Frontline Gist: Issue

December 9, 2016

Monumental Blunder:

Government announced move of demonetization on 8th November 2016 in which the government declared that currency notes of Rs. 500 and Rs. 1000 denomination, which accounted for more than 85% of the value of notes in circulation (and around 25% in terms of sheer numbers), would not be legal within four hours.

Reasons for Demonetization:

(Related Article: All pain for the majority, by C.P. Chandrasekhar, page no. 21)

• Issue of black money and sucking it out from the system
• Holding those who hold black or unaccounted wealth
• Problem of counterfeiting currency
• Flow of counterfeiting notes from across the border that fed terrorist activities are to be stopped
• Setting up of egalitarian society
• Dream of cashless economy and all further transactions to be kept in check
• Push to Digital India

Misplaced Assumptions and problems of scheme:

(Related Articles: All pain for the majority, by C.P. Chandrasekhar, page no. 21; Interview with Pronab Sen, by T.K. Rajalakshmi, page no. 26; Deadly disruption, by Seshadri Kumar, page no. 128)

• The first presumptions was that the black economy consisted of black wealth held and hoarded as black money that would lose all value and disappear after demonetization. The reality is that black wealth either flows out of the country only to return through transit routes
• Second was that the cash economy in which incomes are earned in cash and spent without being deposited in a bank, where sales in cash were based on purchases made in cash, where purchases and payments were made in cash even if the flow of cash was mediated by the banking system
• Third was that at today’s prices Rs. 500 or Rs. 1000 was a sum that was not required in routine transactions so that impounding notes of that denomination and withdrawing them from circulation would not affect the cash economy described earlier
• Fourth was that for considerable period of time those requiring cash for cash would be able to manage with small volume of 2000 rupee notes and 100 rupee notes, even when more of the latter would be needed to provide the change in the transactions that lie between Rs. 100 & Rs. 2000
• Fifthly that forcing out counterfeit notes in circulation would address the problem of counterfeiting, whether resorted to for profit or to wage war on India.
• Next that it is being defined as more of a penalty rather than a preventive measure as it has no provision of stopping corruption
• A cashless economy imposes a certain cost on each transaction which is like a tax
• Informal sector that has maximum contribution in Indian economy works on cash and if the savings are put in bank then harassment to prove your money
• Rural poor do not have the option of plastic economy
• Cashless Economy: Data from Global Financial Inclusion report prepared by World bank show that things in India are improving but still they are fewer bank accounts
                 a) Report says in 2014 only 11% of Indians aged 15 years or above made a payment using credit or debit card & 2.2% use mobile phone to make payments
                 b) In 2014, only 6.4% borrowed from financial institutions whereas as 12.6% borrowed from private lender, 6.6% from a store by buying on credit, 5.4% from employer                       & 32.3% from family and friends
                 c) Only 20% Indians get salaries through bank accounts & 0.2% use mobiles to pay utility bills
                 d) JAM trinity still suffering from backlogs
• Low density of bank branches in rural areas
• Government modifying scheme rules 64 times in 50 days

Impact of Demonetization:

(Related Articles: Politics at its Cynical worst, by Venkitesh Ramakrishnan, page no. 4; Wrecking the system, by V. Sridhar, page no. 14; All pain for the majority, by C.P. Chandrasekhar, page no. 21; Interview with Pronab Sen, by T.K. Rajalakshmi, page no. 26; After the shock, by Anupama Katakam, page no. 29; Ruined livelihoods, by Akshay Deshmane, page no. 32; Rural Distress, by T.K. Rajalakshmi, page no. 34; Despair in Delta, by T.S. Subramanian, page no. 42; Choking a lifeline, by R. Krishnakumar, page no. 47)

• Ironically the stated objective of unearthing massive amounts of black money has emerged as the weakest argument in its favor. The flip flops in deciding the procedures to be adopted and the confusions they created only exposed weakness of the governments failure
• In many places the kharif crop had been just harvested and at some other places just to be harvested demonetization hit like a tsunami
• Lack of currency in ATMs led to huge queues and literally a cashless society
• Long queues in banks to deposit and to withdraw new currency notes which even led to many deaths
• Techno-utopian fascination that has a ready constituency among tiny section of the elites which sees the world in its own image and ignoring the ground realities
• Most affected community has been the farming community which needs to dispose of a crop that has been just harvested and some seeds to be sown all is done in cash but they have been left in lurch
• For India’s poor, middle classes, economic life centres around the cash economy & when government chose to freeze the economy they also froze
• Large informal sector depends on cash and cash is the lifeline & according to National Commission for Enterprises in unorganized sector, the informal or unorganized sector comprises all unincorporated private enterprises by individuals or households engaged in sale and production of goods and services worked with less than 10 workers
• In agriculture both production and income side none is taxed i.e. 18% of GDP right away from economy and they depend on savings and now their saving is futile and they have to prove that the money is theirs
• Inflation as production, distribution and availability cycle is blocked
• The beating to cash driven sectors like gold and real estate and complete Indian industry is gung-ho about derecognizing notes
• Private consumption is expected to decrease
• Rural economy in distress as some areas had bumper crops they are not able to sell ; all four largest markets run by APMC suffered major losses
• Rural economy comprising almost 65% of Inida’s population is a cash economy. Plastic money is an unheard concept ad with just 53% having bank accounts it is unrealistic to have cashless transactions
• Cutting both the deposit and credit facilities of cooperatives cut down only hope for agriculturalists
• Women had saved money to meet exigencies as well as for some family rituals and ceremonies were forced to part with their savings apart from being labeled as “black money” holders
• One subsequent result has been that RBI directive to cooperative banks has been that farmers are unable to pay back their crops both to banks and to moneylenders as well
• Coming on top of a severe water crisis following a failed monsoon and the Cauvery deadlock demonetization has played a cruel joke on farmers of the delta districts on TN
• With no ATMs in villages and nationalized banks having their branches mostly in towns, farmers across TN do not have money even to buy groceries
• The strong cooperative movement in state whose origins can be traced back to the years of independence and they have liberated poor from seclusions have suffered a set back
• As cooperative banking system lay immobilized the IT department issued notices to many banks and societies to open their books for scrutiny and thousand of depositors were left in lurch
• The chaos led to protests and repeated requests to roll back the decision and check the proper implementation
• Middle class, neo-elite suffered

By: Anuj Sharma