India’s Demonetization! A failure or a success

 

Night of November 8th 2016, Prime Minister Modi in a 48 minutes address to the nation announced 500 & 100 rupees notes amounting to 86.4% all currency in circulation in India (14 lakh crore rupees or roughly about US$200+billion ) would be illegal as of midnight, 3 hours is what he gave the country to pull 86% of the country’s money out of

circulation and this in a country where cash represents 98% of all transactions by volume. 

Within days real result of Modi’s announcement became apparent. There was severe disruption of regular economic activity. Over 90% of the financial transactions happens in cash, and over 85% of workers depend on it.  Everyday economy came to a grinding halt. Lack of planning unleashed anarchy on the economy and insecurity amongst people.

Banks did not have enough currency printed, not even a fraction of what was enough to meet the consumer demand for new notes so they restricted withdrawals to small amounts of cash that were insufficient for most people.

Bigger question arises, under which provision of the law can an Indian citizen be denied access to his own account? Can Modi name one country in the world that disallows people from withdrawing money from their own bank accounts? RBI told the Public Accounts Committee On January 18th 2017 that it was up to 60%, SBI estimated it may go up to 70% by end of February 2017, the economic survey claims it will all be back by the end of March 2017.

Inadequacies in printed currency.

Even more in-efficiency came to light they started printing notes but didn’t print enough quantity of the smaller notes, so people were lucky to get two thousand rupee note but no one could make change for it.

furthermore there was even more inefficiency with the ATM’s and it never occurred to the government to realize that if they want to put new notes into the existing ATMs they should be the same size as the old notes but they made them a different size so they won’t fit into the ATMs and then they hire 50k+ engineers across the banking system to recalibrate the machine.

demonetizationThe fastest growing economy in the world can no longer boast of a booming economy, it has suddenly become a cash scarce economy, production went down in all sectors, small producers could not get working capital, some businesses have had to shut down daily wage workers who are a majority of the labor force in our country, many of them lost their jobs because firms didn’t have the cash to pay them.

The economic survey published by the Finance Ministry states “these demonetization is an aggregate demand shock an aggregate supply shock and uncertainty shock and liquidity shock”. All India manufacturer’s organizations, macro and small-scale industries and traders have incurred 60% job losses & 47% revenue losses because of the demonetization. Large infrastructure companies they’ve surveyed have reported a 35% drop in employment and 45% drop in revenue.

Unemployed India

Construction industry which employs four and a half crore people has virtually ground to a halt. A drop of 80% to 90% in revenues, there’s even been an inventory pileup because there’s no consumer demand. Former Prime Minister Dr Manmohan Singh estimated that the GDP of India would shrink by 1 to 2%. Local industries footwear in Agra, garments in other parts of the country, rubber in Kerala and transport everywhere slowed down, in many cases had to be suspending their work for lack of money.

demonetization The informal financial sector, rural money lenders who provide loans that amount to 40% of our total lending that’s infrastructure has all but collapsed inside rural India. Fishing industry depend entirely on cash sales. This has even affected coastal security. Number of boats going out to sea severely reduced. Because of the demonetization that’d be a fewer eyes and ears looking for suspicious activity in the maritime waters. Traders are losing variable stocks, farmers are dumping their produce. Foreigners suffered because of demonetization.  demonetization Tourism prevails by word of mouth, how will you bring back the trust of foreigners who spread the word of their harrowing ordeal in demonetized India.

Where is black money!

The damage is so extreme that the pain inflicted is outweighed by any tangible gain. What was again “let’s take black money” for example. The estimate was that many people rather than attract the attention of the law enforcement authorities and of the tax authorities would not return their money. They would destroy their black money. Various agencies estimated around 25% to 35% of the specified bank notes would not be deposited. The government expected that four to five lakh crores (US$60 billion to US$100 billion) would be rendered worthless on account of not being deposited. what happened!?

demonetization It seems that black money holders found creative ways of laundering their money and the result is that most of the estimated black money in circulation this four to five lakh crores that the Attorney General mentioned has flooded into the banks, now it seems that some well-placed friends of the ruling party may well have been allegedly tipped off because the well-connected clearly were able to unload their money, none of them seem terribly troubled by the November announcement.

By the end of December 95% to 97% of the money in circulation reached the banking system. In our eyes it looks like at most you will have 2% to 3% demonetized banknotes undeposited. So the primary objective of cleansing the economy, we can now forget it. In fact the RBI governor himself considered there is no impact at all.

The corruption

Now as we all know, all cash is not black money, all black money is not cash.  Most of it is invested in real estate, golden jewelry, investments abroad. Round-tripping that has seen the money returned to India stock markets as foreign investment from countries like Mauritius. After demonetization the income-tax department announced it had seized 500 crore rupees (US$5 billion). Unaccounted cash and strikingly 92 crores (US$.92 billion) of that black money happened to be new notes, so what’s going on!? 

 Some bank managers are over sitting in their banks from 9:00 to 5:00 telling people they had no money. From 5:00 to 9:00 in the evening they were getting money out the backdoor to those who could launder it. The government’s drive against corruption. They have created new forms of corruption. Clearly it has merely changed color and shape that money has become white.

demonetization If you’re going to bring new notes then you have to have strong security features with the design in order to prevent counterfeiting but it seems the government has missed the opportunity to put incredible security features in the new notes. There’s no new watermark, no new security thread or fiber, no new latent image and certainly no nano chip; so will a mere color change of color and size make them safe?

People’s suffering

Shockingly RBI  printed three different versions of the 500 rupee note. If all three versions are authentic. Is that going to confuse the public and make it easier for counterfeiters?

Under the supervision of the government’s own national investigation agency. The estimates of fake currency notes in circulation is only 400 crores or roughly 0.03% of the currency withdrawn. It also indicated that the ability of banks to prevent these notes being deposited was limited because a sudden announcement & short deadlines. Lots of money flooding in and the machines couldn’t tell the fake notes to tellers.

Housewives salted away their savings in biscuit tins, stories of individual tragedies have been mentioned, hospitals turning away patients, suffering middle-class, wage earners unable to buy medicine for the sick, 115 people reportedly dying, demonetization resulted in an increase in domestic violence cases, so the people at the bottom of the economic pyramid have been the real victims of this policy. The finance minister talks about expanding the tax net. Look at the cost at which it is going to be! Prime Minister talks about cashless economy. What is going on? No cash in the banks, ATMs or with people and that’s the kind of cashless economy?