Demonetisation And The Common People


India saw a late evening announcement on the 8th of November, 2016; by Prime Minister Mr. Narendra Modi, declaring ‘five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016.’

India is world’s 3rd biggest economy and Asia’s second biggest, in purchasing power (2015) at $7.98 trillion; whereas in nominal GDP, it is the 7th largest, at $2.07 trillion. To support this GDP, India’s Central Bank, The RBI has a bank note cash circulation of roughly $245 billion, out of which around 86% was in the highest two bank note denominations, that is Rs. five hundred ($7.5)and Rs. one thousand currencies ($15, excluding the new Rs. 2000, March 2016 figure).

This announcement of the government surely took most Indian citizens by surprise, although allegations of such a move being selectively leaked out also appear in India’s media and political malarkey. Indian elections have always been more about notes and caste, and key Indian states, including biggest Indian state by population, Uttar Pradesh, is due to go through assembly election in the initial months of 2017; therefore many in the media and the political circle see the move as a political move.

India’s cash-intensityin the economy – as measured by the ratio of currency to the nominal GDP, at 12% is significantly higher than Brazil (4.1%), Russia (11.9%) or Mexico (5.7%). This is natural, at around $1600 per capita income (nominal, 2015) – India has much lower per capita income, less than one-fifth of the second lowest in the peer basket of Brazil ($8538). India is at a much lower socio-economic development cycle compared to the other three peers.

A 2012 study showed cash transactions in India to be 86.6% of total transactions, reducing from 90.6% in 2007.Estimates presently vary from 68%to even 90%(my bias would be closer to the latter).

Justification and post-implementationchaos

Three key justifications have been primarily highlighted on 8th November: (1) Curb against what popularly is known as ‘black money’, (2) curb against fake currencies and finally, (3) within the 2nd set, more critically, part of which is used for terror financing. Black money, in a broader inclusive sense means, income not obtained through legal means and/or income not declared for tax purposes.

Estimates of black money (or the parallel economy that runs on black money) varies widely. Existence of a large informal economy as well as sectors of the economy like agriculture (example is those sustaining only on informal or unorganized sector. On top of it agriculture income, irrespective of the amount, is not taxed in India) at times makes the distinction difficult. Estimates of India’s parallel economy therefore varies from 25% to 75% of its recorded GDP. Estimates of the informal economy, on the other hand, is estimated to be around half of the GDP (this figure may vary substantially, 30% here), and employs nearly 85% of Indian population (this is more reliable).

The need for demonetising existing high valued currencies that are Rs. 500 and Rs. 1000 denominations, or the older ones within that basket, were time and again reviewed as these high denomination notes, as anywhere else in the world, have been used more frequently as fake currencies to terrorist financing;  but fearing massive abruption, no such abrupt decision was recommended in past reviews prior to 8th November.

Those who understand how markets operate, and the reach and effectiveness of the government in a country like India could foresee the unfolding crisis, but much of government basked in the glory of the decision, ferrying again and again how historical and revolutionary the decision is.

Best estimates of fake currencies (terror financing or otherwise) indicate a figure of Rs. 400 crores, hardly 2-3% of value currencies of higher denomination. And as new currencies neither ban higher value currencies (rather opposite by introducing Rs. 2000 currency), nor has any better security feature, this benefit – whatever small being a periodic clean up, is insignificant. The cost to clean-up Rs. 400 crores may be more than Rs. 12000 crores, so simply does not make economic sense, or even common sense!

The ill-preparedness of the government is also visible as of now, possible on account of need to maintain secrecy, from the RBI website’s repeated revisions, to featuring old bank notes (as of 11:16am on 14th November) and no mention of new Rs. 2000 notes. Even the basic logistical issues, like reconfiguring more than two-hundred thousands of Any Time Machines (ATMs), to how to cater to rural agricultural folks through cooperative banks have not been adequately planned.

As of 15th November, 25 people died directly due to this currency-chaos, and this statement alone may be an understatement of the suffering hundreds of millions of common people, mostly from marginalized sections has been going through since 8th November.Trickledown effect naturally ensures that the poor, more so those in the rural places, will get the new currencies, in general, the last – following the stipulated policies, and therefore continues to suffer the most. India’s apex court, while refusing to intervene in government’s economic policy, nevertheless asked the government to mitigate the sufferings of the common man.

Global media (Reuters, the New York TimesFinancial Times and alike) have been reporting on the pains and sufferings faced by common citizens, whereas Indian local media, more so the omnipresent TV news media have been presenting the bold move for better days ahead, and the difference in the reporting style may not be purely accidental.

IMF andEUhave welcomed the move whereas economists, with first hand understanding of the menaces, like India’s former central bank governor and chief economist of IMF, Dr.RaghuramRajanand World Bank’s Chief Economist and former Chief Economic Adviser of Government of India, Dr. Kaushik Basu have expressed their reservations on the demonetisation drive.

Effectiveness of demonetisation in curbing the black money in economy

No elected government or political party anywhere prefer to say or do anythingthat adversely impacts the working class, and the poorer section of the society, more so in a country like India with world’s highest population of poor people. India has around 20% or moreof its people in the category of under the poverty line, and the figure could be around 70% of the equivalent number in Africa.

Researchers in any socioeconomic divide know this golden rule: ‘Reaching the poorest of the poor was (is) going to be the most difficult of challenges.As expected and as natural, since 8th November, a huge degree of crisis has engulfed the nation, the degree of visible suffering proportional to one being closure to that ‘poorest of the poor’.

How much of individual wealth is in cash?

  1. What are the different estimates of total individual private wealth in India? As per New World Wealth (2016), it is estimated to be around $5600 billion. This includes market value of all of that each citizen/household possesses – including land, home, gold, stocks, bonds, bank balance, cash, etc.
  2. How much is cash in it? Roughly $250-$260 billion
  3. How much of that cash is in currencies of Rs. 500 and in Rs. 1000 currencies: Roughly 86.4%, meaning around $220 billion.
  4. How much of the individual average private wealth is held in high denomination currencies? Around 4%.

Above would indicate that black money, so to speak, is not necessarily in ‘cash’; acknowledging the importance of cash in lubricating the economic wheel. Tax raids from 2012-13 prove above this point, as only 6% of the undisclosed income is accounted by cash as per government’s own tax authorities. It is estimated that without cash component of black money, real estate prices may drop substantially over the time. But all of these were possible without demonetisation that affects almost every citizens, as illegal cash money in real estate or other asset classes may be used by 1% or so of the populace.

Records of Indian governments, current (before demonetisation) or those in the past, have not shown any consistent seriousness in dealing with the ‘big fishes’.

Financial inclusion means user behaviour/skills too:

A review at the financial inclusion data, not only the access or the affordability sides, but the skill-gap too becomes vitally necessary in the present context.

This is relevant because back in January, 2014; ruling party in government now opposed same demonetisation. Since then Pradhan Mantri Jan-DhanYojana (PMJDY) did something that should have been done long back, a huge financial inclusion program to bring the populace that has so far not been covered under formal banking network.

PMJDY surely has been a commendable step, but has it indeed changed the habit of people’s usage of plastic money or even visiting the bank/ATM? Are those accounts operational in the basic sense, and is the economy indeed getting cashless for those having PMJDY accounts, other than being only numbers? These become the critical questions.

Let’s look at three data points:

  1. ATM transactions in July’16: Rs. 219165 crores(one crore = 10 million)
  2. ATM Transaction in Jan’2014: 172231 crores
  3. ATM transactions in July 2011 Rs. 112743 crores 

Which suggests that although there has been a huge success in number debit cards issued between January-2014-July’2016 (83%), the user behaviour (cashless economy) growth has slowed down significantly, at 27% during 2014-2016 (two-and-a-half years) from 35% during 2011-14 (corresponding two-and-a-half years before that).

Changing user behaviour is not easy! A daily-wage earner, if s/he spends a day at a bank, misses his/her daily wage. Using ATM needs some skills – many in India still do not feel comfortable with debit cards, or in ATM machines, as they do with mobile, neither the ecosystem, although improving, is far from being supportive from the access point.

Above indicates the sufferings since 8th November for this section is likely to multiply, because the bottom of the pyramid has simply not yet been covered under operational financial inclusion. It is also to be acknowledged that no credible data since census 2011 probably exist on household-level financial inclusion. Back in 2011, 67% of urban households and 54% rural households were formally covered within financial inclusion, not necessarily operationally covered; and some of these capacity building exercises do not happen overnight.

The only long term huge benefit from the demonetisation drive, and the way it is being implemented through a massive shock therapy to the poor, rational thinkers may probably see that pushing people to the extreme so thatthey start using cards/banks – else suffer, may work to an extent, with natural and market-forces driven misuses too. This capacity building should have been done long back, gradually. It is akin to throwing one in deep water without formal swimming lessons to actually help them to learn swimming. Those who could, with plastic money or otherwise, reaches the shore safely.

Any socioeconomic ‘divide’, as per academic literature (rich-poor, educated-not educated, etc), be it digital divide, or plastic-cash divide, has three key root causes: affordability, accessibility and skill level. Presently, affordability is not much of an issue; accessibility (and supporting eco-system) has been improving but need to improve a lot more, constraint is in developing skills. Skill building isn’t easy until financial inclusion really becomes beneficial, so that the poorest of the poor can borrow money from banks and not from moneylenders at exorbitant rates, it has to have some real incentives for the marginalized sections as mobiles offer.

The only other notable impact, even if a single poor man fails to return a single old note (aand many would) due to lack of skill or access and not it being fake or black money, is in the liability side of the central bank’s balance-sheet; however – that is purely economics. Certain broking houses have put the figure of the high denomination bank note cash that may fail to return to the formal banking system at $48 – $80 billion, 10-15% of RBI’s liabilities. Health of India’s NPA-heavy public sector banks may also improve as deposits grow; however – justifying the huge pain of the common man to for these possible marginal and indirect premature benefits probably is improper.

Barring above, rest all are nothing but noise, and spin. But the noises have been ruling at this moment. As India’s social media debates on how people should use online payment services, others bring analogy to Marie Antoinette (“If they don’t have bread, they should eat cake.”). Reuters reported, on 14th November, that demonetisation and the resulting chaos as of now can be the make or break moment for the Modi-administration, the situation on the ground remains fluid. Cash-heavy and critical road transport sector has been affected, naturally. Possible slowdown of the economy is also anticipated.

India’s divided opposition also makes an attempt to highlight sufferings of the common citizen in a unified manner in the Parliament Session that opens on 16rh November, and suggests a more humane approach to achieve the same end goal as effectiveness of what’s happening now remains questionable.

Until stability returns, speculations on why demonetisation happened, what next and who the adviser to the PM is would rule the nation.

Prof Ranjit Goswami is the vice-chancellor of RK University, India

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