Demonetisation and Public Response

Since the announcement of demonetisation on 8th Nov, 2016, a fierce debate has been kicked up. Opponents of demonetisation, which include virtually all opposition parties and a large number of economists and intellectuals have claimed dooms day for Indian economy, where GDP growth will be lowered by two percentage points, people will lose jobs, many will not get wages, nearly a trillion dollar informal economy will come to a crashing halt. Repeated assurance that discomfort may minimise by end of the year, as promised by prime minister, did not cut much ice. 

Repeated dooms day prophecy is enough to sow seed of doubt in the mind of believers. As difficulties rose, as I stood in line without much success in getting money from bank, I felt without planning why did government embark on such a move like taking out 86% floating currency? I was raging mad, when government was using words like Yagna, Aahuti etc. Yagna for whom? Who is giving aahuti, when common Indians are losing their wage, their health, sacrificing their happiness standing in queue to withdraw their own money? At the same time, it started appearing that many people in collusion with bank officials were getting access to new currency notes, while common Indians were turned away from gates of banks, due to currency shortage. To add insult to injury, during a four day long holiday banks remained closed. No one even filled the ATMs. Question arises, are bank employees not part of nationwide Yagna? Why bank employees are not giving Aahuti of their personal comfort at the alter of national Yagna?

As I look at the situation nearly forty five days since announcement of demonetisation, the following are my thoughts and/or questions:

  • It appears that long winding queues in banks are reducing. I had personally experience this in two banks in Delhi. I was told by friends and relatives in Kolkata, Mumbai, Vadodara and Kerala, that cash crunch is not pinching. ATMs at many places, however, are still not working with regularity. 

  • We are told repeatedly in news media that people are leaving their jobs in cities. Many are not getting their wage in cash. Many people do not have access to bank account. Vegetable markets are shut. Small vegetable vendors, it appears, are losing business. So are many small corner stores that sell groceries. Yet, when I visit markets like Sarojini Nagar in Delhi, a market frequented by middle class people, or when I visit a mall, I find these places full chok o bloc. Parking lots are full all the way unto level two of basement. In places were only cash in new currency was accepted, there was no shortage of people queuing up. This means, either there is no shortage of cash or digital transaction was working fine.

  • Big question is why people most affected by the move appear to believe Mr Modi? Some say poor are voiceless, they have no means to protest. Another thesis is moral capital of opposition political parties and politicians is so low, that no one believes them on corruption. Poor of India has seen many regimes and many governments, yet nearly 600 million Indians remain poor despite poor friendly people at the centre. May be poor of India wants to experiment. 

  • Demonetisation has brought to forefront Vijay Shekher Sharma, owner of Paytm bank. First generation English speaking man in family. Vijay Shekher is the people Modi is banking on. Fiercely patriotic a man cries when national anthem is played. His dream to see a resurgent India. Poverty is not new to Vijay Sekher. He once walked from ISBT to Greater Kailash because he did not have bus fare. A billionaire many times, Vijay Shekher believes money is only worth the opportunity it offers. These new breed of Indians and many young people like them, which are 70% of Indian population, will grab demonetisation with both hands. Because it opens new opportunities we do not see in rich vs poor, short vs long term, election win vs loss debates.

Demonetisation Debate, Points to Consider

Decision to demonetize Indian high value currency notes has kicked up huge debate. Many have highlighted serious implementation issues. Problems that has created a lot of inconvenience / hardship to common Indian people. There is no doubt common people have faced serious difficulties. 

Many well meaning individuals have written scathing articles against the government. Some had questioned the move on ideological ground. Others have personal distrust and disgust for anything that prime minister Modi does. I shall try to understand points raised by Ms. Amulya Gopalakrishnan and Mr. Amit Varma, in Times of India. Without going into individual articles, let us look at key points raised by both authors:

1. Government is promoting technology in its pursuit of digital India and cashless society. India has poor infrastructure of technology. Even most developed countries with much stronger digital infrastructure, hardly use 40% transactions in cashless form. The examples of Germany and USA were quoted.

Critics of government policy are loosely using cashless with low cash as a synonym. Government has said that it will try to induce population towards alternatives of cash. This may bring more money into banking system, there will be transparency in transaction and pressure on banks may ease. It must be noted that in most developed economies of the world, cashless transaction constitute nearly 70 – 90% of all transactionsIndia is hoping to reach a modest level of 30% to 50% cashless transaction.

Yes Indian digital infrastructure is creeky. Yes many people do not understand how banking system works. But a thousand mile journey starts with the first step. India has taken the first shaky step. A lot depends on how different state governments work with central government to strengthen the move and educate general population.

2. Many Indians in rural area do not have access to banks. Rural folks are not adept with banking system. Crooks in the form of government employees will cheat common villagers, who do not have any understanding of computers and digital mechanism.

In India, people in rural areas are routinely cheated of their due by rich and powerful. What to say about rural poor, even urbanites and semi urbanites are made to sign a wage amount and disbursed an amount lower than the signed amount. These victims can be  highly educated a college professors, they can be educated mill workers or uneducated / semi educated tea garden labourers. The practice of making payment by cheque or transferring money electronically into payees account may eliminate middle men, remove bribing and put a stop to paying less than agreed wage. Yes there can be corruption in this process also. False account can be created or money can be transferred to a different account. Insistence on adhaar based KYC may minimise creation of false account. Transfer of person A’s salary to person B’s account may be minimised if account number and name do not match. In India, corruption is all pervasive and corrupt are extremely innovative. For that matter, liquid cash is all the more vulnerable to robbery, pick pocket and theft.

3. Privacy of common Indians will be at stake. Government will keep track of all financial transactions. Paper trails will be everywhere. 

A vast majority of Indian people live below subsistence level.  We must discuss in a country where poor are routinely deprived of their due is transferring wage directly to a persons account really bad? We must discuss, after initial hardship of opening a bank account and transferring money to the account, is it so bad if a farmer or daily wage earner can move his money from point A to point B without having to commute many miles or kilo meters? What is the significance of privacy debate, when a vast majority of Indians do not have access to decent living conditions? Many Indians bathe in the open, many ease in the open and many defecate in the open. Our indicator of human development is very poor, be it education, be it healthcare, be it sanitation. We must ask, why seventy years post independence we are so illiterate, why lack so much in infrastructure? 

4. Many women who save money in nooks and cranies of her household will lose her independence. She will be forced to open a bank account.

Are we to understand women save money in 500 and 1000 rupee notes only? If it is true, such women are not poor. They can always open an account. If women save money in 10 to 100 rupee currencies, these notes have not been demonetised. 

Whatever, may be the scenario, government has not forced anyone to open a bank account and/or use digital transaction. Any individual, opposed to alternate methods of transaction can always use cash. If a large number of citizens adopt cash as preferred mode of transaction, then e-transaction promoted by government will fail. Similarly, if a house wife or for that matter any woman and/or man, opens a bank account and transacts electronically, she / he will still retain independent besides earning interest on savings.  

Understanding Demonetisation Debate

A lot has been said both for and against demonetization of high denomination currency notes in India. Nobel laureates Prof. Amartya Sen and Prof. Paul Krugman have denounced efficacy of the mechanism. On the other hand, Prof Jagdish Bhagwati has praised demonetisation as a bold move, and S. Gurumurthy, an idealogogue of RSS, has claimed demonetisation to be a paradigm shift. In the political front, former finance minister Mr. P Chidambaram has called demonitisation the biggest scam, while the current finance minister Mr. Arun Jaitley has enumerated numerous benefits of demonetization on the posterity.

It has been argued that demonetisation has put Indian poor people through extreme hardship. Forcing people to use digital methods of transaction, has the potential of compromising individual privacy. Besides, India lacks proper infrastructure for conducting transaction using electronic means. 

In a country, where a vast majority of people live below subsistence level, in a country where rich and powerful dupe poor illiterate population of their daily wage and other entitlements offered by government, should we debate about futility of electronic transaction? In a country where 70% population is young, what do we understand of demonetisation? Was it needed? Here is my understanding:
  • Indian economy is predominantly cash driven. Cash economy is not illegal provided cash is moved back into circulation.  A sizeable proportion of Indian cash is hoarded and used in parallel economy or black economy. It is believed that almost 30% of cash is circulating in parallel economy.

  • Cash – GDP ratio is an indicator of cash component in national goods and services. Simply put, cash – GDP ratio ascribes monetary value to goods and services a country produces. Generally, most of monetary value of GDP is in electronic form. World average of cash – GDP ratio is 4%. In India, this ratio is between 10 – 13%. This indicates, a lot of valuation of GDP is floating around in cash.

  • In a predominantly cash economy, government has no control over tax it collects. Tax is the source of revenue for government. In India hardly 2% people pay income tax. Most of taxpayers are salaried class. Tax is taken out, before their pay cheque is delivered. Rest, small businessmen, farmers, daily wage earners, vegetable vendors etc, may not have black money, do not pay tax. Many others with black money, obviously are not poor,  also do not pay tax on their unaccounted wealth.

  • Money that government misses out in the form of tax, deprives government of its revenue. Government has to raise tax or borrow money to fulfil its commitments to its people. Borrowed money when comes in circulation leads to inflation. Because excess money fuels demand. Too many people compete for fewer goods. Raising tax makes many citizens to hide their income, this results in generation of black money.

  • Money that is with rich in the form of unaccounted money also fuels inflation because of extravagant consumption of ill-gotten wealth by a small percentage of population. Most of the unaccounted money is invested in gold, real estate and stocks. 

  • As a result of inflation, value of money erodes. An evidence of this erosion of purchasing power of rupee is evident from the fact that when government demonetised its currency on Nov, 2016, 85% belonged to 500 and 1000 rupee notes. Had government avoided present step of demonetisation, in coming years as economy and inflation grow, who knows may be value of rupee would further erode and we would trade in 5000 rupee notes. 

  • It is important to note that black money can also be used for a variety of illegal activities like funding terror against the state. Instances of bank robbery in the state of Jammu and Kashmir, may indicate drying up of funds for terrorists due to demonetisation. It is being reported that naxalite movement and insurgency in north eastern states have also been affected by demonetisation.

One objective of demonetisation was to bring unaccounted money into circulation. There could have been two possibilities. First black money owners would destroy their tranche. In such a case, RBI will be relieved of its liability to pay for the lost currency. This may give government more fiscal room. Second scenario can be money is deposited in banking system. As of today, we have seen that more than expected amount of money has come back into the system. This, though not anticipated, may have advantage of bringing unaccounted money into main stream, increasing tax base and providing more revenue generation for government. 

It has been argued that money coming back to government may suggest that there was no black money in the country in the first place. Such a contention is absurd at its best. It is easier to understand that corrupt have found ways to convert their  unaccounted money using helpful and corrupt bank officials. A recent sting operation conducted by a television channel also confirm that many political parties have no problem converting their unaccounted money. An alternative approach involved using ordinary citizens to either exchange money or parking stash on behalf of black money holders. 

It is important for government to bring more people under tax net. Because higher the revenue, greater the amount government spend on social welfare, on healthcare, on education, on infrastructure development etc. The idea of digital transaction is an extension of demonetisation plan. As economic transactions become more and more transparent, business men, both Indian and foreign, may find it easier to do business in India. Employment opportunities for Indian youth may increase. For a country whose 70% population is young, it is important that there is sufficient opportunities. I think demonetisation, when followed by other steps, is likely to clean up Indian economy to some extent to the benefit of Indian population.

Success Sweet Success

One evening last week, I was out for a walk. In our neighbourhood market I saw people queuing up outside an ATM. This YES bank ATM has been lying shut since 9th Nov, 2016, immediately post announcement of demonetisation of 500 and 1000 rupee currency notes. Along with others, I also stood in the queue with a degree of trepidation. Queue was reasonably short, may by 20 people ahead of me, still nobody was sure if they will go home with cash in their pocket. We were informed that the machine was giving only 2000 rupees per card in 2000 rupee currency note. So there will be enough money in the machine for every one. Yet I was nerveous to to inform my home. I had become the butt of jokes. A person who diligently stood in line without ever getting any cash. 

Gradually we were moving up the queue. Anxiety level increased as we reached the gate of ATM kiosk. “Will there be enough money till I reach there? Why is this person taking so much time? Hurry up man, there are so many people behind you!” Those were cries from people at the door who were getting impatient and nerveous. “Could it be so near, yet so far!” I wondered. 

At last I was standing infront of the machine. I inserted my card. Under pressure, I started making repeated mistakes. First I inserted my card in wrong orientation. Then I inserted it when machine was not ready. Third time I did everything right, but when machine asked for amount, I punched my ATM pin. My transaction was rejected. Crowd behind me was restless and exasperated. “Come on. Do it properly. We are waiting. We cannot be here all night. Why are you punching anything other than 2000? Don’t you know this machine delivers only 2000?” Those were some angry shouts that entered my ear, which were red by the time with embarrassment and anxiety. Finally, one friendly fellow person came in to show me how to insert the card. Voila! There it was my first new 2000 rupee note. Much to the anger of people behind me, I tried my second card. I got another 2000 rupee note. This was my moment of success after a long time

Landline to Mobile Telephony : Technology Has Changed Lives

In India of my childhood, like almost everything we take for granted today, phones used to be rare and sign of status. The black device used to fall sick at the slightest pretext. State of public phones were even worse. They almost never worked. Besides many did not know how to use a phone. Some used to scream at receiver while putting mouth piece in the ear. No wonder many could not communicate. Calling long distance used to be a challenge. Most of the time number would not connect. When lines got connected, one had to really scream. “Helllooo! Helloo! Howww are you all? Fineee?” In a way it felt like by screaming a customer is getting value for his money. 

First time I went out of India, I wanted to call back home. I dialled telephone exchange and wanted to book a call. May be because of my accent or because of absurdity of my request, operator did not say anything and put down the phone. After some wait, I called back again and angrily enquired why did you not connect me? Operator said, “sir you do not need me. You can dial from your phone anytime”. So things worked this way also? I was so ignorant. 

We got a phone connection at home in late 1980s. Landlines would often go bad. One could hear a gurgling sound when received is picked. Many weekends one had to stand infront of linemen of the locality and beg them for resolving the issue. Technicians managing landline used to be powerful.  For money, these technicians could connect person X’s line for long distance call to person Y. Many had side businesses beyond managing MTNL.

Then came, mobile phone. I got my first mobile phone in early 2000. Since then so much has changed. Today my cell phone and that of my maid or that of my boss may differ in the type of handset we use. But we can choose what plan we subscribe to. 

Phone has become increasingly smarter. We can do shopping, banking and many other things using our phone. More importantly, we do not have to beg for better service. Today, we have many service providers. Competition is intense. So, officers in phone company treat customers with patience lest they lose a customer. Such a sea change from days of monopoly of government operated MTNL. Technology has brought in such sea change in lives of people.

Demonetisation, Coping From Cash to Cashless

Ever since demonetisation announcement, questions have been raised if India is ready to go cashless. It has been asked, how would Indian poor who are not familiar with banking system cope? Forget about use of credit and debit cards for transaction, hardly 300 million Indians use smart phone. How will another 900 million Indians access their banking needs?

I was listening to an interview of Mr. Nandan Nilekani , father of Adhaar card, by Ms. Barkha Dutt of NDTV. Similar interviews have been given by chief of NITI Ayog Mr. Amitabh Kant, and CEO of NPCI Mr. A P Hota to other channels. 

A variety of options are available for doing cashless transactions for all sections of society. 

Link adhaar card and phone number to bank account. There are 35.7 crore adhaar linked bank accounts in India. Nearly 108 crore people have adhaar cards in India. Any or all people can link their phone number and adhaar card number to their bank account. At present there are 

Use cards for transaction. It is believed there are 700 million cards including credit, debit and prepaid cards in India. 

  • Debit card money can be deducted from bank account. User has to use a four digit pin to activate transaction. 

  • Credit card pays money and bills customer at the end of the month. One can pay credit card bill using a cheque or net banking.

Use phone for transaction. Customers who do not have smart phone, can use their regular phone for transaction. Customer has to press *99#. Using this number, one can access their banks provided their mobile and adhaar card number is linked to bank account. Using this facility one can deposit and withdraw money. Though *99# can be used from any phone, the system is meant for people who do not have access to smart phone. The process is cumbersome. It needs getting used to the system and its processes. Nearly, 300 million can avail this facility. It is important to be ready with the following information, before one starts transaction:

  • register for IMPS in debiting (paying) bank;
  • register for mobile banking in debiting (paying) bank. Obtain mPin and MMID from bank. 
  • Crediting account should also be registered for mobile banking. The crediting account should have mPIN and MMID. 
  • I think crediting account should be registered in the IMPs of debiting account. 
  • It will be important to have MMID, mPIN, and last four digits of account number handy.
  • Instead of MMID, one can have option to use IFSC code. If using IFSC code, 16 digit account number must be handy. mPIN and MMID must also be kept handy for ready reference.

Use smart phone for transaction. Customer can download a variety of apps from google play store. Some created by NPCI like UPI, backed by many public and private sector banks. Customer has to link his debit or credit or net banking to the UPI app. Many banks have their own app, like SBI Buddy, HDFCZAPP etc. 

Customers can also use private operators like PayTm, Mobikwik, Chillar, Citrus etc. Phone companies have also entered e-wallet business in a big way. Airtel, Vodafone, Reliance all have e-wallet. Customer has to download the app from google play store. I found Paytm wallet to be  very user friendly. One can set up Paytm account in the following way:

  • Download the app from google play store. 
  • Create an account with mobile number and/or e-mail. Set a password. 
  • Link credit card, debit card or net banking for transfer of money. In a given time, one may carry just enough money in Paytm wallet, like an ordinary wallet, and pay. 
  • One can also receive money from family and friends. 
  • When shopping, one can scan Paytm barcode or enter mobile number of shopper and pay. Money in Paytm wallet can be transferred to bank account.
  • Beyond a certain limit of transaction, I think a business account needs to be created.

In rural areas, as well as for customers who cannot sign their names, micro ATM machines can be used. Micro ATMs are Point of Sale (PoS) machines. In urban areas these machines can be used to swipe cards. In rural area using finger print or using retina scan, PoS machines can carry out transaction. Per se, PoS machines cannot issue money. Officer, or bank mitra, carrying PoS machine can issue cash. There are nearly 1.5 Million PoS machine in India. This number is likely to double to 3 million in a few months. Micro ATM can be used for cashless transaction using Adhaar account. 

As it appears, infrastructure exists for transition from cash to cashless. All we need is changing the mindset. In India we are used to cash transaction. We feel comfortable if we have cash in our wallets. Changing from cash to electronic money will need change of mindset. It may take some time to getting used to. Specially for older generation. Younger generation, than constitutes the bulk of the population, may adapt to transition faster and better. Let us see how older generation that is controlling power reacts.