Demonetization Thoughts

On November 8th 2016, the prime minister of India announced on National TV that the 500 and 1000 rupee notes were demonetized effective midnight. The PM announced that the people had until Dec 31 to exchange the old notes. Post Dec 31 the people could exchange them at the specified RBI branches. The government believed that this step would help curb counterfeit currency that fed terrorist activities and fight corruption by bringing black money hoarders to book. He asked the people of India to put up with the difficulty for a 50 days, and to view this as a step towards a new India. People obliged, everyone felt this step was in the right direction. None of the major opposition parties questioned this move as they would be seen as aiding the evils that plagued our society. As the days progressed the practical realities hit home. Banks and ATM's started running out of cash, people started complaining about the need to endure long lines to get money, news reports showed the impact on small businesses and cash based merchants. The government and the RBI announced a slew of measures to counter the realities. Rules were introduced, changed, revoked every single day. As the end of the year approached, it became clear that the challenges would last for more than the 50 day period. The opposition parties started to hound the ruling party holding it responsible for the manner in which the whole process was handed. The ruling party and its supporters blamed the opposition for raking up anti national sentiments and for not supporting the noble cause.

While I do understand that such a large scale undertaking would definitely throw up challenges, I was mildly shocked by certain media reports that highlighted the problems common man had to face especially in the rural areas. As I started talking about the demonetization process with my friends I realized that people were really divided about the benefits, and the picture was not as rosy as the ruling party was trying to project. I tried to understand the numbers that ratified the decision and wanted to understand if this was all worth it. I do have to admit I am neither a economist nor a social policy maker, but I do believe my education and work experiences have taught me enough to put trust in my critical thinking ability. I am not anti-National, and i do want to see corruption free India. I am also ready to suffer long lines for the greater good but please do help me get answers to a few questions I have.

Fight Counterfeit Currency and Sponsored Terrorism:

It is generally accepted in India that most terrorist activities that happen in India are initiated by folks outside the border. The 500 and 1000 rupee note were apparently the most commonly counterfeited and used by anti-social elements to spread the reach of evil. I do not have any information to counter this claim so I will accept this on the word of our PM and national security adviser. It is true by making the (Specified Bank Notes) SBN invalid, we did cripple their financial resources. But unless major security features were introduced in the newer currency, what stops these hoodlums from resorting to counterfeiting again? Would stringer IT audits, and enhanced scrutiny on all financial transactions not help address this problem? 

Fight Black Money and Corruption

One of the major talking points in the news media and social media circles when the PM took oath in 2014 was his stance against corruption. People voted the UPA regime out after numerous reports of scams (2G, Coal, Augusta Westerland, etc.). The PM represented an incorruptible image and does lead a lifestyle that a common man loves to see in a leader. So it should be no surprise when he calls out corruption as one of the major problems that plagues India today. The Income Tax department has published the details of the returns processed for the year 2014-2015. The reports indicate that only 3.65 Crore of the 1.25 Billion Indians have filed tax returns for the year. That is a meagre 3%, so in theory the rest are potential black money hoarders. But taking in account the Indian economic pyramid, and the stats provided by department of labor (surveys- Ref Table 2.4) only about 20% of the population earn income for their households, and from the same paper the number of people performing agriculture based jobs is pegged at 49%. The agriculture based jobs have heavy tax rebates, and for all practical purposes cannot be considered as black money hoarders. (Ref Farmer suicides, news about failed crops). These numbers do indicate that there could be a number of workers who have earned income yet not reported income or paid taxes. Table 1.2 Range of salary income shows that roughly 50 Lakh people have declared an income over 5 Lakhs and hence are liable to pay tax. That makes it 0.5% of the population. The largest black money hoarders would probably be the ones who are in the system and enjoy the loopholes in the law rather than the remote few who are yet to be in the system. The tax payable for the 2014-2015 year was 4.5 Lakh crores, so unless the demonetization move causes the reported number to increase drastically the whole exercise might not be as successful as one thinks.

Another factor that indicates problems with this argument is the number of SBN currency notes returned to the RBI. As per the RBI report around 16.9 Lakh crores worth currency was in circulation as of November 2016 and 86% of the currency was in the SBN denomination. That represents about 14.8 Lakh crores. While RBI has not yet officially announced how much currency has been turned in, there have been unconfirmed media reports that put the figure at 15.2 Lakh crores. If this was true, then the amount of money returned to the RBI is only slightly more than what the  RBI states was in circulation before. The same report does state that only 60% of the currency was in banks, and considering the amount of Indians who do not have a bank account, the amount recovered is truly low. Where are the crores and the lakhs of Black Money that we were all expecting to be turned in? Yes there reports of raids in multiple places, news reports of currency recovered, but none of them were the magical figures that were predicted. Again, while I don’t think India does not have black money but I do know now for sure that it was not stashed under mattresses or roof top tiles as films show.

Cashless Economy and Digital India

India is primarily a cash based economy. Even in urban India where food worlds, more and reliance markets have plopped up, the store at the street corner always seem to do brisk business. Markets (Sandhai, Farmers Markets) play a pivotal role in the economic model of India. The prices are low, and more often not there is minimal operating cost involved and households buy things as required on a Day to Day basis. This is evidently proven by the currency in circulation. The RBI report does state that 14.8 Lakh crores was the worth of currency in SBN as of November 2016. So the Demonetization move meant that the RBI should have looked to replenish the currency in circulation with other denomination notes at the earliest. It would have been highly illogical for anyone to make up the 86% cash by printing lower denomination notes (100's or even 500s) within the specified timeline (50 days from the start) so the focus was to look to print 2000 rupee notes to make up the worth. This would probably explain as why banks were not able to provide for lower denomination alternatives when people turned up in troves for exchanging old notes. Example( A bank in Tamil Nadu received 1.6 Crore worth money from RBI for the demonetization. 1 crore was in the 2000 Rupee denomination the remaining 6 Lakhs were in the lower denomination notes). The fact that the SBN represented 86% of the currency in circulation does indicate that these notes were the preferred instruments for all cash based trade in India. The lack of lower denomination notes directly influenced reduced spending as consumers started either buying things in bulk or started buying from stores where they could use their credit cards. A family member had to close her shop for a few days as she did not have enough lower denomination notes to run her business. These small time merchants seem to be the ones worst affected by the move not the supposedly multi millionaire tax scammers or black money hoarders. The cash in circulation number reported by the RBI dropped by 48% since March 2016. Thereby truly defining a cash-less economy.

The government advocated the people to  embrace electronic transfers, e-Payments, e-wallets, digital transactions and has been trying to promote the Image of a digital India. Sure, several western countries have developed a digital system that minimizes the use of cash in day to day life. In the US, I do use my credit card at grocery stores, parks, movie rental boxes, shopping centers and even parking lots. It is extremely convenient, carries no service charge, helps me track all my transactions and makes me less worried about being mugged. The country has laws in place for data privacy and the banks systems are geared to detect frauds and cyber security attacks. True none of the systems in place are 100% fool proof, but the point is there is a lot of systems in place that helps or promotes cashless transactions. In India, definitely the past few years has seen a spurt in the usage reports of online payments and e-wallets, but these still remain confined to the cities and the private national banks. Co-operative banks, public sector banks still have miles to go before they enable digital transactions for all customers. The service charge on these digital transactions (2%) do not really help as well. The small time merchants I described earlier can afford to offer low prices because of their low operation costs and day to day transactions. Are we expecting them to up their investment and move to a digital system? Are the banks built to allow the same flexibility the cash based system allows? If not we just brought their livelihood to a halt. I think it is great the government has come up with payment modes such as BHIM and UPI, it is a bit concerning to see how government advocating third party systems such as PayTM and Jio Money. Unless there are at least clearly defined laws on the nature of data they can access and minimal rules in place that protect the interest of the consumer it would be extremely difficult to get a majority of the population to trust in these systems.

The System

A new narrative that has been gaining traction is that now the cash is all back in the system the government can put in good use of the money. That is the most absurd thing that I have ever heard, the money deposited in the banks are the people's (exchanged for other denomination notes). The money was already in the system, because the source of the money is known, it was just that the money was not deposited in a bank account. Surely, a little bit of common sense will help see the difference. How can the government claim this for their use? The SBN were declared invalid as a financial instrument so how or what would these notes be used for? Banks are seen as custodians of wealth. They don’t own my money. My deposits in the banks are mine and the banks are liable to give me back the deposits when I want them. How or what gives a democratic elected government the right to set limits on the money I can withdraw from my own account? Is there any draconian law that allows them to do this?

It must be the left-liberal in me that makes me question the oppression of liberty and stand up for others. While I try to defend actions with numbers and logic, people can throw my arguments to sink just based on pure emotion. While emotion is not bad it can sufficiently cloud your thought to be biased (True for me as well!) I do wish I find the strength and patience to help others see reason, but in the mean time if you think of me as the struggling liberal so be it.