D For Demonetization

For once, India had things going for her !

After two successive years of shortfall in monsoon, the nation was blessed with adequate rains. Good farming output promised to reduce the prices for food and commodities across the country. The farmers planned to use these earnings for a nice Rabi crop harvest.

Inflation was hovering around 5% to 6%, significantly lower than the high inflation seen in the recent past. The Rupee was well placed against the US Dollars, and the RBI seemed well set to tackle the 25 Billion USD FCNR B maturing deposits.

And then one night changed it all !

As the people across the United States woke up to vote in the Presidential Elections - to make a choice between Hillary Clinton and Donald Trump, a certain Narendra Modi turned a nation of 1.3 Billion people on its head at 8 PM on 8th Novermber 2016. The esteemed Prime Minister of India stunned the country by withdrawing the then Rs 500 and Rs 1000 notes as legal tender. New notes of Rs. 2000 and Rs 500 were proposed to be introduced.

In 4 hours flat, 86% of the cash (estimated to be around 17 Lakh Crore or 17 Trillion)  in the country was rendered illegal.

People scampered to get the legal tender of Rs 100 from the nearby ATMs, with limited success. Others tried to deposit or use their "soon-to-be-illegal" notes. Most failed.

The Prime Minister promoted this move as a surgical strike against Black Money. Strict rules with rationing were implemented.

People were not allowed to withdraw more than Rs 10000 a day and Rs 20000 a week from the own bank accounts.  As for those who wanted to exchange old currency for new currency, a limit of Rs 4000 was placed.

Trust the GOI to work hastily and create ambiguous rules. 

Banks and people across the country assumed the Rs 4000 limit to be a per person per day limit. People turned up in queues across the bank to exchange money everyday. Later, the limit was clarified to be a "one exchange per person till 31 Dec 2016" limit. The limit itself was first revised to Rs 4500 and later reduced to Rs 2000. The daily withdrawal limit was later scrapped and the weekly limit was revised to Rs 24000.

Special withdrawal limits, significantly higher than the limit for individuals, were put in place for business accounts, for farmers and for marriage purposes.

These frequent changes ended up creating confusion among the minds of the people about the intentions of the Government. Higher limits for certain categories of transactions and people is a noble thought. It will be worthwhile to see if this is mis-utilised.

The intellectuals in North Block decided to use indelible ink to stop the same person from exchanging money again and again. This idea was contested publicly by the Election Commission of India. Call it brilliant co-ordination between multiple Government agencies ! To add, bankers did not even possess this ink when the decision was announced by the GOI. The lone producer of such ink in India received an order for 2.9 Lakh after the announcement. That's called staying behind the curve.

With stringent limits being placed on exchange of the now illegal tender, the GOI is expecting people to deposit money into their account before withdrawing the money for their purpose. They plan to use this trail to detect money launderers. People without accounts are left high and dry.

The Government of India expects that out of the 17 Trillion Rupees in circulation, almost 11-12 Trillion Rupees will find its way into the banking system. The rest 4-5 Trillion is expected to stay out of the banking system and get flushed, forever, from the system by the end of the exchange window, which is 30th Dec 2016 at the Scheduled Commercial Banks and 31st March 2017 at select offices of the RBI.

The GOI is expecting that by wiping out the black money from the economy, inflation will come down. A parallel economy of black money is expected to crumble. The demon of fake currency notes will be exorcised. Funding for terrorists, and anti-nationals is expected to come down.

The impact is widespread. Indian people abroad carrying rupees are left in lurch. Their precious money is now labelled illegal. People in neighboring Nepal, who keep some Indian rupees with them, are caught in the muddle. All these people are clueless how to save their money.

No one has been more affected than the common man in India.

Since the pause in the pan India banking activities on 9th Nov 2016, the canvas of the nation has changed. Every bank branch across India  is seeing a huge footfall from men and women, and elders to exchange their hard earned money. There are only 1 Lakh 30 thousand branches across the country for 1.3 Billion People. 

People are ending up standing in queue to get money for their day to day expenses. Many have returned empty handed after standing in the queue for 8 hours. People have died for lack of money. People have died because their then legal tender is no longer being accepted.  Poor people have stopped eating two meals a day because of lack of cash. Daily wage people are finding it difficult to make their earnings, because they cant be paid due to paucity of cash.

Bank branches are not able to service the large number of people turning up at the door. I visited my branch yesterday, and it had plans to service only 130 people a day ( 130 for cash deposit and 30 for withdrawal).

ATMs are functional in a very limited manner. The intelligent designers of the new notes changed its dimensions making it necessary to re-calibrate each and every new ATM before the new notes could be dispensed. And even after re-calibration, the new notes are mostly giving out Rs 2000 notes, much to the disappointment of people. It is extremely difficult to use a cash note of such a large denomination for day to day purposes.

As for the new notes, Rs 2000 have been dispatched to banks. This amount in a single note is a bit steep for a poor country like India. Rs 500 notes are yet to come into active circulation. 

It will be worthwhile to remember that the Euro Zone decided to stop the production and issuance of the 500 Euro note since it was considered to be promote illicit activities. The old 500 Euro notes continue to be legal tender. And here we are, making a Rs 1000 note as a null and void tender, and introducing a Rs 2000 note instead.

Meanwhile the GOI continues to pat itself on the back, admiring itself as if they are looking in the bathroom mirror after the morning bath. The Finance Minister of India commented, "Execution of demonetisation decision could not have been better." Another pro, Shaktikanta Das, the Economic Affairs secretary cited shortening' queues at banks and ATMs, and about moving from a cash economy to digital economy.

These policy makers sitting in the ivory towers of North Block are ignorant about the challenges faced by the common man. Digital awareness across India is limited. India has around 18 ATMs for 1,00,000 people. That's a far cry from 65 ATMs in the Euro Area, 55 in China and 129 in the UK, for the same quantum of 1,00,000 people. There are regions in India where you have a power cut of 12 hours to 18 hours a day. How does digital money work in such areas? 

Do we have adequate literacy to support digital money? Have we promoted electronic channels for payments? The irony is profound. I pay a tax of Rs 11 if I book my train tickets on the internet. Instead, if I pay in cash, I avoid this charge. Isn't it ridiculous?

Consider this calculation.

• Assume the average wage of an Indian person to be Rs 10000 per month, or Rs 450 per day. 

• I assess each person to invest(spend)(waste) [whichever way you perceive] at least two days in this entire exercise to deposit, withdraw and exchange money in the next 2 months. 

• Assume 800 Million (60% of the nation's population) stand with the GOI in nation building exercise.

• This means a loss of productivity of 0.72 Trillion Rupees ( Rs 450 salary per person per day * 2 days * 800 Million People )

This is a mammoth loss for the country (for flushing out 4 Trillion Rupees). The mental pressure on the common man, bankers, loss of life is innumerable.

And then there is Rajan, Raghuram Rajan. The esteemed ex Governor of RBI, Raghuram Rajan, had said some time back, “I am not quite sure if what you meant is demonetize the old notes and introduce new notes instead. In the past, demonetisation has been thought of as a way of getting black money out of circulation. Because people then have to come and say “how do I have this 10 crores in cash sitting in my safe and they have to explain where they got the money from. It is often cited as a solution. Unfortunately, my sense is, the clever find ways around it. Black money hoarders find ways to divide their hoard into many smaller pieces. You find that people who haven’t thought of a way to convert black to white, throw it into the hundi in some temples. I think there are ways around demonetisation. It is not that easy to flush out the black money.”

There have been benefits too. Insurgency and protests in Kashmir has reduced. Same is the case in the North East. 

The banks are increasingly becoming flush with cash deposited by people. They have hastily reduced the term deposit rates. Yet, they are extremely cautious while reducing the lending rates. Call it making hay while the sun shines. I sincerely hope that they translate the excess cash into lower rates of interest for borrowers. The cash is expected to make the banks profitable again, after quarters of losses.

The debate on demonetization will rage for the next few months. Economists expect the Indian economy to contract anywhere between 0.5 to 1% in the coming half year. The rupee, too, is feeling the pain against the US Dollars. It has already slipped to 68 against the USD. If things go bad from here, it will slip below 70. Imports will feel the pinch and the common man will feel the pain again.

As usual people are supporting this move. There are others who are against it. To each his own. Yet, we don't have a choice due to this decision by our elected leaders.

I am tending against the move, simply because the pain it will bring into the life of the people. Yet, I will keep my judgment in abeyance and keep an open mind towards the noble goals this demonetization is trying to achieve. 

The day the 500-1000 notes were made illegal, I rushed to buy a kg of tomatoes from my neighboring store at half past ten in the night. It costed my Rs 30 a kg !

I hope come back a year later with the price of tomatoes and will let you know if the surgical strike against black money changed things - for better or for worse. Until then, राष्ट्र  का  निर्माण  करने  के  लिए  मैं कतार में   हूँ !

What do you feel about Demonetization? What do you think about Demonetization?