The Devil is in The Details
Truths & Fallacies of Demonetisation
Straight off, let me tell you, this article will be neither short nor sweet.
It won’t be terribly opinionated either, unlike the 8000 previous demonetisation pieces you’ve already devoured.
Newsflash: We live in a ‘post-truth’ world. Logic and evidence, like the old 500 & 1000 notes, are relics of the past. Debate and argument, apart from being shouting matches, are reduced to a simple clash between two narratives — of two value systems.
Media-savvy governments control the power to shape our discourse. You could argue they’ve always had it. Melodrama and political rhetoric are their weapons of choice; and when rolled out smoothly by an obsequious news-media, we the sheeple lap up any story that’s been dished out. Or at least most of us do.
Before the conspiratorial tone starts to freak you out let me get to the point.
No matter how polarized narratives & opinions get, numbers do not lie.
“Everyone is entitled to their own opinions, but they are not entitled to their own facts”
This quote keeps popping up nowadays. Its relevance in our current situation cannot be emphasised enough. And it is the raison d’être behind this entire piece.
The following article brings you the truth as told by the numbers.
It is a study of the fine print beneath the theatrics of demonetisation; a single repository of the facts & figures, real not alternative. The answers to your many questions are below. And a few perspectives that might help you see the larger picture.
P.S If you appreciate this article, do share & recommend. Happy reading!
Rarely in the history of a nation does an event as sensational as the sudden demonetisation of 86% of all currency, take place. In fact, you could say it is unique in world history. A bold masterstroke!
Since then, countless opinions have been voiced and much mud has been slung about. Even respectable economists have lost their usual restraint & indiscriminately thrown about estimates and pronouncements — much of which have landed wildly off the mark.
But now, two months after the momentous decision, it looks like the dust has settled and we have a relatively clear idea about what went down, and what didn’t.
The never-ending lines are gone, at least in the cities. This topic isn't a trending anymore, we’ve moved to the next and more pressing outrage.
Okay, so has demonetisation worked? Is it a good thing or a bad thing?
Well, if you could just shut your Facebook & Twitter tabs, pour yourself a drink perhaps, and let’s go through the nitty-gritties of this entire business.
Basically, as with most things politicians do — nothing is quite what it seems. There are a bunch of yuuuge factors at play here, which most of us have no goddamned idea about.
Throughout this article, we’ll be dealing with all kinds of large numbers in lakhs, crores, million & trillions & everything in between. To help with quick conversion, here’s a ready reckoner for reference.
Before we begin, what exactly is Black Money? How is it made?
If you’re looking for a short and simple definition, it is
‘any income from financial transactions, legal or otherwise, that the state did not get its rightful share of taxes from’
The point to keep in mind is, black money is not a static object, it is a flow. Currency, as in cash, is simply a medium for its transfer. The same commodity, whether cash, gold, property. etc, can be held either as black money or white.
The only factor which decides its legal status, or should we say colour, is whether the current owner has declared it and paid tax on it, or not.
This benign anecdote might provide some clarity.
Okay, so exactly how much Black Money is there floating about?
No one really knows. From the earlier narration, it is evident that one can't exactly put a number to it. During demonetisation, the current govt. had assumed that the total cash stash of black money was up to a third of the total 15 lakh crores of high-denomination notes (HDN).
The next point to note, comes from this White Paper on Black Money — demanded by the BJP back in 2012 and published by the Ministry of Finance (led by Pranab Mukherjee at the time). It said “demonetisation may not be a solution for tackling black money or economy, which is largely held in the form of benami properties, bullion and jewellery”. The rest laundered overseas through well-established hawala channels and now sitting comfortably in overseas bank accounts, shell companies, etc.
Only 5–6% of black money assets are stored in cash.
This figure is backed up by income tax raids from 2006 to 2012 [chart below], which found that hard cash, as a proportion of black money assets seized or uncovered, amounted to between 4%-7%.
Point being, rather than put the entire nation through such a churn, it would have been far more productive to go after the 95% of black money that is not in cash, and held by just a few million people at most. Whatever amount is captured after demonetisation, it will be loose change compared to what could be recovered using better-aimed ‘surgical strikes’.
Alright, we’ve been told that our ‘shadow economy’ is really large? And that its immense size was clouding our growth prospects?
In all countries around the world, there exists, what is referred to as the ‘shadow economy’ — defined as financial activity not reported to the authorities. In India, as in other poor nations, this shadow economy coincides with the informal sector which employs 93% of our workforce. Here organisations or individuals are too small or too poor to keep books of accounts and report the same to the govt. every year.
A 2010 World Bank estimate says India’s shadow economy was 23.2% of the GDP. Other studies have similar numbers. Let’s say it’s 25%.
Comparatively, is that a high number?
Not really. Most developed countries in the west have figures between 10–20%. Our developing-nation peers fare worse than us. China is an outlier at 15%, mainly due to its 45% industrial centrally-regulated economy. Whereas Japan, with a small 12% shadow economy has the highest Cash to GDP ratio in the world at 22%.
So was India ‘reeling under the menace of corruption’ or not?
Probably not. Corruption, as in dishonesty, is part of human nature — it exists in every country. Its scope and extent is larger in poorer countries where government officials wield inappropriate amounts of arbitrary power, and checks & balances are few and far between.
Now, this is where things start to get interesting.
According to a report on black money by the Central Board of Direct Taxes, ‘Measures to Tackle Black Money in India and Abroad’ (2012), the main method for generation of black money in India is through commercial tax evasion. Read: easy to trace & prosecute.
A range of business entities hailing primarily from the petroleum, mining and related sectors under-report revenues and inflate expenses in order to hide enormous chunks of income. This further explains why countries rich in natural resources such as Russia, Nigeria and Brazil have such enormous shadow economies.
What this means is that more than individuals, it is the supposedly bona fide, large multi-national companies that create the bulk of black money through ingenious methods — the likes of which are elaborated upon in this Times of India article.
A Quick Guide to Round-Tripping of Foreign Direct Investment (FDI)?
Everyone knows what FDI is, right? It’s the key to the booming Indian stock market. At $40 billion, or almost Rs. 3 lakh crores, in FY 2015–2016, it would be most interesting to know just how much of it is powered by black money.
How black money is laundered abroad & brought back ‘white-washed’
Using methods like the infamous Hawala route, large amounts of Black Money are sent abroad. This wealth is then parked in shell companies in various tax havens such as Switzerland, Panama & its neighbours, and the Indian favourites — Singapore and Mauritius, which together account for well over half the (FDI) in India.
So basically the big players in the black money racket comfortably use these routes to funnel out cash. At the same time, ‘whitewashed’ black money plays an important roundabout role in sustaining the Indian stock market and thereby the formal business sector.
Takeaway: Erase those ideas of sackfuls of dirty cash. The lion’s share of black money constantly flows in and out through easily traceable routes.
You’re telling me that the rich don’t need to use sleeping tablets?!
“The sleepless are those who need cash to get by; the truly rich are laughing all the way to their flats in London.” — The Economist, Dec 3rd 2016.
One has to be stunningly callous or borderline delusional to believe that the poor are sleeping peacefully and the corrupt rich are the ones suffering. Anyone with a basic knowledge of ground-realities knows just how easy it was to exchange old notes for new, at a loss of 10–20% commission.
Say, you own 100 Cr. of wealth today — of that 5 Cr. is in cash. Tomorrow, after demonetisation you lose 1 Cr. during conversion. Would you be suffering? With 99 Cr. still in your kitty, suffering is definitely not your current state of affairs. On the other hand, the 150 million daily-wage labourers whose lives & livelihoods have been threatened by this exercise — who barely eke out an existence with no safety net whatsoever; are the ones who really suffer.
Only ‘retail (low-level) corruption’ requires cash. High-level corruption can be electronic, or involve transactions in kind, and/or take place off-shore. — Barbara Harriss-White. The Wire, 25.01.17
Let’s examine historical ground-breaking corruption scams such as the Bofors pay-offs or the recent AgustaWestland case, or the intriguing De La Rue scandal (brought to light by the Panama papers — which reads like its straight out of a Bond movie) where the British currency manufacturer paid lobbyists in order to bag RBI contracts.
The common feature is that there was no cash element to the bribes and beneficiaries were allegedly paid off in foreign currency through overseas bank accounts.
However, India has recently taken one step forward in this respect and amended its tax treaties with Singapore, Mauritius and Cyprus in 2016. Tightening the noose around tax havens is a vital measure in reducing black money laundering and round-tripping.
So how do we stop the generation of black money?
While the demonetisation of 86% of currency might have laudable aims, or claims, it does nothing towards stopping the ebb and flow of this illicit wealth. To get serious about cracking down on large-scale corruption and the embezzlement of resources, governments (read: political parties) need to extricate themselves from their dependency on corporate funding — a subject we shall elaborate on later.
Meanwhile, everyday bribery and corruption can be stopped only by modernizing and streamlining the outdated Kafkaesque mechanisms of government. Our bureaucracy, judiciary and police forces are massively flawed institutions which function as the very drivers of corruption.
And nobody is batting a freakin’ eyelid about it!
If any government is sincere about recovering black money, the first and most effective place to begin is the Income Tax department of India. This most vital cog in the war against corruption and black money is brazenly extortionate, incompetent (when required) and woefully understaffed. They are the ones who turn a blind eye to — or often coerce — businesses into fudging their books of accounts and in return, paying a rather hefty hafta.
Currently the Income Tax dept. has a capacity to process 6–700,000 cases annually. Post-demonetisation during analysis, if even just one per cent of the total 400 million bank accounts are red-flagged as “suspicious” by the I-T dept., they will have to process ten times the number of cases they do annually.
To get an idea of just how bad the situation is, do flick through the report linked above. Just read the tables. That’ll be enough.
Studying at the table, it is apparent that their capacity to recover dues and prosecute cases of tax-evasion is lamentable. In a country of 10 million tax-filers, whose economy was seemingly threatened by ‘black-money hoarders’ we find that prosecution is launched in less than a thousand cases every year!
Whereas 96%, or 6.7 lakh crores, of their overall demand (from tax-evaders) has been flagged as difficult to recover. Just to put that figure in perspective — it is almost one half of all the cash that was demonetised.
Besides tax-reform, what India desperately needs are systemic reforms to restrict the flow of black money. Our political system thrives on wads of tainted cash to pay cadres, fund polls and advertise. The only way to end this nexus is to make fund collection and spending by political parties completely transparent.
Sounds great! But could you tell me why my halfwit uncle keeps jumping up and down saying he’s going to get 15 lakhs now?
He’s probably been watching too much Times Now for his own good. But besides that, in early 2014, Narendra Modi put the black money issue onto front pages by campaigning with the promise that — if he was elected, he would within 100 days bring back all the black money looted from India and stashed abroad. And then he would go on to deposit the aforementioned amount into every account.
As you would expect, large numbers of the desperate, yet hopeful masses, eagerly lapped this up; and we all know what happened next, at the elections.
What about terror funding — has Demonetisation landed ‘one hard slap’ on these terrorists, or what!
To be certain, counterfeiters in Pakistan or wherever else are putting in orders for new machines as we speak. Demonetisation has undoubtedly been quite the headache for them.
However, after taking a good look at the new monopoly-money type 2000 & 500 Rupee notes — which bleed ink, are often printed without the Gandhi image, and most importantly have no additional security features — it would be safe to assume that with a little re-configuration of their minting templates those Pakistani factories will be back to business as usual.
And no, no matter what Zee News and numerous emoji-heavy Whatsapp forwards might tell you, the 2000 notes are not GPS-enabled nano-tech wonders. I think it’s alright if this assertion is not referenced.
Hate to break the bad news, but cross-border terrorism is alas not financed using petty gains made from counterfeiting. It is bankrolled by the Pakistani government, using a good chunk of the almost One Billion USD it receives from the American establishment every year. Don’t believe me? Here, follow these links.
As a measure against terrorism, drug-trafficking, and other criminal goings-on, the impact of demonetisation is analogous to a tyre puncture — stop the vehicle, take out the spare, if that’s not working, take the tyre to closest puncher shop (never too far), get it fixed, shell out a few hundred, and get back on the road.
So, how big a threat is counterfeit currency to the Indian economy?
These the RBI figures below present us with really tiny number — somewhere around 0.000025% or 1 in every 40,000 notes were fake. Not exactly what you’d call a threat. There’s a far greater chance of you being run over on the streets then encountering a fake note.
There are two ways through which Fake Indian Currency Notes (FICN) is weeded out of the system — one is detection by banks when deposits are made; the other is through police-led seizures. The tables below, show that approximately, 75 Cr. of FICN are detected or uncovered each year.
Then there’s this joint study — commissioned by the ministry of home affairs and conducted by the ISI in 2016 under the supervision of the National Investigation Agency (NIA) — which states that the face value of FICN in circulation (at any given time) was found to be around Rs. 400 crore — a value that they claim has remained constant of the last 4 years.
Now, that figure isn’t really backed up with hard stats, but nonetheless it now takes the FICN figure to — 1 in every 4000 notes. What does that look like?
But the point here is not whether Fake notes constitute 0.000025% or 0.0025% or even 0.025%. Demonetisation of old notes and the re-printing of new low-quality ones, does precious little to stop the continuation of this currency racket.
Also, do remember the mere cost of re-printing & distributing 22.4 Billion new notes is a whopping Rs. 16,000 crores, or 400 times the largest estimate of FICN.
The counterfeit currency argument just doesn’t hold.
The only actions that make a difference in combatting FICN are
- Greater vigilance and securitising the border with barbed wire fences at known junctions where petty smuggling takes place — N-E & Nepal border.
- Introduce more machines and implement regular checks and ensure all banks weed out FICN— it seems, currently only three banks — Axis, HDFC and ICICI, report about 80% of fake currency detected.
- Introduction of Polymer notes — cleaner and last up to 5 times as long as paper notes. Most importantly, they are virtually impossible to duplicate. This opportunity could have been used to make the switch to a technology which is fast-becoming the norm in most developed countries. India could also have become a producing hub and exporter of these polymer notes.
- Complete self-sufficiency in printing currency. This includes paper, ink, machines and any other raw materials — if the RBI continues to import paper and security ink from the same foreign companies as Pakistan does, then the new notes will remain as vulnerable to counterfeiting as the older ones.
In his initial speech on 8th November, our current PM Narendra Modi mentioned ‘black money’ 18 times without a single mention of a ‘cashless economy’. However, in two speeches that he gave on 27th November, he mentioned “cashless” and/or “digital” 24 times, whereas ‘black money’ came in only 9 times. Some Cake for thought.
To be able to make cashless payments, the first requirement is a banking account of some sort. Then comes the internet & mobile phone bit, which we’ll come to later.
In India, banking is still a luxury for the vast majority hovering around the poverty line. Data also reveals that there is one bank for 9,500 Indians. 33% of branches are located in just 60 Tier-I & II cities. The rest of the country is mostly serviced by informal banks & neighbourhood money lenders.
Let’s start by trying to understand why exactly so many are still unbanked.
Rural India, where 840 million Indians or 68% of the population live, is still hopelessly poor; and mostly illiterate. Thereby failing in the two vital qualifiers required for banking.
How bad is it?
75% of rural India survives on Rs. 33 per day and are literacy levels are deplorable. A third are completely illiterate and barely have two square meals a day, and going by various surveys, at least two-thirds of rural households still do not have toilets. Yes, of course this is all the Congress’ fault, what isn’t!
As the rows 4 & 14 above tell us, almost half our population live their entire lives in debt. They earn their living on a daily or weekly basis, and almost immediately spend it on subsistence needs — food, shelter, clothing, and depending on the gender of their offspring, education or marriage.
Forget saving, their primary need is to borrow money. And banks, as we well know, do not lend to those without collateral. Hence, the inescapable need for the usurious money-lender.
The majority of rural dwellers still live too far from bank branches & ATMs. Effective use of bank accounts is not a viable proposition for them. It is pointless to place money in a bank if the system does not provide you with the infrastructure to withdraw it at will and with ease.
In this article, Business Standard takes a look at some of these factors to give an idea of the state of India’s financial inclusion and how the country fares globally.
Official data shows that only 27 percent of villages in India have a bank within a 5 km radius. And in rural India, travelling 5 km up and down is neither affordable, nor quick. Roads are bad, buses are scarce, and pedaling it on cycles or cycle-vans can take up half a day.
For the urban poor also, banks are rarely an attractive or feasible solution. They work from 6 am till 6pm, or even later. Most banks are open only from ~10 am till ~4 pm. Besides, public-sector bank clerks are discouragingly rude to them, and being illiterate they are reliant on strangers for each transaction.
What about the PM Jan Dhan Yojana and all that? Didn’t the govt. just conduct a massive drive & enter the Guinness book of world records?
Yes they did, and the numbers are impressive — as on November 9th, there were a whopping 25.78 crore (257.8 million) bank accounts, with an accumulated balance of Rs 45,636.61 crore. This works out to around Rs. 1,800 per account.
However, half of these accounts have been found to be either ‘zero-balance’ accounts or those where bank officials, under pressure from above, have been putting tiny amounts of money (1–10 rupees) to mask their dormancy.
Indeed, as per RTI information provided, the number of zero-balance accounts have fallen sharply — from 76% in September 2014 to almost 46% in August 2015, then a steady fall to 24.35% on August 31, 2016 — primarily because of this one-rupee-trick.
So, why did they open these accounts if they didn’t plan to use them?
Most of these accounts were opened in bulk during the PMJDY drives in 2014–15, by coaxing the masses with various promises and incentives such as a RuPay Debit card for every account holder, an inbuilt accident insurance cover of Rs 1 lakh and life insurance cover of Rs 30,000. Besides, the scheme also envisaged channelling all government benefits to the beneficiaries’ accounts. The scope of the scheme was later expanded to offer other products too.
“Our preliminary estimation shows that around 25% of accounts are repeat or multiple accounts opened by people already holding accounts in different banks,” GS Sandhu, Secretary (Financial Services) Ministry of Finance, September, 2014 — Scroll.in, Sep 13th, 2016.
Every zero-balance account cost a bank an average Rs 140 a year to maintain.
The ground reality is that a small percentage of these accounts are effectively being used. On the other hand, bank officials are regularly hounded by PMJDY customers who impatiently want to know when ‘their money’ — the imagined or promised incentives and subsidies — is going to be put in their Jan Dhan account.
Besides all of these problems, there are still just too few bank branches & ATMs in rural India — approx. 5 ATMs per 1 lakh people. 850 million people reside in 640,000 villages in India, that works out to…
1 ATM per 16 villages
1 ATM per 20,000 people
1 bank branch per 12 villages
1 branch per 16,000 people
And then we wonder why they don’t use banks more.
What about Banking correspondents — aren’t they our new saviours?
Under the PMJDY there are 32,481 branches and 126,592 agents or bank mitras/correspondents. This brings this figure of unbanked rural villages down to, the still huge, 425,000 number. The success of micro-finance institutions (MFIs), such as Bandhan Bank, in reaching rural areas is great news. But as of now, they’re still mere drops in the ocean. Furthermore, starved of HDN, these MFIs have had to suspend much of their operations and many might not survive the demonetisation downturn.
The sad truth is that our rural areas are nowhere close to being adequately banked.
They barely even have basic necessities such as education, roads, electricity, healthcare or even running water — it’s just reckless tomfoolery to be talking about wireless connectivity & smartphones.
Okay, how about our thriving cities? That’s where the real cashless economy is, isn’t it?
As of 30th June 2016, there were 174,694 ATMs in Urban & Semi-Urban centres. This works out to approximately 42 ATMs per 100,000 urban dwellers. Not too bad you’d think. But then, an RBI survey in early 2016 found that a third of ATMs in India don’t work.
Just for perspective, overall figures for the BRICS countries are — Brazil 114, Russia 173, India 18, China 76 and South Africa a density of 69 ATMs per 100,000 adults.
Although there are ~700 million debit cards & 24.5 million credit cards in India, FY16 saw fewer number of POS Debit Card transactions than there are people in India.
Now, think for a minute, how many debit card transactions do you make in a year? 100, 500, 1000, more? I personally have 5 debit cards and most people I know have a similar number — then there are company debit cards.
Point being, in reality it’s just a 100 million people at most, who effectively comprise the entire user-base of debit & credit cards. And that’s where the cashless party ends. Currently, 80% of transactions using bank cards (debit and credit) are, paradoxically, for withdrawing Cash — as this table below shows .
Perhaps the reason for this poor show is that, once again, India has one of the lowest per capita Point of Sale (POS) card-swiping machines. Current data indicates India has some 1.46 Million such machines (most large merchants have 2 or more) which works out to approximately 90-odd terminals per 100,000 people. Even among emerging economies this is very low. Compare this with China 450, and Brazil 3,300 terminals per 100,000 people.
So, why are there such few POS card-swiping terminals?
At the end of the day, it’s the cost factor that acts as a deterrent. Indians are notoriously tight-fisted — with good reason I might add — especially those running small businesses. Setting up a card swiping terminal costs a trader between Rs 4,000 and Rs 8,000 today. Then there are the service charges; termed as the rather harmless-sounding MDR, or Merchant Discount Rate.
The average MDR across the world is between 1–3% . For online merchants, the rate tends to be higher. In India, on every card transaction, merchants pay a fee of around 0.25 — 1% for debit cards. Below are the official rates as per RBI notification.
0.25 per cent for transactions up to Rs 1,000 and 0.5 per cent between Rs 1,000–2,000, the RBI said in a notification. The existing MDR cap is 0.75 per cent for transactions up to Rs 2,000 and 1 per cent for over Rs 2,000. However, there is no RBI cap on MDR on credit card payments.
Mostly, merchants absorb this charge, but sometimes they pass it onto the consumer. This in turn puts off the consumer, and they end up doing the deal with good old cash instead.
But note, all the above is only possible provided the merchant has access to electricity, a working phone line and a reliable internet connection. All of these being relative luxuries anywhere outside metropolitan India.
PayTM! We’ve forgotten about them and all these new e-wallets.
If anybody struck gold with this demonetisation business, it’s PayTM — who till then were running massive losses — Rs. 1,534 Cr. for FY16 — almost 3 times their revenue. Just hours after the Nov. 8th announcement, an utterly ecstatic Vijay Shekhar Sharma appeared on various interviews looking like he was about to break into a gleeful song and dance at any point.
And then the next day, he went on to publish full cover-page ads in numerous newspapers — the likes which will live on in its jingoist infamy.
E-wallets are definitely a great accessory for the financial system to have, but not the panacea that is needed.
Consider these numbers:
India has 930 million active mobile subscribers (not unique — for e.g. in our family of 4, we have 7 connections), according to this November 2016 TRAI report. Of these, 154 million — a mere 16% have broadband connections (3G or 4G).
This data back is backed up by a 2016 survey by Pew Research, which found that 17% — 131 million adult Indians use a smartphone. 7% in low-income families 22% for wealthier ones.
And even amongst those ~130 million consumers, the average page-load time on mobile is 5.5 seconds; compared to 2.6 seconds in China, 4.8 in Brazil, 4.5 in Sri Lanka, 4.9 in Bangladesh and 5.8 in Pakistan.
India is a 96th in terms of download speed and 105th in terms of average bandwidth availability. Oracle Maxymiser, a website optimisation tool, reports a two-second threshold before users stop an online transaction.
Would you wait 6 seconds for a page to load and then go about entering a number or scanning a code, and then wait for confirmation — when within that span of time, you could fish out your wallet, pay the 10 rupees and already have a few sips of your kadak chai.
E-wallets are perfect for transactions such as paying for — cab rides, cigarettes you bummed at work, quicker online checkouts, splitting last night’s bill, returning loans to friends, and of course, receiving cashbacks — not so much for everyday transactions where speed and efficiency is of the essence; those quick buys when you’re in a hurry and so are those waiting in line behind you.
Asking India, that is Bharat, to turn cashless overnight is like putting a few Red Bull stickers on a souped-up Tata Nano and expecting it to race at the Formula One. It’s going to turn into a joke.
What about cyber-security? Rahul Gandhi’s twitter account got hacked recently, didn’t it?
Yeah, now here’s a figure where we rank fairly high. When it comes to cybercrime, India is 6th in the world. The incidence of cybercrime in the country has doubled in just a year. Users and experts alike are worried about growing cybercrime, with almost zero conviction. The Indian IT Act is a toothless overarching law with few provisions for specifics and almost none for cyber attacks.
In Oct. 2016, in the biggest-ever security breach affecting the Indian banking sector, 3.2 Million (32 lakh) debit cards of various public and private sector banks were ‘compromised’ by cyber malware attacks in some ATM systems.
Note: each data breach costs the bank Rs. 3–4,000.
Overall, India also has a record of poor internet security, which is progressively becoming worse — it tops the world in terms of ‘ransomware’ attacks. Ransomware is a type of malware that usurps control of systems preventing users from access — targets include banks & establishments with sensitive, confidential information.
When your wallet is stolen or lost, you stand to lose only the limited amount of cash that was there — cards can’t be used without PINs or OTPs. However, when servers that store our security details are hacked, the entire content of our bank or credit accounts can be emptied in a jiffy, and furthermore we don’t even know about it till much later.
And then there’s the recent business of Aadhar details being shared with Reliance & other such corporations who want to use it. India is unique in the near-absence of legal protection — There’s no specific privacy law in India and nothing to protect data breach.
What about the ‘Cost of Cash’? I’ve heard its ridiculously large.
Over the past few years, studies conducted by think-tanks — bankrolled by a plethora of entities with more than a few vested interests — have shown how the ‘cost of cash’ to the Indian government, is enormous.
To unravel the murky details, do read this series on the ‘War on cash’.
But if we dissect the large numbers quoted above, it is apparent that these costs in fact translate into a innumerable jobs. To create, transport & disperse cash, the government creates gainful employment for lakhs of drivers, security guards, factory workers, bank tellers, what have you — all of these are important white & blue-collar jobs which help in sustaining the formal economy.
On the other hand, charges borne while using ‘cashless’ mechanisms are directly transferred out of the country and into the hands of multinational corporations such as VISA, Mastercard and Citibank — to name a few. There’s an insightful article about it @MediaNama.com which delves into the intricacies of going Cashless in India.
The bigger question here is… is it ethically right, or even financially prudent, for the government to transfer the costs of transactions to small merchants & consumers — which is, what moving from cash to cashless comes down to.
It costs the government ~3 Rupees to print a 1,000 rupee note — 0.3 percent. Every thousand rupee note changes hands hundreds of times in its 3–5 year lifespan. Hence the ‘cost of cash’, comes down to an infinitesimal fraction of a percent.
However, with cashless systems, we are paying 0.25 to 2% (+bank fees & service taxes) for every transaction. That works out to 5–20 rupees as processing charges on each and every transaction (range of Rs. 500–2000).
At the risk of sounding paranoid, I feel I am compelled to say — It’s all a scam!
While not every bold action is a productive one; every action, however messed up, does lead to a few positives. Yes, there a few positive takeaways from DeMo. Let’s break them down one at a time.
Will it cleanse the financial ecosystem of Dirty Cash?
If there’s one undeniable fact, it’s that there’s been way too much dirty cash moving around. The massive real-estate bubble which refuses to burst, and the infestation of gold & jewelry shops across swanky streets are the clearest indicators of all that is wrong with India’s love for dirty cash.
And then, the luxury cars — a most incessant and annoying reminder that a whole bunch of crooks are making hay while the hot sun shines on your tax-paying ass: 35,000 luxury cars at 30+ lakhs each, are being bought every year for last five years. Whereas, according to IT returns, there are just 50–60,000 people earning 25 lakhs or above.
Whatever the government’s true motive(s) for demonetisation might have been, we have to credit them for trying to rein in indiscriminate spending. Since the start of 2016, retailers, primarily from the luxury segment, have had to collect PAN card details for all cash transactions above Rs. 50,000 and for any transaction above Rs. 200,000. Measures such as these — which come at the cost of lower spending, leading to lower tax revenues (import duty, VAT etc.) — have to be appreciated.
But as we all have learnt of late, black money is a flow, not a static object. Old stashes have already been changed for new, and bribes restarted almost immediately.
Until the myriad mechanisms which enable its creation are impeded, this fox-hunt is really not worth the effort — there are too many loopholes in the system which allow an easy escape for the hunted.
But still, it’ll certainly make life difficult for the corrupt…
For the first time the dishonest are losing their money in large numbers. I guess that is a start. And some of that cash is also percolating down as commission for the poor who are converting the old money into new. But the resultant money-laundering is turning a whole host of erstwhile honest people into collaborators — which doesn't make for a bright future.
So, just who are these filthy-rich corrupt bast*rds from whose pain we, the people of the nation, will extract such copious amounts of schadenfreude?
Three distinct groups spring to mind, although their modus operandi, as dictated by the structure Indian socio-political system, makes their relationship a fairly symbiotic one.
- Politician-Builder-Mafia — Local strongmen who have leveraged their position in society (as land-owners, elected representatives, ex-cricketers, or just crime-lords) to shove their grimy fingers in any and every pie lying around.
- Unscrupulous Bureaucrats — the real enablers of the this entire Black Money racket. Our taxes pay their salaries; their jobs are to protect and uphold the laws and form the backbone of our nation. Yet, they take from both rich and poor alike, facilitating the perpetuation of the evil that is corruption.
- Petty-to-large baniya classes — who, with a little help from the previous bunch — have been edging out honest businesses, hiding their incomes and cheating the citizenry of their due.
The fear is, these villainous characters know how to play the system much too well for this current situation to be anything more than the proverbial puncture.
Some of their money will be lost, and there might still be a few potholes in the road ahead. But while one bunch of scoundrels get a little poorer, another lot — hoarders, traders, and racketeers in new currency— are having a field day. As during any prohibition, these pimps & dalals have made a killing on this one.
But now the size of the informal economy will shrink. More people will pay taxes & formal economy will grow — which good for the GDP.
Since all stocks of Hard Cash will have to flow through the banking system, it is certain at least a part of it will be taxed. How much? That’ll depend on the jugaad powers of the Indian public. Considering that almost all the cash is back in the banking system well before time, we should assume that they’ll manage to get most of it out, in time, as well.
Of course, the closer we move towards the long term goal of a more inclusive formal economy, the better it is for the govt. and its financial instruments.
India’s tax to GDP ratio is 16.6 per cent. Around 25% of that comes from Income Tax, the rest through various indirect taxes. That 25% is paid by 5.5% of Indian earners.
Only 5.5% of earners pay tax! How can it be that low?
Well, mainly because the agricultural sector — which employs almost half the working age population & constitutes 25% of the GDP — is non-taxable! Add link.
So basically 42% of Indian earners, no matter how much their income, don’t even have to pay taxes. Also, those who belong to Scheduled Tribes of most parts of N-E India & Ladakh are fully tax-exempt.
But most importantly, if 10% of Indians own 80% of its wealth, is it really surprising that the remaining 90% are too poor to pay taxes? That 5.5% doesn’t seem that ridiculous now.
This should help bring more people into the banking system?
JAM — Jan Dhan, Aadhar and Mobile, are part of a big move by this present government to bring as many Indians into the banking system as possible. If ground-level infrastructure can be rapidly vamped up along with a regular flow of incentives through these apparatus, we should see a large number of the rural poor make the shift. Nonetheless, this will not significantly increase the deposit base as the poorer half of our country own only 3% of its entire wealth. There is… only so much they can bring to the table.
The question here is… will the unbanked illiterate poor — whose first brush with formal banking has been this near-traumatic exercise of demonetisation — now begin banking with renewed gusto, or will it be a case of once bitten, twice shy?
Still, the flood of cash will mean lower rates & more money to lend…
Quite possibly on orders from the government, big public-sector banks have begun to cut lending rates. This is perhaps the one thing you could have made safe bets on right at the start.
Raghuram Rajan had been shouting himself hoarse for a good many months before he left, that banks were simply refusing to lower loan rates proportionately with RBI rate cuts. The fact is that — or rather, the crux of the matter, is — most public-sector banks are sitting on piles of bad loans. They have been, and if I may be a blunt, shit-scared to give any kind of loans lest their bad debts increase. We shall elaborate on this topic soon.
Okay, but this move shows the government is ready to take bold steps to tackle corruption!
True, there is no doubting the seriousness with which the government is going after hoarders of Black Money. Provided the Income Tax department follows through with equal vigour, this should make, at least a few, tax-evaders think twice the next time around. More and more people will choose to come into the formal economy just to play it safe.
However, knowing the smarter-than-average Indian’s capacity for jugaad, the fear is that the government will now have to deal with an even greater level of scheming and deception when attempting future crackdowns.
Will it improve India’s confidence amongst international community?
A move like this should enhance India’s ranking in various global indices of transparency and also in the ease of doing business survey. On the other hand, the powers-that-be, might not look so enthusiastically towards a government that claims to be pro-business, but has no qualms about running rough-shod over the Laissez-faire system that defines capitalist society.
What of the huge tax-gains? These will mean increased spending on Infrastructure, Health & Education.
Well, the tax-gains aren’t going to be anywhere as large as previously expected. The RBI has been keeping mum about the figures for over a month now. Such being the times we live in, let’s not attempt an assumption. Let’s just go with an arbitrary ball-park figure of 2 lakh crore (Trillion).
However, any moolah squeezed out through taxes, penalties or wrung out of the RBI (I hear, the correct phrase is ‘extinguished liabilities’) will have to be offset against the runaway costs of re-printing, transporting and distributing cash. And then you’d have to factor in the various costs incurred by banks, enterprises (SMEs to MNCs) & private individuals in the form of lower revenues.
And then, add all the tax sops and interest waivers which the PM just announced during his NYE speech. More tax reductions — both individual and corporate — are likely to follow in the budget. All these added together, and the govt. could be looking at a 1 lakh crore (Trillion) Rupee bill.
As for spending on health and education: who isn’t for it! It’s just that going by this govt.’s track record, we must be excused for any lack of faith.
What seems a lot likelier, is that the govt. will use a significant portion of their spoils to re-upholster the capital ratios of public-sector banks, which currently, lie in tatters.
Beneath the rosy headlines of (somewhat suspect) 7.something GDP growth rate, India was on the brink of a mini-financial crisis — similar to the 2007–08 ‘Sub-prime Mortgage Crisis’ that brought on the global recession. Only it wasn’t housing loans that were going to do us in.
Our Banks, government-owned public-sector banks (PSBs) mainly, have gotten themselves into a bit of a quagmire. They are sitting on humongous piles of very bad loans. Loans which aren't coming back anytime soon. Which, if not sorted out, threaten to drag them into insolvency — implications of which being, their customers could lose their hard-earned deposits.
Well of course, unless someone comes and bails them out… like ummm… the government.
Basically, if you compare the estimated black money recovered against the colossal shady loans, write-offs & bail-outs given out to fly-by-night operators/corporate giants — it’s a no contest.
Have a look at a larger picture.
Why exactly is this such a bad situation?
Because, large companies essentially lobby/bribe/arm-twist the government into ordering poorly-run PSBs to give out these loans with few, or dodgy, background checks. Besides the money spent on actual projects, a significant part of the loan— which was created out of your small deposits — is then fissioned off into top-rung salaries, to relatives, shell companies or overseas ventures. Most of it, never to return again.
A few years later, when interest payments stop coming in, the loans are declared Non-Performing Assets (NPAs). Next, companies request ‘re-structuring’, or bargaining for more time & lower rates. Eventually, when payment falls through, the loans are ‘written-off’ by the banks and the proceedings are moved to our speedy courtrooms. Inevitably, these companies declare themselves bankrupt. Some measly properties are then seized by the banks, yet individuals responsible — sitting cozily in their hideaways “ring-fenced” from real financial harm — are rarely ever brought to book, or even ‘named and shamed’.
If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.” — John Maynard Keynes
When was the last time you took a loan, failed to repay it, and got away scot-free? Or have you even heard of someone who was? Of late, I’ve seen and read many articles about farmers being hounded for being unable to repay their loans. Whereas, on the other hand, the debt owed by Adani, Essar, Vedanta & Cos. well exceed the ENTIRE farm-loan debt in this country.
Now, you mustn’t think that this is an attempt to lay the blame for this entire crisis on the current govt. The previous govt. too had its fair share of crony capitalists and the bulk of these loans were given out during their tenure. However, 2013-2016 saw the largest corporate debt write-offs in Indian history — 1.99 lakh crores.
And in defence of this current govt., to facilitate the process of recovery from defaulting borrowers, they have armed the banks with the new Insolvency and Bankruptcy code, which was notified on May 28, 2016.
To help those unfamiliar with these terms and the workings of the banking system, below is a table with definitions and a few numbers for perspective.
Okay, so the banks were in a mess. What about deposits?
Things get a bit complicated here on, but this unravelling of the banking system makes for wonderful reading too.
Besides the out-of-control bad loan problem, the banks had also been refusing to lower interest rates on loans as they were too busy setting aside cash to — cover the risk of defaults, and thereby — erase the various bad loans from their books. Meanwhile interest rates on deposits were being disproportionately slashed since mid-2014.
The result was that people slowly stopped putting their money in the banks.
Although inflation had come down, inflation expectation among the public had not. Aggregate growth of deposits fell to single digits — the lowest since 1962–63 (over 50 years).
People were choosing to invest their their money in gold, real estate, the stock market, just keeping it under the mattresses, or sending it abroad in large amounts — after the current govt. twice raised the slab for Liberalized Remittance Scheme from USD 75,ooo annually to USD 250,000, or Rs. 2 Cr. per individual.
At the same time, growth of bank credit to the commercial sector (corporate loans) — which is how banks really earn their living — had fallen to 5%, a 20-year low.
Credit growth is closely linked to the pace of overall economic growth — growing at 2–3 times the real GDP growth in recent decades.
To pile on the woes, job growth in the formal economy had almost ceased in 2015–16.
Vikaas, or development — particularly industrial — is central to the Modi government’s sales pitch. Without real growth there is only so long one can get by with switching GDP-calculation methods and other general fudging of numbers.
In plain words, behind the cosmetic GDP figures, the economy was spluttering. It needed a jump-start — a strategy to reduce interest rates and get corporate credit back on track.
So how does Demonetisation tie-in to this entire equation?
There are two ways of dealing with a bad loan epidemic. One is to make money readily available to satisfy the demand thereby allowing inflation, which naturally raises spending and increases sales revenue for companies — which helps them to repay the loans.
The second, is to freeze cash into bank deposits such that capital ratios improve and loan interest rates reduce and companies can be offered better terms. This isn't a great option and was tried out by Cyprus in 2013 with disastrous effects.
Now if you can successfully attach a reason — something emotive like that of corruption & black money — to your prohibition of cash, you end up killing two birds with one stone. Next, add the cashless angle to the moral crusade against physical cash (buy 2 get 1 free), and you have an (almost) foolproof plan. At least, one that wont get scuttled by this miserable opposition.
And if the fabled ‘dividend from extinguished liabilities’ becomes a reality — all the more cash for re-financing the banks.
The only problem they didn’t anticipate in their unshakeable self-confidence was that the severe & continuing shortage of cash could lead to an economic downturn that would shave 1–2 points off the GDP and as a consequence, a significant chunk of stressed or restructured loans could still turn bad.
Aha! Almost a win-win situation for them then?
Yes, we’ll all have to wait and see how the economy plays out. But lo & behold, economic recovery & the moral high-ground is not all they have to gain. There’s also the small matter of the UP Elections, which just happens to be round the corner.
Uttar Pradesh is, by far, India’s most significant state. If Uttar Pradesh (UP) was a country, it would be the world’s 5th most populous country. The sacred cities of Varanasi and Ayodhya — central to the Hindutva narrative — are situated in UP. 1 in every 3 Indian youths hail from Bihar or UP.
Uttar Pradesh is, the beating heart of Hindusthan.
In a resounding victory, the BJP trounced all comers in 2014 , taking 89% of Lok Sabha seats, with 31% of the vote share. However, in last year’s Bihar assembly elections they weren't able to capitalise on the 55% of Lok Sabha seats they took in 2014, and were routed by the mahagathbandhan. To stem the flow, a win in UP is of vital importance.
The 7-phase UP elections have been scheduled to start on the 11th of February & end on the 8th of March.
Are you implying that UP Elections was a motive behind Demonetisation?
Just after the Nov. 8th announcement, that exact thought was expressed by numerous political commentators, from both sides of the fence.
The recent abrupt move to ‘prepone’ the announcement of the budget by 30 days, from the traditional last working day of February to the 31st of January, is a clear indication that the BJP are leaving no stone unturned in their attempts to cast demonetisation in a positive light.
The fear amongst opposition parties is that the govt. will use the now combined union & railway budgets to present a pro-people budget (with sops claimed to have been derived from black money recovery) just one week before polling begins in UP and the four other states of Uttarkhand, Punjab, Manipur & Goa.
Finally, we arrive at the immediate cause for the pre-emptive strike that was #demonetisation: Black money. Lot’s of it! This being election season — all the more of it. Entire sackfuls sitting in various godowns littered across the state. And booze too!
As one can tell from the table below — and these are only the official statistics — the SP & BSP have made a lot of money while in power. In 2010–11, BSP, raked in 116 Cr., almost as much as the 168 Cr. BJP managed — as a national party spread across 20+ states. Whereas, income for the Samajwadi Party has been outperforming since coming to power — almost 170 Cr. per year; and we haven’t even received FY16 numbers.
The lower reaches of India’s dance of democracy function in a distinctly timocratic manner — quite antithetical to the principles of a democratic state. Here, aspiring MLAs must deposit 1–2 Cr. (or maybe a lot more) with the party, upon which they are given a ‘ticket’ to contest the election as their candidate; such sale of tickets will be happening this year, at least not with the same ease.
Mass rallies, which are sponsored by ‘fast cash’ sourced from local traders & factory owners — small & large — shall now be held on smaller scale, and there wont be too many “freebies” for voters.
How does this help the BJP? Their stashes get neutralized too.
With respect to political party donations, the BJP have truly walked the talk and gone cashless. Political parties can now accept donations from abroad and the BJP has been milking that foreign cow for all it’s worth, read: Modi’s worldwide rockstar concerts.
An analysis of donations from the corporate/business sector, by the Association of Democratic Reforms (ADR) reveals that in FY 2014–15, the BJP alone garnered 409.94 Cr. or 71% of the total 576.37 Cr. received by all national political parties.
According to the Delhi-based Center for Media Studies (CMS), which tracks campaign financing, the BJP relies on cash for less than two-thirds of its funding in a state like Uttar Pradesh. Unlike the SP & BSP, who rely on unnamed sources for every rupee of their funding.
The BJP’s close ties to big corporate donors, can help them survive the cash crunch better than others.
“With big business and the super-rich firmly on his side, Modi does not need funds from traders and contractors to run his party.” — Hindusthan Times, Nov. 14, 2016
It can also bank on the manpower of the Rashtriya Swayamsevak Sangh, which will campaign on its behalf, with the tab for that campaigning not picked up by the BJP — Scroll.in, 16th Nov 2016.
But the BJP already thrashed everyone in the 2014 national elections. They’re now sitting comfortably with a huge majority in parliament. Why do they need to win more state elections?
Besides UP’s emotional worth to the Hindutva narrative, control of the province’s state administration will offer the BJP numerous advantages in the lead up to the national election of 2019.
Politics is an endless game of chess. While you might presently hold more pieces & thereby control of the board, a strategically-positioned opponent Queen can thwart your chances of all-out attack; that is precisely what the Rajya Sabha — our ‘upper’ house of parliament — is to the BJP right now. Their National Democratic Alliance (NDA) are close to a special majority in the Lok Sabha with a strength of 339/545 seats, or 62%, whereas in the Rajya Sabha they are in the minority with only 74/245 seats, or 31%, as of January 2017.
Control of both houses of parliament is something the BJP & its alliance urgently desires. Their exclusionary ‘my way or the highway’ approach to politics allows for few neutrals. Our constitution dictates that of the 4 types of bills (passed into laws), Ordinary Bills, Constitutional Amendment Bills, Financial Bills require at minimum a simple majority in both houses. Only Money Bills can be passed by a Lok Sabha majority alone. And this is precisely where the Rajya Sabha becomes a thorn in the side for the BJP-led NDA.
For example, to officially cancel the old HDN as ‘legal tender’ they need to get a law passed by both houses. At present they cannot do that.
Also, there’s the bit about Congress-mukt-bharat, BJP’s current pet project.
Uttar Pradesh sends a whopping 31 seats to the Rajya Sabha — the largest, by a distance, for any state. The 5 states — UP , Punjab , Uttarakhand , Goa  & Manipur  —are going to the polls in Feb-March 2017, together send 53 seats to the upper house of parliament. Electoral gains in these assembly elections, could help in securing a good proportion of the 74 Rajya Sabha seats which are up for election in 2017 & 2018.
A haul of anywhere close to 50 of those 74 seats would effectively see the NDA wrest power of the Rajya Sabha by 2018, comfortably placing them in the driving seat before the all-important 2019 referendum.
50 days later, it appears that the bold & unprecedented ‘masterstroke’ has turned out to be more akin to ‘carpet bombing’ than any manner of a surgical-strike, as plainly observed by the Chief Justice of India.
Anyone who’s reading this, with debit cards, mobile wallets & net-banking probably hasn’t faced more than a few niggling pains. For the common man however, the best analogy for demonetisation would be — getting one’s teeth pulled out without anesthesia.
No one is denying the fact that India did have a massive black money problem, and that this act of demonetisation will cause the ‘black money hoarders’ (say ten thousand people) some losses. But, at the same time, for hundreds of millions — the poorest of the poor, who don’t have savings or electronic forms of payment — this destruction of the informal economy has led to immeasurable distress which will continue well into 2017.
“Most free societies would rather let several criminals go free than convict an innocent man” — Larry Summers, 21.11.2016
For years the debate will rage on — have the costs of demonetisation exceeded the benefits or vice-versa? Economists on by both sides will make tall claims to prove their claims.
But, can you quantify the deaths of over a hundred people?
And at what point do we say it is too much a cost to bear? Is not even one life lost one too many? — Firstpost, Nov 12, 2016
Is it possible to compute the extent of human suffering and the trauma of the families whose lives have been permanently debilitated, of the millions who for no fault of their own have lost their jobs, who have had to run from pillar to post just to keep afloat their cash-based farms and businesses, who have had to return penniless to their villages for lack of work, who have had to skip meals everyday since just to make ends meet, for the sick and the dying who needed medical care but were refused treatment at hospitals as they could not pay with the old notes.
“I and many others are skipping one meal a day to survive till employment returns,” said Kushwaha — a daily-wager, for whom even buying a detergent soap to wash clothes is a luxury now. — Business Standard, Nov. 20, 2016
Ours is an economy where 98% of all consumer transactions take place in cash; where 490 million, or 93 % of workers, are employed in the unorganised sector — which means the vast majority of them are paid in cash, don’t get any notice before being fired and don’t get any severance packages to tide them over in hard times.
Ours is a country — where only 130 million people, or 10% of the population are properly equipped for electronic payments of any sort; where the poorest 50% share only 3% of its wealth [value of all assets of worth owned by a person] — which works out to approximately 6,600 rupees each — and crucially, have no viable access to formal banking.
Theirs, is an ecosystem ravaged by two consecutive years of drought and crop failure, whose negative multiplier effect has led to a slump in the rural economy and beyond — a loss of over Rs. 2 lakh crore annually.
They had little, now they have even less.
It is improbable that this government lacked knowledge of these harsh economic realities — and yet, to attempt a speculative move as turbulent and repressive as this, was to gamble with the lives and livelihoods of the weakest and the most disenfranchised.
“It is natural law that chaos takes its toll most heavily on those who are the weakest. The whole point of civilization and an ordered society… is to safeguard those who can’t defend themselves.” — Firstpost, Nov 12, 2016
As a counterpoint, it is definitely accurate to say that thousands of people die everyday in India due to lack of food, medicines, shelter.
Of course they do, as they have always done.
India is an immensely large and largely poor country. Life, for the wretched, has always been that way. So if you’re looking for someone to blame, you could start with the discriminatory nature of the caste system, failings of ancient rulers exacerbated by the British colonisers and then a series of successfully incompetent government policies, our general lack of compassion and so on.
But none of those issues can excuse the fact that, in this case, innocent citizens have died as a direct consequence of an act of government — one in which the clearly foreseeable outcome was one of tragedy.
It can’t ever be proved that demonetisation was in fact a cynical political calculation in the garb of a moral crusade towards social re-engineering. The double-edged sword that is our demographic dividend will ensure that Indian economy continues to grow steadily, but the true plight of the poor will never register as more than just a mere dip in the numbers.
Numerous other issues come to mind, yet there is neither space nor time to dwell upon those. They will have to be left for another time and another article.
- Re-Printing of Notes — Cost & Delays
- Indian Capacity for Jugaad
- The Fairness of Taxes in a Land without Basic Justice
- The Symbiotic Relation between Politics & Black Money
- 1:5:20 — Our Dysfunctional Order of Currency
- Sudden Spike? The Suspicious Surge in Deposits
- View from Outside — What the World thinks of Demonetisation