10

There are multiple accounts of official spokespersons referring to the government using the money of citizens deposited into their bank accounts for development of infrastructure and other government spending. This is alarming. The money owned by individuals is not government property.

There are at least three occasions when official representatives of the government or major institutions have referred to the government using the money deposited by citizens in banks for development. None of these statements have been refuted by any official government spokesperson.

This here is Sambit Patra on the 19th of November 2016

(Around time 0:16): "... where would this money go? This money is deposited in Indian bank. Not in someone's personal account. This money would be for the poor people's affair. It would be for infrastructure. It would be for roads..."

On the 5th of January 2017, in an interview published in The Hindu Businessline, Pankaj Patel, President of the FICCI says ‘Post demonetisation, money with banks should be used for infra projects’. The last line of the first question of the interview:

This large amount of money that is available with banks has to be used for infrastructure projects in a big way, and it can help increase demand.

Today, Nirmala Sitharaman has said that the money deposited in the banks can be used by the government for developmental activities.

The money deposited in banks belongs to the account holders. The bank further gives it out on credit and earns an interest on the loans generating revenue for themselves, and passing some on to the depositors. The money available for the banks to use is the money it generates as interest from loans. The government doesn't use any of this money. Funds available to the government are those raised from taxes and such or any revenue the RBI makes as profit and transfers to the government.

Banks are actually going to be in trouble for revenue, as deposits in banks have gone through the roof, while the demand for loans is still low. So banks will have to pay out interest to depositors, but their means of raising interest by lending money have not increased in proportion. In a situation like this, it is alarming to hear that the government would use the money in banks for anything - development and infrastructure or otherwise.

Given the complete impunity with which the government has disregarded citizen rights during demonetisation, is the next shock going to be losing our funds to the government spending sprees?

Modi sarkar needs to clarify. Fast.

4

Over the last few days, I've had many discussions with various people about going cashless. So far, I haven't met anyone who applied for internet access if they didn't already have or installed a payment app if they didn't already have, contrary to reports in media (which may possibly be largely limited to the metros). Here are some reasons I found out.

Ours is an area that would classify as a town though it has now been clubbed with several other towns into a city. It is close to Mumbai and a lot of people who work in Mumbai but can't afford to live there live here. About half the population is lower middle class and tenants in the properties of people in Mumbai who have purchased flats here as an investment - me too. There are also several people who are quite poor and live in slums and old buildings in small cramped quarters. In other words, there are few people who'd qualify as rich in this area or even well off enough to not care about monthly budgets - perhaps some of the more prosperous shop owners. Our building is probably among the most "posh" in this area and there are maybe 6 cars parked in the compound with a few hundred flats, and 3 of those are cabs.

Note: I am neither for, nor against the use of cashless transactions. It is a useful method for those willing to spend that little bit extra for convenience. It is invaluable for doing online payments and a handy record of spending in bank account doesn't hurt for those, like me, who cannot remember where they spend money five minutes later. However, forcing people to go cashless is extremely unwise, in my view. Regardless, this is merely a disclosure of where I stand and the below are not my views. 

Domestic workers

I spoke with several of these. My regular maid usually gets paid into her bank. Another I hired to help her out financially takes cash. Apart from these two, I spoke with about 4-5 others. Only one of them who was previously getting paid in cash is getting paid by cheque this time (she will be withdrawing the money for use, not spending cashless). Among the others, reasons varied. They found the bank intimidating and cash easy and familiar - is a common sentiment. All but one of the others didn't have their own bank accounts and did not want to deposit their income into the accounts of their husbands or other family members. The remaining one had a bank account in her village, and when she applied for a new cheque book, it got delivered to her village address, so she wants cash till she has a way to withdraw money. Only my maid has a smart phone that is compatible with an app (she didn't buy it, she is using my old one) and she uses it without an internet connection. The phone automatically connects to the WiFi when she comes into range, but she has never shown any interest in using the internet and is reluctant to do it now. In any case, I would never advise her to begin her introduction to the internet with a high stakes thing like payments.

Vegetable vendors

I've spoken with about a dozen of these. Most of them didn't know about apps. I informed them. They don't think their transactions are large enough to afford commissions to receive money on. Additionally, there aren't people buying. No one seems to have asked them if they will accept an app payment, so they don't think there is any point in using it unless people in the area adopt it.

Grocers

Business is very low for grocers, but none of them showed any interest. When people have money, groceries are a priority, and they usually offer credit to regular buyers at such times, so they don't think an app will add any business for them. Like the vegetable vendors, no one has offered to pay them by app so far.

Car mechanic

I spoke with one. Business is down enough to be as good as zero. No work other than emergencies like punctures is happening. No one has offered to pay him by app before, but he would consider it if there promises to be a good amount of business. We speculated on the possibility of vehicle owners being likely to own phones that could install such apps and perhaps trying to pay that way if he put up a board, but he didn't sound anywhere like he was headed for a download. He would have to upgrade his own phone first - it is not a smartphone. Another reason he was reluctant is that he would likely have completed the work first and then if the payment did not happen, he could suffer a loss. I explained that there was very little chance of that happening, but it is unfamiliar tech and he is not internet savvy and I couldn't with any sense of ethics recommend it beyond discussing it as a possibility for the same reasons as my maid - first experience of the internet being payments is asking for trouble.

Garments shop

I spoke with two. Both had near zero business and were very interested in the app. They had smartphones and had even experimentally downloaded after seeing all the ads. However, the problem is that no one is coming to their shops at all. Whether paying with cash or cashless. There are no customers at all.

Housewives

I spoke with several asking if they had considered buying using an app. All of them had some money (one of them having borrowed from me). All of them had priorities and were managing those priorities in the cash they had, which admittedly is very little. None of them were interested in using an app to buy anything. They would rather cut corners and buy when they had the money. Some were making do with dal and pulses and onions and potatoes they could get on credit from the grocer and skipping buying vegetables when they didn't have money, but they weren't interested in installing an app so they could buy clothes - for example.

I am also a stay at home mom, but I am cashless enabled, so to say, so writing my experience separately, because it is different from theirs. I follow news rapidly, and anticipated the problems with cash that would happen, so within the first few days, I had my money converted locally - without paying a single rupee as commission - in medical shops and such. I further withdrew money from ATMs at the crack of dawn to find smaller queues, knowing that people would be needing to borrow as well as my second maid would need a salary. I have cash. There is a Reliance Fresh where I can swipe my card, but I have not used any cashless payment at all since demonetisation, because I believe those unable to accept cashless methods are really suffering for business, so I'd rather spend in their shops.

People with jobs in offices

Most of these in our building are male, but there are a few women too. They mostly seem more inclined to save mone rather than use cards or apps. Most of them have cards. Most of them use cards to withdraw money from ATMs as possible. None of them use cards for anything except withdrawing money from ATMs, though they are aware, and one of them had used cards to make payments before and knows how to do it.

I didn't find any credit card users other than myself in our building and among people I spoke with. One woman whose husband works abroad has an add on card to his credit card for emergencies, but she has never used it. She is also the one who has used a debit card for purchases before.

8

As soon as the demonetisation of Rs.500 and Rs.1000 notes was announced, I had said that it was a forced and public funded "bailout" of banks. This article examines news reports from the last year and explains how I arrived at the conclusion.

Please note: I am not an economist or banker or accountant or even particularly good with money or calculations. As a result, almost all the conclusions in this article are actually quoted from news reports and analysis. I have merely strung them together. I could still be wrong, feel free to argue in the comments.

As soon as the demonetisation of Rs.500 and Rs.1000 notes was announced, I had said that it was a forced and public funded "bailout" of banks. This is a phenomenon polite people call recapitalization unless the government literally dumps money into banks.

This view has not changed. But many are skeptical, saying that excessive money with banks is not good for them as they will have to lend it out in order to earn from it. That is true, and they will have to lower interests and give out more loans and such. However, to those following the news, I'm simply presenting various things that happened in the year before the demonetisation. Particularly with regard to the Non Performing Assets - NPAs. Too many NPAs and the banks won't be able to function. On the other hand... pay attention here: The bank with the largest number of NPAs - State Bank of India - doesn't seem to be in as much crisis as several others - say... Indian Overseas Bank - guess why? Because with that size come plenty of other performing assets as well as deposits keeping the show going.

For the record, it isn't the first time that the government has forced the country into actions that end up putting money in banks. The Jan Dhan Yojana was the first. It doesn't seem to have yielded much. Then came the DBTL, where in spite of the Supreme Court saying that citizens must not be deprived of their rights because of not having an Aadhaar, a convoluted scheme was imposed on them where the gas subsidies provided for the state would be provided as deposits into their bank accounts as opposed to people paying less for gas while buying it. Small amounts at a time, but it would end up totaling to a good amount of money belonging to citizens getting deposited into the banks by the government. People were free to withdraw it, but at least some of it would hopefully remain as deposited, just like some Jan Dhan accounts would indeed see use even if most remained empty. But these are old stories.

The NPAs of banks had increased to an alarming level by the end of the December quarter, last year. Then governor of RBI, Raghuram Rajan had been on the case of banks for NPAs for a while, and took a firm view of the matter, giving the banks until March 2017 to deal with their NPAs. Banks were to start flagging and resolving NPAs and restructured loans and by March, skeletons were tumbling out of banking closets and it was clear that the banks had been underplaying NPAs in order to show better results to investors (presumably). With the pressure on from the RBI, the banks started turning the heat on defaulters. It is no secret that it is banks with large corporate loans struggling the worst with NPAs, and I can only speculate that people who knew people who knew people had a lot of money at stake. To quote from the linked article:

RBI had conducted an asset quality review of Indian banks and found many accounts that were showing stress were required to be classified as non-performing. But since banks were not classifying those accounts as NPA, the banking regulator directed lenders to classify them as sub-standard and provide accordingly. Sub-standard assets attract 15-20 per cent provisioning as compared to five per cent provisioning requirement in standard assets.

RBI had asked the banks to complete the exercise of classifying assets as NPA in the third and fourth quarter.

As a result, many banks including the likes of Bank of Baroda, IDBI Bank, Bank of India suffered record losses in the Oct-Dec quarter. Since the remaining accounts (those which were not classified as NPA in Q3), need to be classified as NPA in Q4, losses could her mount. Bankers said this has prompted the banks to call the management of the defaulting companies and ask them to make payments, which will help the lenders avoid further losses.

Incidentally, this is around the time when Narendra Modi claims that planning for demonetisation started (although there doesn't seem to be much evidence of planning going by the manner in which it has been carried out).

Soon after this began noises of Raghuram Rajan not continuing as the governor of RBI after his tenure was complete. What happened behind scenes is anyone's guess and rumors and claims out in public range from Raghuram Rajan not wanting to continue to the government not wanting him to continue. Regardless, he was succeeded by Urjit Patel, who headed GSPC in Modi's Gujarat when GSPC took loans to the tune of 20,000 crore and basically had nothing to show for them, with no gas ever being produced. His closeness to Ambani (who profited majorly from the GSPC mess) as well as Jignesh Patel is well known. So, given Modi's preference for complete incompetence in area where competence is expected being a requisite for appointments, who better than Urjit Patel to head RBI while it was overseeing banks reducing NPAs?

Unlike Raghuram Rajan's approach, where the RBI would support banks in dealing with bad loans, Urjit Patel was of the view that "bad banks" take over the debt. It is unclear what happened of that approach or whether and what efforts continued toward NPAs, but they continued to rise. Attempts by Modi (and one wonders why Modi) to get Indian state owned firms to take over floundering defaulting companies (and their debt) failed a month before demonetisation was declared by Modi. To quote from the link:

India's government is pushing state-owned steel, power and shipping firms to take over assets of private companies that have defaulted on loans, but faces resistance from them, leaving it scrambling to clear a $135 billion pile of stressed loans from banks' books.

[...]

Last month, steel ministry officials met with Modi to outline measures to revive a sector reeling under bad loans and cheap Chinese imports. Days later, in a renewed push, Finance Minister Arun Jaitley met with top lenders, including State Bank of India (SBI.NS) and ICICI Bank (ICBK.NS), steel and shipping ministry officials and some state-owned companies.

He gave the state-owned firms a list of 23 troubled steel, power and shipping companies with bad loans totaling $14.5 billion, according to government officials and minutes of the meeting seen by Reuters.

The state-owned firms were "encouraged" to buy at least one asset and take a minority stake in a company on the list.

The banks needed lots of money and fast, or many of them being Public Sector Banks with the government owning more than half of them, it would stress the government for funds. One wonders what was wrong with turning the screws on NPAs harder. The banks needed money and fast.

How could this be achieved? Well, how about if all the people in India put most of the money they had into banks and left most of it there?

What followed, with demonetisation seems to be a harebrained scheme to get most of the cash with the country into banks. This is how not only do the banks not have enough cash planned and are not even in a position to provide enough cash in the near future, we have increasing noises about "cashless" transactions being an intent behind the demonetisation. So the money gets transferred from account to account, but remains with the banks instead of returning to the people with limits withdrawn and notes available again.

Then with demonetisation with banks bloated with funds, some of the staggering NPAs were "written off" to reduce their burden and free the money the banks would have to provision for the bad loans. Any taxes the government got would be a bonus (but given the expenses and waivers of demonetisation, I doubt these were the real motive).

Added feedback from someone who knows more about money than me: While the increased deposits will allow the banks to lend more, earn more, lower interest rates, etc, the interest earned by the banks and taxes to the government will no doubt be useful toward recapitalizing the banks. As will various confiscations of deposits be.

So now the thoughtless demonetisation with it unending new rules being pulled out of hats has happened. Banks have a different problem. Too much cash. And the methods to deal with it won't necessarily result in big profits for them. What they will do to existing loans with the economy and thus borrowers stressed far worse is anyone's guess.

Finally, how do I know that this is really a bank bailout and not a coincidence? Well, now that things are going south with the demonetisation, the usual process of protecting Modi from the consequences of his own action has already begun. From being "Freedom at Midnight" - Modi's project planned meticulously and in complete and necessary secrecy for 10 months, the story now is that the RBI and Finance Ministry presented the demonetisation plan to Modi in a manner that "turning down the scheme was out of the question". And guess why (emphasis mine):

Prime Minister Narendra Modi is working “more than ten hours a day” just on ensuring that the 8 November money measures announced by him ensure a smooth landing for the economy rather than turbulence. This despite the fact that the plan actually owed its origin to the Reserve Bank of India and the Ministry of Finance, who persuaded the PM to go forward with an idea which will affect (and has affected) over a billion citizens of this country. Prime Minister Modi showed moral courage in coming forward and accepting ownership of the currency swap scheme announced on 8 November, and has since then publicly backed every twist and turn in that policy by the monetary and fiscal authorities. Senior officials say “Prime Minister Modi was presented with the issue in such a way that turning down the scheme was out of the question”. Through the plan, concerned officials wished to “shield those in high positions in banks across the country from the consequences of the crony-oriented lending that they had been doing, specially since 2006”, the year when Narasimha Rao’s liberalisation policy was fully substituted by the UPA into a faux Nehruvian economic policy that combined Fabian socialism with Wall Street ways. “Officials argued that a windfall of up to Rs 550,000 crore would flow to the banks through the enforced extinguishing of currency notes issued by the RBI, and that this would recapitalise several banks that were in effect bankrupt, thereby allowing them to lend again”. The Prime Minister was assured that “steps would be taken to ensure that the common man suffered minimal discomfort” and that “the informal economy would accelerate its absorption into the formal without jobs being affected”. It needs to be mentioned that it is the formal sector that is responsible for not repaying bank loans of a value crossing Rs 750,000 crore, which will be several times the value of tax evasion by the informal sector. NPAs are being written off by banks at an accelerating pace over the past six years, with still more businesses declaring themselves unviable by the month.

I rest my case.

Political parties in India are not required to account for small cash donations. This has been used to do much evil in India. Political parties should consider exchanging the troublesome notes for citizens as donations received and returned (for whatever reason, including "demonetisation") and get the notes exchanged in bulk at the RBI (or deposited into their bank accounts and withdrawn as legal tender for further exchange).

The RBI cannot shrug off liability for these notes on whim.

rbi-circular-notes-exchange

In current cash strapped circumstances, with banks no longer exchanging cash, the common man can hardly walk up on a daily basis to the RBI. It is an open secret that political parties can be and are used to launder money. For once, this laundering of exchange would actually be in the larger public good.

It is also an open secret that political parties spend considerable amounts of money to "buy" votes. This wouldn't need them to spend a thing beyond the expenses of their own volunteers.

An open political campaign such as this would be a good protest move, help people and encourage them to feel an affinity with your local party office resulting in a win-win situation for citizens as well as political parties. Where distance deems it suitable, exchange and protest marches to RBI for exchange would allow people usually intimidated by the idea of approaching RBI to find comfort in numbers.

Even better, it would save political parties a hell of a lot of money they usually spend on voters, when they help voters survive the BJP. This matters when fighting a party as well funded as the BJP.

Note: I oppose opaque funding in political parties. I believe it violates the voter's right to information on influences acting on the candidate they vote for. However, since parties have resisted transparency in accounts, in this instance I believe that it should at least be used for some good, for once.

3

There is an abundance of claims by the government both about the virtues of demonetisation as well as the duration of the "inconvenience" people have to go through. Here is my attempt to debunk some of them.

To begin with, there is a slight problem. The objectives of the demonetisation have not been officially and explicitly listed anywhere, it appears, so one must draw them based on the Prime Minister's speech and whatever various people have said would be a "good" result from the demonetisation. These include fighting black money, fake currency notes, reducing corruption, bringing most of the money in the country into the banking system, generating more taxes and improving economy. Other non-stated objectives, widely pointed out of course, would be the ongoing bank bailout using private funds of citizens (recapitalizing, it is called in polite circles) and strangling the financial resources and thus limiting power while contesting elections for political opponents.

Let us look at these one by one.

Fighting black money

There seems to be no consensus on how much black money exactly is in the form of currency notes. An estimated 6% of all illegitimate income recovered has been in the form of currency, which does not appear to be a lot in comparison with the losses to the economy from the shock of the demonetisation. How much has been recovered is unclear. There are several reported instances of notes being confiscated. However how much of it is black money and how much is (or gets explained away as) legitimate income remains to be seen. There are reports of the news of the demonetisation already been leaked to the wealthy well in time and is supported by increased sales of gold before the demonetisation being announced. Additionally, as economists are repeatedly cautioning, black money is a result of the nature of the transaction rather than a quality of the money, so the same notes can be black money or white depending on the legality of the transaction and whether it is declared in taxes.

Supporters of the government, in their attempts to silence all criticism of demonetisation have increasingly taken to demonising cash transactions or the possession of cash itself as black money, which is a dangerous perspective in a country where 95% of the transactions happen in cash. They might as well call India a black money country. This view is incorrect and obfuscates facts. However, there is no shortage of reports of the old notes themselves being traded for a lesser value creating an overnight black market ranging from a single note to crores being laundered through agents. Between the advance warning and the laundering a large amount of the already small percentage of black money is likely to have safely returned to its owners without changing color.

A small percentage of people may declare their money and choose to pay tax on it, but this is not likely to be a large amount given that amounts over 2.5 lakh will be flagged for Income Tax, and those that cannot be explained as legitimate income are likely to incur a 200% fine in addition to the tax on the deposit (though there currently does not appear to be a provision under the law), essentially leaving only 10% with the owner of the money. Another percentage of the black money is likely to be confiscated from suspicious deposits in banks and through raids. Given that the Income Tax Department will have to show that this money is not legitimate income, the percentage of money likely to be confiscated will be small compared with all deposits flagged, if for no reason then for the sheer number of accounts that will be flagged requiring manpower to investigate and process. No doubt mass mailing of notices will happen and is already reported to have started.

However, there appear to be plenty of ways for people to launder money, including big and connected agents close to the government, false sales of gold, purchase of gold, backdated fixed deposits in banks, interest free loans, advance salaries for several months to employees and more. The government itself offered the victims of the Kanpur train tragedy compensation in the old and illegal notes. It is anyone's guess whether these amounts were originally withdrawn as legal notes and swapped with illegal ones before giving the victims, since the notes not being legal tender cannot be legally paid out by the government after demonetisation.

But the biggest blow to claims of black money being hindered by #demonetisation is the abundance of people named as having offshore accounts, notorious for having black money, cronies who have benefited from disproportionate favors from Modi led governments (state before center) and of course the noble denizens of the black money rich Bollywood. If all these people support demonetisation, they are clearly not worried about their black money being in trouble.

Fighting fake currency notes

The new notes introduced have no additional security features. Existing notes are already counterfeited, so it does not seem like demonetisation will prevent fake currency to any large degree. In fact, within days of the new notes being released, there were instances of photocopies of the notes being used to defraud people, including, in one instance by school children. The garish color and relatively flimsy paper of the new 2000 rupee notes make even real notes appear to be dubious in comparison with regular currency notes. How soon or late counterfeiters start producing fake notes is anyone's guess, but there is absolutely nothing to indicate that it won't happen. We certainly seem to have failed in intercepting their distribution, or fake notes would not be a reason to demonetise.

The hasty nature of the demonetisation causing the panic and overburdening the banks has not allowed banks to adequately examine deposits to catch and refuse fake notes, so existing fake notes are likely to have been knowingly or unknowingly legitimized with government approved real currency through deposits and exchanges.

Reducing corruption

This seems to be mostly fiction, as even in this short duration, a bribe of four lakhs was paid using the new 2,000 rupee notes, that at the time of being caught had not even been released for a week. Reducing corruption cannot be achieved by changing currency. It would require better law enforcement and deterrents. The government machinery being one of the biggest causes of corruption in the country on every level, the government making a claim of reducing corruption with the simple changing of notes sounds mostly like the fox claiming to provide security for the poultry. Indeed in recent days, we have seen allegations backed by documents that implicate the Prime Minister himself in receiving over 55 crores from the Sahara group when he was the Chief Minister of Gujarat.

Another set of serious allegations come from several quarters, notably a BJP MLA himself, indicating that businessmen close to the ruling party had advance notice of the demonetisation and had already cleared their black money. A third allegation is that people close to the president of BJP, Amit Shah himself are exchanging large sums of black money for a fat commission. This is by Yatin Oza, a former BJP MLA who also claims to have videos backing his accusation as well as makes some realistic challenges about the richest people not featuring among those with large deposits of money into banks. Large quantities of 2,000 rupee notes seen with various people support these accusations, as no one can legally get a bundle of 2,000 rupee notes at this point due to limitations on withdrawal. None of these allegations have so far been denied by the Prime Minster or Amit Shah.

While the country lines up for access to its own cash, a large number of loans by high profile defaulters have been written off. A green fine worth 200 crore levied on Adani has been waived. BJP MLA from Rohtak has publicly reassured black money owners that they need not worry and that Haryana Chief Minister Khattar and Modi were with them. And all this is just within the last few days without needing any extensive searches through history. It is unclear why corruption would reduce under a leadership like this.

Routing most money through the banking system

How much money remains in the banking system is a matter of debate once the cash demonetised is fully replaced. Opinions are split on this. Right now people have no choice, since they aren't allowed to withdraw much cash, and banks are often even failing to provide the allowed limits of cash given the severe cash crunch that is likely to last for 4 - 6 months by most estimates. When they do have choice, it is quite possible that a lot of the cash will be withdrawn right back out. Also, given the availability of the 2,000 rupee notes and their relatively low utility for transactions, the only purpose they could realistically be used in any quantity appears to be hoarding. Even while limited cash withdrawals are allowed, there have been several instances of bundles of 2,000 rupees being seen with people including office bearers of the BJP as well as being used to pay bribes. The instances described in the black money laundering also would remain outside the banking system. So it is entirely possible that while the country struggles for cash, a lot of the illegitimate money may still remain out of the system, merely converted to new notes.

In the meanwhile, there seems to be some evidence for the misuse of Jan Dhan accounts (and indeed it could be done with other accounts too) for parking funds. So money entering the banking system may not necessarily be in a manner desired. My suspicion is also that if there are corrupt bank employees, money could be deposited into the bank accounts of people who aren't even aware that their account is being used for laundering. Such money could probably be recovered by forging signatures on withdrawal slips or misuse of debit cards if the person whose account is misused is known to the launderer and trusts them. There seems to be evidence of this happening as well. Such money would fly right out of the banking system once scrutiny was reduced and if caught, would implicate a complete innocent.

The large number of Jan Dhan accounts lying unused and thus likely to not be monitored by owners are particularly a concern, as they have been suspected to be misused for hawala transations in the past.

Improving collection of taxes

While there will be increased collection of taxes, there are easier ways of doing this with far less loss to the economy. Namely tax reforms, reducing corruption in the tax system and robust enforcement. As of now, about 1% of India's population pays taxes. Given the widespread poverty even with an absurdly low poverty line, how much this number can be realistically expected to rise is anyone's guess. The economic stagnation will also result in fewer taxes being collected because of lost jobs, wages, business losses and devalued goods, even if more people temporarily seem to be on the radar.

Recapitalizing banks

Banks will be recapitalized, loans will be easier to get, interest rates will be lowered... are the expected outcomes from demonetisation. I am no expert on these matters, but given the kind of slowdown the economy is seeing, there will also be reduced deposits, transactions, people digging into savings and businesses collapsing, taking their loans down the drain with them. There is speculation that low interest loans will encourage rebuilding of the economy. No economist of note seems optimistic that it will outstrip the shrinking already set into motion. At best it is put as a possibility in the long run, all things going well. All things don't appear to be going well, given that it will be months before there is any liquidity worth mentioning for businesses. What advantage will evolve in the long run remains to be seen.

Preventing terror financing

This seems to be a popular reason on TV as well as supporters of the government. Modi himself referred to it in his speech. However, going by evidence so far, it does not make sense. Manohar Parrikar hurried to claimsuccess as a halt in stone pelting incidents in Kashmir after demonetisation. This echoes a popular belief within the ranks of the BJP leadership and supporters - that the stone pelting incidents in Kashmir are not spontaneous protests, but well organized and funded with black money. However, this couldn't be farther from the truth. Apart from demonetisation having triggered stone pelting on banks in other parts of the country, the stone pelting in Kashmir had actually reduced by October - as per the J&K Home department data (BJP itself is a part of the J&K government) - well before demonetisation and there have been incidents of stone pelting after the demonetisation as well, though congruent with the slower frequency. Furthermore, Kashmir actually saw the least disruption to daily life and order as a result of demonetisation in the country - this is attributed to the penetration of banking to even remote parts of Kashmir as compared with the rest of the country.

Furthermore, the most counterfeited currency in the world is the dollar and it is also the one most likely to be used by international terrorists for financing, yet demonetisation has not seemed to be a feasible deterrent to any such use if it happens. In comparison, Indian currency has far more limited use - within India and Nepal alone and is even less likely to be used. Several people have pointed out that there is no reason why terrorists wouldn't use online banking and electronic transfers, given that they could be accomplished with fake identities, and being caught for taxes is unlikely to bother those willing to brave the consequences of being caught for terrorism (there may be the potential to dispute this using some jokes on taxes here).

Attack on finances of other political parties

One would expect to see a lot more agitation among political parties if their finances were truly disrupted. And it would have been possible for the BJP to disrupt them quite thoroughly if it had chosen to implement transparency in political funding as well. However, BJP has not done that - quite likely as a result of it being the party with the largest amounts of unaccounted funding in the country at present. Consequently, the other parties are merely opposing the BJP for politics as well as the sheer disastrous nature of the demonetisation. There seem to be no indications of alarm for their own well being.

There have been no instances of black money being found with rival parties or politicans so far. In fact, so far the few instances of large amounts of cash being found as currency notes have all been from the BJP itself. The reason for this likely is that political parties being allowed to accept funds in cash as well as not provide details for donations under 20,000 rupees, it is a routine practice for parties to even show larger amounts of black money as several donations of smaller amounts. Far from being cornered, rival parties would likely be able to comfortably change old notes for new ones, including the potential of laundering black money to white for politicians belonging to the party.

It is unclear what advantage, if any the demonetisation will end up giving BJP in comparison with rivals when measured against the tremendous inconvenience, losses and worse caused to voters.

This post will be updated with links to all the claims and quotes in a couple of days when I get some time. Till then, you could probably google the references up if you need them.

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What follows is a compilation of excerpts from various articles describing the impact of demonetisation.

Demonetisation effect: Cash crunch hits transport business hard

The demonetisation exercise has put the trucking business, one of the largest unorganised, cash-based sectors in the country, in great difficulty. Operators say their truck transport business has been badly hit by the demonetisation of Rs 500 and Rs 1,000 notes as they have no new cash even to pay the drivers, while clients are finding it tough to pay them in the new currency.

“In an effort to let go off their old higher denomination notes, most of our customers and clientele have passed on the abolished notes to us. They threaten us to accept them without which we don’t stand a chance of receiving any revenue from them,” he added.

“The withdrawal limits imposed upon us are too small to cater to middle-sized and large scale operators. How are we supposed to pay cash to drivers who venture out regularly for business related transactions? We are also facing issues with paying our pending installments to banks,” said Shamshuddin Khan, a mid-sized fleet operator.

The operators who use trucks, tanks and lorries for transport of goods and commodities across the nation, have complained against troubles while paying dues of drivers, bank installments and other payments due to cash shortage. With no cash in hand, at least forty percent of their operations has been majorly affected, they said.

“We are not able to take any new consignments or orders considering we have no cash to give to our drivers. Some of our drivers are stuck following the announcement as there is no new denomination notes available for immediate usage,” said Gurvinder Singh, vice-president, Bombay Goods Transport Association.

“One has to understand that plastic money penetration in India is minimum. We cannot expect our drivers to indulge in cashless transactions at one go and neither will they understand how to make use of it all of a sudden. The question remains whether each petrol pump, food joint or truck repair centre in interior areas will have facilities for accepting card payments,” added Manjinder.

Demonetisation effect: Cash crunch hits transport business hard

Demonetisation: At Gujarat protests, farmers dump milk, vegetables on road

Farmers dumped grain and poured milk on the strees at protest rallies in Surat and Anand on Saturday to protest the withdrawal of high denomination currency notes and restrictions imposed on district central co-operative banks (DCCBs) on exchange and deposits.

In Surat, thousands of farmers under the banner of Gujarat Khedut Samaj (GKS) gathered at Jehangirpura in the Randher area in the afternoon, and travelled nearly 10 km through the city with truck-and tractor-loads of wheat, sugarcane and other agricultural produce to the office of District Collector M S Patel at Athwalines.

They handed over to the Collector a memorandum addressed to Chief Minister Vijay Rupani and Prime Minister Narendra Modi, saying there was a danger of prices of essentials like vegetables and milk rising, and possible “disorder” that could impact the Assembly elections in 2017.

At the Collector’s office, the farmers dumped wheat, paddy, vegetables and milk on the road in protest.

In Anand, members of the district Agricultural Produce Marketing Committee (APMC), farmers and women from milk cooperatives joined a huge rally that the district Congress took out to protest the “unplanned demonetisation”.

The protesters emptied sacks full of vegetables on the streets in a symbolic protest against the government’s decision that has affected their livelihoods. The rally travelled to the District Collector’s office where the protesters submitted a memorandum demanding immediate corrective action in the face of the crisis they were facing. The memorandum submitted to the Surat Collector said many villages in Gujarat did not have nationalised banks and farmers operated through DCCBs. “It looks as if the government does not trust the farmers, milk producers and their unions, which is why we have been left out of the financial transaction processes,” the Gujarat Khedut Samaj said in the memorandum.

The Reserve Bank of India has asked DCCBs not to accept or exchange the demonetised Rs 500 and Rs 1,000 notes. Of the 370 DCCBs in the country, 18 are in Gujarat. A large majority of the rest are in Maharashtra and Kerala.

The memorandum said that the monsoon crop had reached the APMCs but there was no cash for traders to buy it from the farmers, who are running out of time to prepare for the Rabi season. The restrictions on DCCBs be lifted, and the RBI should open its own counters at cooperative banks to disburse money to farmers, the GKS said.

“There are over 6.5 lakh account holders of Surat District Cooperative Bank, which has branches across the Surat and Tapi districts. The Surat District Co-operative Bank has over Rs 5,000 crore worth fixed deposits of farmers and co-operative societies like Sugar Co-operative Society, Cotton Co-operative Society, Paddy Co-operative Society, Service Co-operative Society, etc.

 

Demonetisation effect: Unbanked villages, small businesses badly hit as currency crisis continues

The lopsided rural-urban spread of ATMs and bank branches has snuffed out economic activity in rural India, with micro, tiny and small enterprises finding it impossible to get cash in 100-rupee notes for their daily operations.

Consider this statistic: every bank branch in a rural and semi-urban centre caters to more than double the number of people in an urban and metropolitan centre. According to a December 2015 Reserve Bank of India report on “financial inclusion in India”, each rural and semi-urban bank branch serves 12,863 people compared with an urban and metropolitan branch which serves just 5,351 people. The spread of ATMs too is skewed in favour of urban centres. Delhi, for instance, has 9,070 ATMs, more than Rajasthan, the largest state in terms of size.

Now, juxtapose this with the spatial distribution of micro, small and medium enterprises. The data on MSMEs, as per the latest available Fourth Census of MSME, 2006-07, reveal there are 200.18 lakh unregistered rural sector units, and they make up over 55 per cent of such enterprises in India. Urban SMEs are 161.58 lakh. The data from 2007-08 to 2014-15, compiled from the Entrepreneurs Memorandum filed by MSMEs in District Industries Centres, suggests that 22.10 lakh units were added during this period. It doesn’t say if they are rural or urban, but even if they were evenly spread, it does not change the broad picture.

Abhitabh Meshram, an entrepreneur in Nagpur, who supplies potable water in bulk to enterprises including government departments, says there is difficulty in paying cash to even hawkers for intra-city transport and workers, who are paid weekly. “I have another agri-based business, but in mandis, they wouldn’t supply large quantities of onion or garlic without cash.”

Zoom out to a particular state, for instance, Tamil Nadu. It has a million-plus tiny and small units. “There will be no production for a month-and-a-half. Many units in Chennai are still recovering their losses from the previous year when the city was flooded during the monsoon. While it is certain we will not register any sale, it is even more certain banks will debit the EMI from bank accounts on existing loans,” said C Babu, President, Tamilnadu Small and Tiny Industries Association, an umbrella organisation that represents such units, which employ over 15 million workers in all.

“Inadequacy of bank branches is one primary reason why cash dominates small businesses. Many rural branches are open for just a day or two in a week. People consider bank postings in rural India as a punishment,” says Anil Bhardwaj, Secretary-General, Federation of Micro and Small & Medium Enterprises (Fisme). “The smaller the enterprise, the bigger the problem. Anecdotal reports suggest that manufacturing value addition has come to a standstill,” he says.

Source: Demonetisation effect: Unbanked villages, small businesses badly hit as currency crisis continues

Demonetisation effect: Massive layoffs, Tamil Nadu construction workers have no cash or food

* “Work on a villa and apartment project in Navalur (Chennai suburb), where I was employed for a year, was stopped on Sunday (November 13). We have no clue about the whereabouts of the contractor… over 300 workers are waiting for wages.” — R Ayyanar, mason, 42.

* “I have not eaten properly for three days…The contractor’s phone is switched off… We will wait.” — Nizamuddin, construction worker-cum-painter, 32.

These are the voices of only two of the estimated half-a-million migrant and unorganised workers who are facing layoffs in the construction sector in Tamil Nadu, 11 days after Prime Minister Narendra Modi announced the demonetisation of Rs 500 and Rs 1,000 notes.

According to experts and various agencies, the construction sector has come to a standstill in the region. Multiple reports from Chennai — which has the maximum share in the state’s construction sector — Coimbatore, Trichy and other areas warn of a disastrous situation if the currency shortage doesn’t get resolved soon.

Confirming reports that workers were struggling with no food or wages, N Nandakumar of the Confederation Of Real Estates Developers’ Associations of India (CREDAI), Tamil Nadu, said builders who are members of the organisation have been asked to arrange rations for workers at their shelters.

“On an average, there will be anywhere around 100 to 200 workers at a single project. CREDAI alone has 130 members (who are all leading builders) in Chennai. Many of us have decided to supply rations immediately as the situation is not too good. To prevent starvation, some of them have arranged catering services too,” he said.

However, CREDAI does not reflect the total number of builders and projects on the ground. According to a labour department official, there are 500-600 unorganised builders in Chennai, who are not members of CREDAI or other builders’ organisations. “Hundreds of these projects and thousands of workers employed in these projects have been affected. Neither a builders’ body nor a state government can handle this crisis,” he said.

While a labour department official said over 200 major construction projects in Chennai city, Old Mahabalipuram Road and GST Road areas have been either stopped or partially affected in the last four days, CREDAI and other sources said nearly 1,000 major projects in Chennai and Kancheepuram districts have been hit.

B Seenaiah, one of the largest infrastructure developers in the country and managing director of BSCPL, whose firm specialises in major highway and irrigation projects, said the impact on the construction sector may be anywhere between 30 to 40 per cent.

Source: Demonetisation effect: Massive layoffs, Tamil Nadu construction workers have no cash or food

In the absence of cash, business is driven by trust

The impact of demonetisation of high-value currency notes may be the subject of much debate, but one thing is sure: it has increased the availability of credit, based on trust, in the marketplace. This extends from trading in goods and services to lending cash to people without collateral.

Small businesses without card swiping machines have two options: either accept old currency or trade in credit by placing immense belief in their customers. Most are doing both. However, running on credit has hit farmers, who need cash to pay off dues, the most.

G. Muniswamy Gowda, a vegetable grower in Devanahalli, said that he has been supplying vegetables to the market on credit most days. “The traders also don’t have money, particularly not in the new currency or Rs. 100 notes. Most traders in K.R. Market are asking to dump our produce in the market for credit, against a signed note by them. Over the last few days, some of them have paid me in installments. However, I still am owed over Rs. 40,000 and am facing a severe cash crunch,” he said. There is no guarantee when he will receive his pending dues.

The situation in APMC yards - co-operative markets - is no different. “We are unable to pay farmers for their produce as most of them refuse to take cheques. Most of them are giving us their produce on credit. A few are taking post-dated cheques. Our outstanding to farmers has increased multiple times over the last 10 days, to such an extent that we fear that repayment will have to be staggered over the next few months,” said Ravi Kumar, a senior trader in the APMC Yard, Yeshwantpur.

Source: In the absence of cash, business is driven by trust

Demonetisation: Inconvenience to insecurity, the narrative is changing

As the chaos and disruptions continue, following the Nov 8 decision to scrap Rs 500 and Rs 1,000 notes, is the tide turning? Undoubtedly, the initial days of the financial surgical strike drew applause and endorsement from a vast majority of people, especially those in the serpentine lines. Writing on the subject last Sunday, I had argued how the underclass seemed to have rallied behind Modi for what they saw as a decisive and brave move to clean up the system. The nation, it was emphatically declared, was a winner from it. That was the sense coming out of street corner conversations, people on TV channels and news reports from across the country.

Cut to now, I see a once-assured narrative steadily wilting. The earlier almost nonchalant and casual attitude that demonetization was going to be all but a temporary ‘inconvenience’ seems to be rapidly mutating. Anxiety has replaced hope and the previous unflappable patience is making way for discernible worry and anger.

It is evident that the government underestimated the scale and complexity of the decision it took. Pulling out Rs 14.2 lakh crore, or 86% of the money in use by a nation of 1.2 billion people will involve more than inconvenience, for sure. Collecting and counting that money, which runs into 2,200 crore notes, and then destroying them is a humungous exercise that will take months and hugely strain the country’s banking system. So will be the task of getting new bills into circulation.

These are just some examples of widespread impact on the ground. Elsewhere I've blogged about the impact on small vendors that I witnessed personally.