Well, we ran a Google News Search on “demonetization” and guess what turned up as the first result? – “Early Lessons from India’s Demonetization Experiment” from Harvard Business Review – unfortunately, the tone of the opinion piece tilts against the general optimistic sentiment of the victim country. Nevertheless, while the world seems divided at India’s much-publicized d-move, Cians is back to take a guess at what was the slightly un-altruistic motive behind the hasty implementation of the demonetization drive and if there is a silver lining to this at all.
Presenting Part 3 of Decoding Demonetization…
There is Light at the End of the Tunnel
Is a Fox Guarding the Henhouse?
So when demonetization was announced back in 2014 by way of withdrawing all currency notes issued before 2005, the present government had opposed the decision asserting it as anti-poor, proclaiming how the move will be unable to tackle black money, how the sufferers will be the aam aadmi1, those who are illiterate, those who have no access to banking facilities…
Considering its current 180-degree Trump-like turn listing out the “benefits” of demonetization, is that an itsy bitsy non-altruistic motivation we see there? Well, the recent victories have stamped the fact that the ruling government’s spearhead remains the most popular figure, waving his wand, showering invisibility powder on any contentions of past misdeed.
However, one can’t help but ponder that amidst the big show over the enormous confidentiality of the operation, what exactly prompted the West Bengal BJP to deposit US$1.5 mn (₹1 crore) in cash on November 08, and the several plots of land being bought by the party just before this announcement…? Day-to-day expenses, right?
Oh wait, there is more – relatively unusual deposits totaling US$76.8 bn (₹5 lakh crores) were seen in majority of Indian banks just prior to the d-move announcement. While the government attributed it to the payment of arrears for the 7th Pay commission, what it forgot to mention (very conveniently so) was that the arrear payments amounted to approximately US$5.3 bn (₹34,600 crores), or 7% of the total increase witnessed.
And since we promised ourselves to leave political matters untouched and unconcluded at our end, we leave YOU to answer whether there was any attempt to curb the ‘war chests’ of BJP’s political opponents while having taken care of their own?
1 Hindi colloquial reference to the public, usually referred to people belonging to the middle-class
Can the “Mango People2” Take Any “Rahat-Ki-Saas3” anytime soon?
You can blame the government for its lack of proactivity in terms of implementation of the d-move, but you just cannot do so when it comes to reassuring the public of when the ‘ache din4’ in terms of monetary flow will waltz in! However, the capacity of RBI’s printing presses (US$1.1 mn (₹7.4 crore) per day) and the current rate of currency distribution paint a different scenario altogether.
As per an interpolation done by the Economic Times, if the government wants to introduce US$138.3 bn (₹9 lakh crore), which is 65% of the money it pulled out, it will take up to May 2017, and if the entirety of US$215.1 bn (₹14 lakh crore) that it withdrew needs to be reintroduced, that could take up to August 2017.
2 Literal English translation to refers to ‘aam aadmi’
3 Hindi phrase meaning a sigh borne out of ease (with the situation at hand)
4 Means good days – essentially refers to the present government’s ‘election agenda’
Looking at the Brighter Picture
Well, there are always two sides of a coin. Below are a few points presenting the rosy side – a few factors that have the potential to spell ‘ache din’ for the future…
The “Sigmund Freud” Approach
The biggest impact, no questions asked, by the abrupt announcement of the demonetization drive has been the ensuing mental terror unleashed upon the petty hoarders of black money (read: petty, because as everybody, including the government we know it, the bigger black jacks have “invested” their secret stash) and the long lasting and relatively deadlier psychological fear of another sudden all-consuming onslaught that has been instilled into the minds of black-money holders (petty or otherwise).
And the World Goes Round and Round and Round
Currently, only about 5.5% of earning individuals pay taxes in India, compared to the US which has only 16% of India’s working population, but 54.7% individuals pay their dues. Additionally, while the direct tax-to-GDP ratio of India is 5.5%, the tax-to-GDP ratio, which includes the indirect taxes as well, stands at 16.7% – much lower than the emerging market economy (EME) and OECD averages of ~21% and ~34%, respectively. After the recent demonetization, about 97% of the currency in circulation has been received back in the banking system, i.e., within the gamut of the taxation. This cash, while pushing up banks’ deposits, also increases their loan issuance ability, which in part, can be utilized to hand out loans to the low-NPA-prone sectors and boost development. Excessive deposits translate into lower interest rates, which encourage the flow of money in the economy, and consequently, increase the GDP. And ta-da we are back to a greater-than-earlier circular flow of income with a lower-than-earlier domestic black money stashes!
Similarly, deposits beyond the prescribed limit of US$3,841 (₹2.5 lakhs) will earn the government substantial tax revenues, which can be used for productive purposes, for the actual ‘greater good’, hopefully to boost capital expenditure in the economy, or to improve the dismal condition of NPAs in the banking system.
While these are probably the collateral benefits of the d-move, the major benefits have been accrued in the form of more people gaining access to the banking system, thereby increasing financial inclusion, even if it is not by choice but a created necessity, and the rising use of cashless methods of payment. More and more people had approached banks to change currency denominations or for deposits, thereby increasing awareness from the consumers’ end; however, efforts should now be underway from the banks’ side to ensure widespread availability. Popularity of portals such as PayTM, Ola Money, and Freecharge is also rising, with everyone from small tea vendors and vegetable sellers to large retailers, accepting digital cash.
The rise of a digital economy, while encouraging ease of doing busing business via a much-simplified payment process, also ensures a much more rapidly rising adoption level of smartphones and the Internet, while also incentivizing operators to make such services available in even the most rural parts of the country.
And now we come to an end to this dissection.
A shabby implementation with an avalanche of revisions, combined with rollbacks and non-concrete research have underscored the quiet efficiency that is expected from the demonetization policy. However, the much relevant fears of an economic backlash have been put to rest following India’s 7% GDP growth in Q3 FY2017 (in line with the pre-demonetization projections), coupled with an increase of 5.6% in industrial production, 15.0% in capital goods manufacturing (which had previously been witnessing a contraction) and 8.9% in electricity generation. Hence, we, along with everyone else, end on a note that hopes that the government, akin to its much-publicized repetitions of additional measures, has a plethora of after-magic tricks hidden up its arm to substantiate its enactment of the d-move and achieve harmony for its set targets.
Authored by Shikha Dey