart from the fact that demonetisation is now beginning to lose its place on the front pages of newspapers, this news item points towards another so-called “cultural change” that has been brought about by the sudden withdrawal of money from the economy. People’s cultural propensity to consume has been drastically hit. Consumption and circulation are inextricably linked, and a contraction in one area is bound to have a domino effect on the other. There is a fear that once spent, one will run out of cash. Therefore, apart from the bare necessities, cash transactions are being withheld from the economy, which is critical to sustain innumerable small-scale transactions.

This is also a stinging indictment of the government’s rhetoric of going cashless. Going cashless does not mean withholding cash, or not spending in cash, not because one doesn’t need to, but because of a fear that once spent replacement in the form of currency notes may not be easily accessible.

Very clearly, the trust of medium and small scale consumers in the banking system has taken a big hit. Banks have failed in honouring that trust which is reposed on them as holders of public funds which can be accessed by the public on demand. The demonetization therefore has also pulverized the Indian banking system.

More importantly, this complaint, which banks are now making, is a vindication of the sheer economic necessity of keeping and strengthening the legitimate cash-using economy of this country. We must remember that digital banking and online transactions constitute a mere 3 percent of all transactions in the economy, and that more than 90% of monetary transactions in India were legitimate before the financial tsumani of 8th November, 2016.

  • K SHESHU BABU

    Trust of people on governmental financial institutions as well as ruling party is fast dwindling due to sudden and abrupt ban of 86% of currency and the decision to enquire into Jan dhan accounts held by poor. This is to divert from big account holders who actually have bulk of money in foreign banks and other assets. The move is anti- poor and pro- corporate.