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The demonetisation by the government removed 86 percent of the currency in circulation. This was all currency being held in the form of Rs 500 and Rs 1000 denomination notes. These notes are currently being replaced gradually by notes of Rs 100 and Rs 2000 denomination. There are two problems one sees in this demonetisation and remonetisation moves which, as some economists have pointed out, would lead people to explore alternative currencies. While there has been talks about gold or foreign exchange becoming a substitute for formal currency, there are newer forms emerging as we speak. It would be interesting to explore what this means for money as a medium of exchange in the Indian economy.


Two developments in the economy are paving the way for various currency substitutes. The first is the limited extent to which until now the currency has been remonetized – the slow pace and limited scale of remonetisation has reduced the amount of money in circulation making it very difficult for transactions to be undertaken. The second issue is the remonetisation of denomination of Rs 2000 with the next note being of value Rs 100. The former forces people to transact in digital or plastic money or look for cash substitutes. The latter makes the available Rs 2000 notes virtually unusable unless it is for a high value transaction thereby again necessitating the need for alternative currencies to convert the Rs 2000 note or to withdraw from the account.
In this context, it is expected that human ingenuity should introduce alternatives. One such interesting innovation that was reported in the newspapers today is the issue of tokens by IDFC at the rythu bazaar to facilitate people’s purchases of vegetables. The process being used can be summarized as follows: the consumer can give her Aadhar Card number and from the connected bank account an amount like Rs 500 would be debited and an equivalent value in tokens of Rs 5, Rs 10 and Rs 20 denomination would be issued. The tokens would be used to buy vegetables. The vendors can encash the tokens and get the amount credited to their accounts or get it converted to cash. This innovation has been encouraged by the government of Telangana, which has a proposal to extend it to hospitals as well. This is an interesting instrument since there is a credible financial institution, backed by a state government, and it allows people to move from formal currency or bank accounts to tokens and back. Technically, this instrument cannot be called official currency since only the Reserve Bank of India or Government of India can issue legal tender. However, if one puts the legality aside, it can serve a number of functions of currency. In principle, any consumer who converted some money to tokens might decide to hold on to the tokens to use on her next visit to the rythu bazaar. In other words, this token can be used to hold balances. Further, it can be transferred with ease to others in the economy for them to use to pay for their purchases. From this description, it is only a small step to imagine others accepting this token as a medium of exchange, since it can always be surrendered to the issuer for exchange into the formal currency.
Another such token was issued by the agency given the responsibility to collect green tax by the government of Delhi. While the agency was accepting the demonetised notes, it could not return change to people and therefore began issuing tokens for the balance to be returned. The tokens could be used any time during the next six months to pay the toll tax. This instrument is a little different from the IDFC tokens since it does not allow for a conversion back to currency or to bank accounts, but allows people to hold the token as a money equivalent.
What will this change on the ground? It potentially brings in the possibility that even in the absence or limited presence of cash, the only alternative is not digital or plastic currency. It therefore reduces the scope of monitoring transactions through the banking network and therefore of deriving the many benefits in terms of expanded formal sector and enhanced tax collection. It might be argued that Rs 500 is a small amount which cannot be enough to change the way the economy functions. But the concept can power the change. How does one ensure that it stays small? More regulation and more enforcement? belies the spirit of voluntary compliance.
The author is Professor, NIPFP. Click here for detailed profile.
The views expressed in the post are those of the author. No responsibility for them should be attributed to NIPFP.
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