The government needs to print 2,300 crore pieces of notes valued at Rs 15 lakh crore to replace the Rs 500 and Rs 1,000 denomination currency notes withdrawn by the demonetisation decision of November 8. The printing and transportation of new notes are likely to take time, even as queues at banks and ATMs across the country lengthen. It may not take much for the government to move the currency notes to urban centres once they are ready. But the process of despatching them to the hinterland is likely to take longer. Even slight delays can have large consequences since the withdrawn notes account for 86 per cent of the currency in circulation, in an economy in which a significant chunk of transactions is conducted in cash and over 85 per cent of the work force get their wages in cash.
Reports from rural India point to growing distress as transactions grind to a halt. Cash drives the rural economy. Agriculture, small industry and trade function around it. Though banks and ATMs are present in small towns and many villages, plastic money is hardly in use.
Farmers, who have reported a bumper crop after two years of drought, are now hit by the currency crunch. With traders running short of cash, harvest is not being lifted from the farm, causing a price collapse. The disruption in transport facilities has compounded the troubles.
With the rabi sowing season on, farmers, short on cash, are unable to buy seeds and fertilisers. Farm and factory labour, paid in cash, now faces the prospect of delayed payments. Retail trade, which revolves around cash, has come to a stop. The unexpected and unprecedented currency crunch, followed by state-induced restrictions on bank withdrawals, has also disrupted social life: Marriages and birth and death ceremonies are facing the brunt. What could accentuate the crisis further is the squeeze on cooperative banks. These banks have been told they can’t receive the withdrawn notes and the RBI has refused to lend them cash. Cooperative banks have a customer base running into crores and deposits of over Rs 10 lakh crore. They are the lifeline of the rural economy, especially in states like Maharashtra and Gujarat.
The government’s move to keep them out of the banking system at this juncture is tantamount to penalising customers who have parked money in these banks. It is unwise not to avail of their facilities when commercial banks are straining to address the currency crisis.
While it may be easier for the government to focus on urban areas, it should not lose track of rural India, where much of the production takes place. A breakdown in the economic processes there can derail the prospects for growth and upset food security.