It is precisely this home work that is missing in the great plan of demonetization that has resulted in so much difficulty for the common man of India.

Who of you, desiring to build a tower, doesn’t sit down and count the cost, whether you’ve enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it begin to mock him, saying, ‘This man began to build and was not able to finish.’ “This profound statement is not from Amartya Sen or Raghuram Rajan who are mortals but from Jesus Christ ,son-of-God,talking about need for ‘planning ‘ the Holy Bible.

raghuram rajan demonetization Demonetization—The Maths That Finance Minister Has missed !

Our Honb’le Finance Minister seems to have missed this valuable advice while planning for the much-talked-about demonetization bomb .Consequently the entire nation  has landed  in a terrible financial mess.Yes,today the people of India,rich or poor,have no money to buy rice and vegetables to eat,milk to feed babies,gold for marriage or even a handkerchief to wipe the tears!Every retail market is crashing as ‘cash ‘is the prime mover of Indian economy and that ‘cash’is jailed for now,so not available.Demand and supply norms have crashed.Huge supplies.Huge demand.Have money in Bank accounts.But no cash in hand!What a terrible situation!People standing in endless queues for just Rs 2000/- ration of new currency!Many are on leave for this purpose!Senior citizens cannot draw their pensions!

modi combats black money Demonetization—The Maths That Finance Minister Has missed !

The Maths That FM Missed !

The intention behind demonetization is undoubtedly lofty and the country badly needs the black money hiding in the economy, to be flushed out in full.No doubt,the genuine growth of the economy,needs to  be reflected in the balance sheet of the country.Towards achieving this,the demonetization  move is,sure in the right direction.PM needs to be lauded for this bold move.The move ,by its very nature,essentialy has to be highly secret so that the purpose doesn’t get defeated before the launch.So far so good .But what the Finance Ministry officials  have missed in the planning stage is the big question ‘what would happen when all of a sudden 86% of the currency in circulation is sucked out of the system ,with all supplies remaining the same?’.

hqdefault Demonetization—The Maths That Finance Minister Has missed !

The total currency in circulation works out too 16.41 lac crore rupees as on 2015-16 .Out of this total currency in circulation roughly 86.4% is accounted by high denomination notes of rupees 1000 and 500 alone.When this amount of currency is sucked out of system,by a single stroke of demonetization, all of a sudden,obviously there is likely to be a traumatic cash crunch. Its like sucking out 86% of blood from a human body all of a sudden and then infusing millilitres of blood as replenishment day by day!

When the liquidity of the system gets eroded to this extent,it needs to be corrected as early as possible, lest it should lead to a demand- supply panic mismatch. The total currency notes sucked out of the system is approximately 2200 crore  notes i.e pieces. The aggregate currency printing capacity of the Indian currency presses is only 300 crore notes per month.  This means replenishing the currency sucked out with the new currency notes will take at least 2200/300 = 6.5 months roughly.

This also means that the economic activity of the nation is bound to take a hit for six and a half months at least. The economic activity will either be slowed down or can not reach the full extent possible.

The level of digital banking in India is not up to mark,either to supplement or to replace  the hard cash floating, in a short time. This also involves a major shift in the money culture of people who are trusting more in hard cash than in digital banking. For a country like India this change in mind set may take a long time and immediate results cannot be expected.

THE LOGISTICS OF REPLENISHMENT OF NEW CURRENCY

As per conservative estimates  there are around 2 lac branches of commercial banks operating in India as on Mar 2016.The exact number could not be ascertained.The total customer base of this banks is estimated at 97.8 crore accounts as on  Mar 2016 .

Based on this figures, following is the rough ,per day requirement of new notes for exchange of old demonetized notes .

A–EXCHANGE PURPOSES

No. of customers -97.8 cr

Currency exchange per person,per day,say – Rs5000

Total currency exchange per day Rs5000x97.8 cr = 4,89,000 cr per day

No. of days permitted for currency exchange  -50

Total currency requirement for exchange for 50 days = 50×489000 cr=24450000 cr

Ie,Currency notes to be ready as on the date of demonetization for Exchange = 24450000cr(value)   (A)

2000 Currency note pieces required=24450000/2000=12225 crore pieces

For practical reasons,lower denomination change for adequate quantities to be provided also.

B–CURRENCIES REQUIRED  FOR NORMAL BANKING OTHER THAN EXCHANGE

Average daily cash withdrawals from all  Banks in India = 200000  cr(estimate)

Total cash withdrawals for 50 days for normal banking= 50×200000=10000000 cr   (B)

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C-CURRENCIES REQUIRED FOR ATM FILLING

people protest dmonetization Demonetization—The Maths That Finance Minister Has missed !

Average currency requirement per ATM per day = 40 lacs rupees

Total no. of ATM’s in India as on date = 2.2lacs

Average currency required for all ATM filling = 2.2x40lacs = 88000 cr rupees

Total cash required for 50 days for ATM filling=50×88000=4400000 cr rupees (C)

——————————————————————————————————————————————————————————

As the demand for new currencies will be high during the first 50days ATM’s may have to be replenished more than once every day so the estimated requirement of this cash is likely to be at least 150% more  of this estimate.We are,however ignoring this for our calculations.

TOTAL NEW CURRENY REQUIREMENT DURING THE 50 DAYS

The total currency requirement shall be the total of all the three sub groups mentioned above hence the total will be

A+B+C= 24450000+10000000+4400000=38850000  cr rupees

—————————————————————————————————————————————————————————–

QUEUE  MANAGEMENT LOGISTICS

The total no. of customers who’ll be standing in queues during the 50days period will be huge and needs to be managed as well.Here is a rough working :

Total no. of branches- 2.lacs

Average no. of customers queuing up,per branch = 500

Total no. of customers in queues 500×2 lacs =1000 lacs =10 cr people ,per day

Total no. of ATM’s I India = 2.2lakhs

No. of customers in queue per day = 300

Total no. of ATM in queue =300×2.2.lakhs=6.6 cr people,per day

LOGISTICS OF ATM RECALIBRATION

In view of the introduction of  2000 denomination note,the need for recalibration of existing ATMs for dispensation of these notes,should have been anticipated while planning for demonetization itself.

Here is a rough work-sheet for this.

No of ATMSs to be recalibrated—2,20,0000

No of ATM Engineers available— 2000

No of ATMs that can be calibrated per day by 1 Engineer—4

No of ATMs that can be calibrated per day by 2000 Engrs—8000

No of days required to calibrate all ATMs—220000/8000=27.5 (excluding travel time to reach the spots)

So ATMs can be replenished for all ATMs only after,say 28 days .Till then ATMs that are recalibrated alone can be filled with cash,in a phased manner only.

This means ,the first 28 days are not practically available for use .Only ,the latter 22 days are available out of the 50 days given for using all the 2.2 lac ATMs in the country.

IMPACT OF CASH CRUNCH IN DAY TO DAY LIFE OF EVERY CITIZEN

Apart from the above study, the impact of cash crunch in the following areas could have been easily anticipated.

·        Retail markets

·        Agricultural operations

·        Medical care

·        Emergencies

·        Marriages

·        Transport /Tollways

·        Petrol Bunks

Similarly the impact of reduced cash supply in business , agriculture , industry , real-estate etc cannot be ignored. The impact is likely to last from six months to one year till the entire sucked out liquidity is restored by infusion of the new currencies in its place. What is clear is the feeling that the Finance Ministry does not seem to have applied its mind to the post demonetization trauma  in the economy of the country. It is precisely this home work that is missing in this great plan that has resulted in so much difficulty for the common man of India.

ATM long queues Demonetization—The Maths That Finance Minister Has missed !

  Referring to the demonetization move.PM has coined a slogan‘Short term pain for long term gain’The question that poses now before every Indian ,standing in the queue is’Is the pain,really a short term pain?If so ,how short? ‘

(Assumptions are based on estimates,based on available data ..Actuals may vary)

By Anonymous

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