Confidence in currency - Observation of transacting with Rs. 10 coin

Recently, I was transacting with a fruit vendor, to whom I owed Rs. 10. I had given him a coin of that amount for the payment (i.e. a rupee 10 coin). However, the vendor refused to accept, stating that the coin is no longer in use. To provide a context in this regard, a rumour had actually begun a couple of years back and spread like wildfire stating that Rs. 10 coin is no longer a legal mandate. While the RBI has been trying hard since then to curb the fake news and clarify that the coin is a legal tender, at the ground level the message doesn't seem to have trickled. Another important aspect (which was brought forward by a budding economist fellow of mine during our discussion) is that the rejection of coin here does not comment on its carrying inconvenience. This is because the value of Rs. 10 for these small vendors is much more than the inconvenience in carrying them. Simultaneously, they would gladly be willing to accept other coins. For example, instead of 1-Rs. 10 coin, they would accept 10-Rs.1 coin or 5-Rs. 2 coins.

I believe the example of a vegetable vendor here is an appropriate proxy to understand the ground-level reality for two main reasons - 1) such vendors are exposed to a significant number of cash transactions on a daily basis of lower values (e.g. < 100 bucks). Therefore, such vendors have higher probabilities to be exposed to transactions involving Rs. 10 coins. 2) Such vendors would form views (about accepting and rejecting the coin) on the basis of their daily observations rather than online RBI based articles. It is highly likely that such vendors are not exposed to the latter at all. Consequently, rejection to accept Rs. 10 coins by the vendor demonstrates the unacceptability of Rs.10 coins at the base level amongst people in India. 

Now we know that, in the end, any currency derives its values from the confidence that individuals have in them via the central bank or treasury assurances. In the case discussed here, the central bank has been pushing hard to distribute the word regarding the coin being a legal tender. Yet, the base levels do not seem to have affected much. Firstly, this raises a loud alarm, that is the potential of misinformation to effect the economy on the whole. I am not sure about the origins of this neglect behind the acceptance of the coin, but whatever it was it had a severe impact on the entire system. Secondly, the incidence also sheds light on the asymmetric transference of information between the top (policymakers) and down (individuals) levels. It is clear that the top-down approach isn't as effective as the bottom-up approach. This also points towards the existence of a large void between the country's policymakers and its citizens. This gap, I believe must be addressed at the topmost priority for a democracy to succeed in the long run. These voids, in the long run, act as a tool for harmful externalities to destruct the alignment between a nation's policymakers and their citizens. It allows the external agents to exploit our system and destroy prosperity and fraternity. Before discussing the third aspect of the alarm, let's ponder on another point.

The point is how I reacted to the above-mentioned transaction. After failing to convenience, I took another Rs. 10 currency and gave him that, while accepting the coin. It is important here to note that if an informed agent like me is making such a choice, I believe so could several others. The first question then arises as to why there is no push from informed individuals at the grass-root level to make such transactions applicable. I believe the possible reasoning behind this is high judicial costs for common citizens in India. It is relatively easier for an individual to go to the bank and deposit the money or just keep it as a souvenir than going to the courts in response to everyday transactions of such magnitude. The extremely high judicial cost in terms of time, money, stress, societal views etc is so high that common individuals feel demotivated to push back to ensure such transactions do hold. 

So, the third aspect of the alarm is regarding judicial reforms. The response amongst Indian individuals despite RBI's attempt to maintain the coin legal tender points towards the failure of the judicial system as well. Although, I do agree that courts had some cases regarding the issue and they did decree but the fact that the coin is still unacceptable to people did make it a fail case. 

In conclusion, what I studied in economic books and how most economists think about currencies functioning - the top-down way, the incident portrays that it is much more involved, at least for developing economies. There is a limit up to which the top-down confidence trickle works for backing the currency. The wide gap which exists between the top and the bottom distorts this trickle and has the potential for creating havoc. A potential solution and a step in this regard, I believe, is starting from judicial reforms to reduce the cost of justice for the people of India.