Dear RBI, It’s Not About Hoarding Notes, It’s About Shortage of Cash


In the press conference that followed the monetary policy on December 7, 2016, R Gandhi, one of the deputy governors of the Reserve Bank of India(RBI), said: “We reiterate that there is adequate supply of notes and hoarding of notes helps nobody’s cause.”

The impression that the RBI is trying to create is that all is well and that it is the hoarders are responsible for the mess that prevails on the cash front, all through the country. But is that really the case?

In a press release dated December 8, 2016, the RBI said: “During the period from November 10, 2016 and December 7, 2016, banks have reported that banknotes worth Rs 4,27,684 crore have been issued to public either over the counter or through ATMs.”

The total value of the Rs 500 and the Rs 1,000 demonetised notes amount to Rs 15.44 lakh crore. Hence, the notes replaced amount to close to 27.7 per cent of the demonetised notes. Before the notes had been demonetised the total value of currency stood at Rs 17.87 lakh crore. This basically means that around 23.9 per cent of the currency that was in circulation before demonetisation has been replaced.

Hence, around one-fourth of the currency is back in circulation. The question is why doesn’t it feel like one-fourth? Why does it continue to be difficult to carry out cash transactions? The answer is straightforward.

To replace the Rs 500 and Rs 1,000 demonetised notes, the government printed the Rs 2,000 note, first. This means that there is no note between Rs 100 and Rs 2,000. Hence, every time one tries to spend the Rs 2,000 note, it is tough going because the other party simply doesn’t have enough change going around.

This, despite the fact that the RBI has supplied: “lower denomination of the notes, that is Rs 100, Rs 50, Rs 20 and Rs 10… over its counters,” as well. In fact, it has supplied 19.1 billion pieces of denomination of these notes over the last one month. As deputy governor Gandhi put it “This is more than what the Reserve Bank had supplied to the public in the whole of the last three years.”

While the RBI said that a total of 19.1 billion pieces of notes of small denomination were printed, it doesn’t provide us with a breakdown of numbers. It doesn’t tell us how many Rs 100 notes were printed, how many Rs 50 notes were printed and so on. Hence, there is no way of finding out the total value of these notes that had been printed.

Nevertheless, it is safe to say that the total value of the lower denomination notes printed and pumped into the economy, would essentially amount to around 5-6 per cent of the total currency in circulation before demonetisation. Hence, the bulk of the notes printed have been Rs 2,000 notes. Given this, there isn’t enough change going around, which means even those who have Rs 2,000 notes are finding it very difficult to use it.

What this means is that the 23.9 per cent figure of the total amount of currency replaced in comparison to the currency in circulation before November 8, 2016, when demonetisation was carried out, is overstated to that extent.

There is another problem with the Rs 2,000 note. There is a huge rumour going around that it has been launched as a stop-gap arrangement and is likely to be demonetised soon. This rumour perhaps comes from what was mentioned in the press release accompanying the demonetisation decision. As the press release said: “High denomination notes are known to facilitate generation of black money… Infusion of Rs 2,000/- bank notes will be monitored and regulated by RBI.” It is well worth remembering that the original motive of demonetisation was to tackle black money and fake notes.

How will the situation play out in the days to come? Will things improve by the end of this month as the prime minister has repeatedly told the nation? As Urjit Patel said during the course of the monetary policy press conference: “What we have done over the last two weeks is recalibrated our production towards the 500 and the 100.” This is going to improve the situation a little, given that as more 500s hit the market, the chances of the 2000s being accepted will also go up, as more change becomes available.

Having said that it will take some time for the situation to get back to normal. With 500s and 100s being printed the rate of currency replacement will slow down. It takes four 500 rupee notes to replace the currency that one 2000 rupee could.

Further, it is worth remembering here that the capacity of the printing presses supplying RBI with notes is around 300 crore notes per month. This, when the presses work 24 hours a day and for the full month.

The total number of 500 rupee notes demonetised stand at 1716.5 crore. At 300 crore notes a month, it will easily take five to six months to replace the total lot. Even if all the notes are not printed, given the push towards cashless, it will be a while before there is enough cash going around in the economy.

Hence, the point is that people are not hoarding cash. There simply isn’t enough cash going around. But what about all the raids all across the country and the cash being found during these operations? Isn’t that hoarding cash? Yes. Nevertheless, these seizures at best amount to a few hundred crore, which is a minuscule part of the overall currency that has been printed and pumped into the economy. At times, one does get excited looking at absolute numbers, but to put things in a proper perspective, it always makes sense to look at percentages.

To conclude, currency or cash is not the only form of money going around. There are other forms as well. Nevertheless, for a country where 98 per cent of the consumer transactions happen in cash, cash remains the major form of money. How difficult it is to understand this basic fact?

The column originally appeared on Equitymaster on December 12, 2016

It’s the politics, stupid. Why onion prices will continue to cross Rs 100 per kg

Onion_on_WhiteVivek Kaul 

A recent report in The Economic Times said that onion prices may touch Rs 100 per kg by October 2014. The report pointed out that “hailstorms and unseasonal rain in the past, along with the weak start of the monsoon season has created scarcity and strong inflationary pressures.” For the week between June 12-18, 2014, the rainfall had been 45% below the normal.
If this trend continues, chances are that vegetable prices in general and onion prices in particular may rise in the months to come because a lack of sufficient rainfall will lead to a fall in production. Nevertheless, vegetable prices have risen over the last few years, despite a steady increase in production.
A standard explanation for the inflation in vegetable prices over the last few years has been that the demand for vegetables has far exceeded their supply. Data provided by the National Horticultural Board tells us that India produced 129.07 million tonnes of vegetables in 2008-2009. This number had gone up to 170.2 million tonnes in 2013-2014.
This meant an absolute increase in production of around 32% over a period of five years or an increase at the rate of 4.67% per year. This is a reasonable rate of increase though not a fantastic one. During the same period the vegetable prices more than doubled. Given this, there might be some truth in the argument that demand for vegetables might have outstripped their supply.
But this is clearly not true at least in the case of onions. The onion production in the country has gone up at a rapid rate over the last few years. In 2007-2008, it stood at 9.14 million tonnes. This more than doubled to 19.3 million tonnes in 2013-2014.
Hence, Indian farmers are clearly producing enough onions. Also, it is safe to assume that demand for onions couldn’t have suddenly doubled over a period of five years. So, what explains the fact that onion prices have crossed Rs 100 per kg several times over the last few years and in the months to come the same scenario might play out again? The simple answer is hoarding. While most vegetables cannot be hoarded given that they rot quickly, onions last easily up to six months. This leads to their hoarding by traders in Nashik, Navi Mumbai and the Azadpur (in New Delhi)
As the report titled Competitive Assessment of Onion Markets in Indiawhich was commissioned by the Competition Commission of India points out “A few big traders having well connected networks with market intermediaries in other markets seem to play a major role in hoarding for expected high prices.”
These traders typically start hoarding onion in the post harvest season. By doing this they manage to tighten supply in the lean season. “The lean season also happens to coincide with start of major festivals and ceremonies like marriages in India. This clearly manifests itself during months of September to January, in which the supply from onion producing regions is minimal and festivals like Dasera, Dipawali, Eid, Chrismas and marriages and other ceremonies put higher pressure on the demand of onion,” the report points out.
It is not difficult for the government of the day to identify who these traders are. But most of these traders are close to political parties. Take the case of the traders operating at out Nasik and Navi Mumbai. These traders are known to be close to
Sharad Pawar’s Nationalist Congress Party. Given this, it was not surprising that when Pawar was the agriculture minister he regularly made statements that drove up onion prices. (You can sample a couple of statements here and here)
Economist Devinder Sharma
in a blog written in December 2013 points out “The Azadpur mandi traders association in Delhi is aligned to the ruling Congress party. In Punjab, on the other hand the traders associations predominantly back the ruling SAD-BJP combine.”
This explains to a large extent why politicians tend to look the other way when onion prices are rising, and they even go ahead and make insensitive statements. Take the case of Kapil Sibal, who when asked about the rise in onion price in September, 2013 had said “Ask the traders this? The government does not sell onions.”
Given this, it is not difficult for the government to control the price of onion, if it wants to. All it needs is a few basic steps. As the report commissioned by the Competition Commission of India points out “For these, measures such as cancelling license for a temporary period; putting fines and penalties, and monitoring closely the behaviours of traders for any intentional hoarding, could be taken.” Of these measures, monitoring the behaviour of traders for any intentional hoarding is the most important.
Having said that, the onion production may have seasonal variations and that may drive up the price of onion. But that still does not explain the astonishing rise to Rs 100 per kg several times over the last few years. As
Shreekant Sambrani writes in the Business Standard “ A five per cent reduction in its supply supposedly causes a 50 per cent increase in its price. While its per capita availability trebled in the last decade (faster than the per capita income, which doubled), its price rose fourfold in the same period.” Hoarding is the only possible explanation.
Potato, is another vegetable, which like onions, doesn’t rot immediately, and hence can be hoarded. Potato production has grown at the rate of 6.2% per year between 2008-2009 to 2013-2014 to 46.4 million tonnes. Between 2012-2013 and 2013-2014, the production grew by only 2.3% but the prices over the last one year have shot up by more than 30%. Hoarding is a major reason for the same.
Given this, the government needs to ensure that the prices of onion and potato are decided on true market demand and supply, and not because of hoarding. The inflation that the people faced during the second term of the Congress led UPA government was a major reason why the Narendra Modi led BJP was elected to power.
Hence, it is important for Modi and his government to do all that they can do on the inflation front. If they don’t, there will be trouble ahead. As Sambrani puts it “Inflation is a two-edged sword. Hurt in the pocketbook, the 
aam aurat could start venting her wrath on the new government. Onions don’t respect ideology while bringing tears.”
The article originally appeared on on June 26, 2014.

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Continuing a legacy? When Jaitley does a Chidambaram on food inflation


Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
Complex problems do not have straightforward answers. But politicians need to come up with simple answers in order to explain things, especially if they happen to be lawyers.
In order to tackle the high food inflation finance minister Arun Jaitley has asked states to “crack down on hoarders”. The food inflation for the month of May 2014 was at 9.5%(as measured by the wholesale price index and 9.4% (as measured by the consumer price index). Over the last ten years food inflation has averaged at 8.1% and has even gone above 10% in recent times.
Jaitley’s response to tackle food inflation was similar to what P Chidambaram had said in December 2013. “There is also a need to deal wisely with harvesting and marketing and deal strictly with hoarding and profiteering,” the former finance minister had said.
So is India’s food inflation problem only because of hoarding? As mentioned at the beginning, complex problems do not have simple answers. And India’s food inflation is a really complex problem.
One of the biggest hoarders of food is the government of India. The Food Corporation of India (FCI) indicates its grain stock at the beginning of every month. As on June 1, 2014, the food grain stock stood at 74.8 million tonnes. This primarily included rice and wheat.
This stock is much more than what is required by the government to run its various subsidy programmes and also to maintain an emergency stock and strategic reserve requirements. In fact, the Commission for Agricultural Costs and Prices(CACP), a part of the ministry of agriculture, estimated in May 2013, that anywhere between 41-47 million tonnes, would be a comfortable level of buffer stocks.
In fact, the level of the stocks with FCI has gone up dramatically since May 2004, when the Congress led United Progressive Alliance (UPA) first came to power. At the beginning of June 2004, the stock of food grain had stood at 32.3 million tonnes. It has more than doubled since then.
With more and more food grains landing up in the godowns of the government it is not surprising that price of food grains has risen over the last few years. The price of rice has risen by 12.75% over the last one year. The rise in the price of wheat has been rather subdued at 3.64%. But around the same time last year, the price of rice had risen 12.37% over a one year period.
In order to control grain prices, in the short run the government needs to sell some of its hoard in the open market. And that is exactly what it plans to do. It plans to sell 50 lakh tonnes of rice in the open market at a price of Rs 8.3 per kg. More importantly the government needs to stop hoarding rice and wheat, and not buy more than what it requires.
Other than the price of rice, the price of milk, fruits and egg, fish and meat has also risen at rapid rates of 9.57%, 19.4% and 12.47%, respectively. As far as hoarding is concerned India does not have the supply chain infrastructure required to hoard these food products. In this case, the inflation is clearly a case of the demand outstripping supply.
In a recent report titled
What a Waste Crisil Insight points out that “inflation in egg, fish and meat has consistently [been] at 10-15% since 2009. The story is similar for milk and milk products where inflation peaked above 15% in 2012.” Hence, inflation in these products is not a recent phenomenon and more than that it has nothing to do with hoarding.
Crisil Insight points out that “loose fiscal policy, rising demand for high-value food items and substantial increase in wages — especially rural wages, as a spillover [of] the rural employment guarantee scheme – have translated into higher demand for proteins. This has raised the prices of items such as milk and milk products, egg, fish and meat as supply falls short of demand. The production of milk and eggs has risen only 3-4% a year, compounded annually, during 2009-10 to 2012-13, while inflation in this category has risen 14-15%.” Hence, the only way to control inflation in this area is to encourage more production of milk, eggs, fish and meat, and that of course, needs a lot of effort and cannot happen overnight.
So that leaves us with vegetables. Vegetable prices on the whole have fallen by 0.97% over the last one year. But this aggregate hides the fact that potato prices have risen by 31.44% in the last one year. In this case, the hoarding argument can apply given that hoarding potato is far more easier than hoarding other vegetables or fruits or meat for that matter.
Interestingly, onion prices haven’t gone up in the last one year. They have fallen by 2.83% during the period. At the same time last year, onion prices had gone up by 94.28% over a period of one year. In order to stop anything along similar lines from happening again, the government has imposed a minimum export price of $300 per tonne for onions. In fact, the ministry of commerce has been asked to come up with a similar measure for potatoes as well.
Hopefully, all these measures should have some impact on the burgeoning food prices. To conclude, it is important to understand that food inflation is not just because of traders hoarding food products. Prices of different food products have risen due to different reasons over the last ten years. And these reasons need to be specifically addressed, if food prices are to be controlled.
The article was originally published on on June 19,2014

(Vivek Kaul is a writer. He tweets @kaul_vivek)