We took time to assess the market tailwinds – akin to jurors serving on panels – because we did not want to be influenced by judgements, comments, and rumors that were fogging up the already chilly winter air!
Presenting Part 2 of Decoding Demonetization…
Two Sides of a Coin Note: India’s Demonetization on a Roll or Takes a Toll?
“Unity in Diversity” has been a popular ideology in theory, but that its practical application is far from reality has been proven by the D-move. While a part of the population is hailing the move as ground-breaking, a ray of sunshine in a dark room, and finally a substantial unafraid stance against the wrong-doers in the economy, there are those who are dismissing it as cynical, fanatical, a ‘flash’ of sunshine in a dark room, and immensely haphazard. Let’s examine what divides our opinions this drastically.
For the sake of an argument, will you ever start constructing a building without obtaining the appropriate sanctions or before running a thorough check on land quality and the type of construction materials to be used? On similar lines, below are few necessary infrastructural factors that a government looking to demonetize 86% of its currency in circulation should have gone through and ensured a certain adequacy level:
- Banking Penetration: As of 2015, India’s banking penetration1 stood at 13.5%, at par with the world average of 12.7%; the account penetration2, however, stands at 52.8% (lower than the world average of 60.7%), although up from 35.3% in 2011. While 97% of the 125 million accounts newly opened between 2011 and 2015 can be attributed to the Pradhan Mantri Jan Dhan Yojana3, 76% of these accounts had a ‘zero balance’ as of September 2014 (this was before banks deposited up to $0.15 (₹10) out of their own pockets to depict operability; this reduced the share of zero balance accounts to 24.4% as of August 2016, and later demonetization put them to good use). Additionally, as per the World Bank, dormancy rate for accounts in India is at a high of 43% and has a 42.4% share of all dormant accounts worldwide.
1 Bank Branches per 100,000 adults
2 Proportion of 15+ year population who hold an account in a financial institution
3 Prime Minister’s People Money Scheme is India’s National Mission for financial inclusion
- ATM Penetration: ATM Penetration in India, as of 2015, stood at ~20 ATMs per 100,000 adults (the world average is ~41 ATMs per 100,000 adults), or in other words, ~5,074 adults share 1 ATM – remember this information the next time you stand in queue and complain about the crowd. While these figures did not pose any threat before the abrupt announcement of demonetization, the post-demonetization scenario is slightly abysmal.
- PoS Terminals: As of October 2016, India had 739.3 mn debit cards and 27.3 mn credit cards, corresponding to 1.5 mn POS terminals (70% of which are installed in India’s 15 largest cities), 15 mn retail merchant establishments, and 36 mn small and medium enterprises. Additionally, POS usage of debit cards is 1/6th of their usage at ATM terminals, while their value is almost 1/12th. Even with the planned additions of POS terminals, the country would need a 10x jump in the current numbers to bridge the existing gap.
- Internet Access: India’s internet penetration, as of July 2016, stood 34.8% – ~13.5% of the global internet user base. However, what’s staggering is that only 13% of rural India has exposure to the Internet.
Some food for thought!
Intention Greater than Implementation?
There is merit in good intentions; however, when that translates into a fiasco affecting 1.3 bn people, with a lax backend-implementation strategy, the nobility and altruism behind the intention become questionable.
On recommendation of the Central Board the 6[Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender 7[save at such office or agency of the Bank and to such extent as may be specified in the notification].
In a nutshell, the government can demonetize any series of banknotes, but the decision must be backed by the RBI’s central board. However, an RTI indicates that the RBI recommended the policy merely hours before the PM made the announcement; moreover, only 8 of the 10 board members were present in the meeting. As of November 08, the central bank had merely ~2.5 mn notes of the new ₹2,000 (approx. $29.3) denomination, amounting roughly to $717 billion (₹4.9 lakh crore) – a figure less than even 1/4th of the value of the newly demonetized currency notes ($3 trillion (₹20.5 lakh crores)) of ₹1,000 (approx. $14.6) and ₹500 (approx. $7.3); moreover, not a single new note of the ₹500 denomination was held.
Does this mean that obtaining the RBI’s approval was merely a formality?
A Surgical Strike on Black Money or People?
If only we had one rupee for every time the word ‘surgical strike’ is used to describe just about anything the present government does!
The smart ones rushed to the ATMS to deposit cash immediately after the announcement and then were those who were late to react (for lack of knowledge or for wanting to play the wait game) and ended up in serpentine queues outside banks and ATMs. Demonetization has bizarrely also proved that the evils of income inequality still exist all around. There were rampant reports that the upper-class, more notoriously known for their cache of kala dhan4, were either busy finding better alternatives to convert the black into white or collaborating with bank officials to make the unaccounted, accounted.
4 Colloquial term in Hindi for black money
The media hasn’t been kind either; reports of approximately 50 people who died because of being either directly or indirectly affected by the sudden cash-ban have been viral across all media. What did not the help the cause was the rather emotionless remarks of members of the ruling party, who have driven parallelism between the situation created with birth-related difficulties, deaths on railway tracks, road accidents, terror attacks, and even deaths in queues for rations!
The government has been firm in its stance of “For the Greater Good”, but the feeling on ground is that of “greater inconvenience”.
Has the Government Been Successful in Achieving its ‘Original’ Intended Targets?
Between November 08 and 27, across 6 speeches in India, the Government ‘adapted’ its stance from aiming to eradicate ‘black money’ and ‘counterfeit currency’, to going cashless and digital.
Let’s begin by answering the government’s tallest agenda, exactly how was the black money stash affected? Demonetization has affected only the current stock of black money held in currency forms within the nation – no effect whatsoever on the future flows, or black money invested in real estate or gold, or held as foreign currency or in offshore accounts. In the PM’s own words: Even a kid knows that most of the black money is held abroad (in Swiss Banks); however, no concrete step to provide immediate relief has been taken so far!
It has been widely reported that the rich found ways to convert their black into white by way of buying large items through old notes, paying for weddings, citing large-scale old notes as cash gifts received or household savings, depicting it as income of a minor family member earned through means such as giving tuitions, booking first-AC train tickets with the motive of cancelling them later to get reimbursed in new notes…
Other tactics used were the bulk purchase of gold (usually at 20–65% above the going rate), paying advance wages to employees or advance payments for loans, urging others to deposit money in their own accounts (a handsome commission of 30–50% was meted out), and using banks’ overdraft or credit system facility.
The second agenda on the government’s hit list was the amount of counterfeit currency floating in the country. According to a study carried out by the Indian Statistical Institute, approximately 250 out of every 1 million notes in circulation are fake, with an average of $10.3 million (₹70 crore) being introduced to the system on an annual basis, pegging the quantum of fake notes in circulation at $58.7 million (₹400 crore); however, law agencies are able to detect only 1/3rd of this cache.
Amid reports of Pakistan printing 15,000 trillion notes, majorly of the “now” demonetized currency in a move of economic warfare, the d-move definitely did nullify the immediate possibility of a rampant counterfeit economy, majorly attributable to the differentiated design. However, what remains to be seen is the longevity of this effect. This leads us to our next question – would not a slower replacement of notes, much like the 2014 demonetization of currency notes printed before 2005, be as effective and achieve much of the same result as now, sans the pain?
If you are not a part of the solution, you are the problem!
Not just cynic Indians, but the world too, is crying foul over the government’s abrupt ‘Tughlaqi Faraman5’– while the World Bank and Fitch have cut India’s growth forecast from 7.6% to 7% and 7.4% to 6.9%, respectively, esteemed publications, such as Forbes, the Wall Street Journal, and the New York Times are criticizing the move as “breathtaking in its immorality”, “bizarre war on cash”, and “atrociously planned and executed”.
5 Colloquial term in Hindi for an authoritarian order issued without any thought to its logic or viability
Many economists and intellectuals have suggested that unless those who make decisions are not affected by their implications, the solution can never be effective. May be the government jumped the gun or may be the ‘greater good’ and ‘altruism’ will soon surface. We end this part on this note but will be back soon with the last of the trilogy answering if not black currency, why else did the government take such an abrupt action. We also hope to shed light on the ‘other’ side of the coin – the yin amidst the chaos of the yang.
Authored by Shikha Dey