Demonetisation: The Other Side Of The Coin
On November 9th last year, I had to take an early morning flight from Bangalore. By the time I arrived at the airport, it was a picture of chaos and airport hit with flight delays. The cab driver dropped a bomb on me when I handed him a Rs.1000 note. The Government, he said, banned 500 and 1000 rupees notes, and we were instructed not to accept the same. I started sweating in the dead of Bangalore winter. Woefully, I had only those notes, whose funeral was conducted the previous night. We finally negotiated and resolved that he need not return me the balance money. I am by no means averse to technology and innovation, Howbeit, I never took mobile wallets seriously. I always opined that mobile wallets are an idea whose time will never come. I never installed one and still favoured the plastic money.
The Battleground
The opposition parties, of course, have brought the Government to its knees for this very radical move. Those who were party to it wasted no time in circling the wagons and were cock-a-hoop over the achievement. Economists and media-outlets were divided on the Government's decision.
Many passengers were caught on the wrong foot by the demonetisation. The entire nation was thrown into a panic and pandemonium. Intriguingly, the Aam Aadmi or the commoners have maintained their composure and a positive outlook.
There were umpteen convincing reasons not to go for the demonetisation, as taking such a bold step could have proved disastrous for the Prime Minister. The economy was in a robust phase with impressively encouraging major economic indicators. The money supply had a circulation of 500s and 1000s that accounted for approx 86 percent of the Country's currency. The government's decision not to grant another term to the RBI governor didn't go down well with Rajan's sympathisers and fans. Assembly elections of critical States were due. There was some unrest in Gujarat, Modi's home turf. The mood of people and environment was contrary; the air was filled with talk of intolerance and communal undercurrent. Moreover, the Government just assumed power and merely presented two union budgets. Externally, China has been growing its influence on various organisations and throwing its weight behind Pakistan. At the border, intensification of conflict and war tension with Pakistan was mounting.
On the other hand, there were several reasons why the step was necessary and the order of the day. Modi had not taken an audacious blind move. He had laid the foundation for a grand overarching strategy. He'd armed the Infrastructure, Information and Technology before the notes surgical strikes. P.V.Narasimha Rao, The father of economic reforms, the only person I can imagine who would have given demonetisation a thought. Surprisingly, Vajpayee, the tallest leader of our times, granted the Rs.1000 note a third life in 1998. Rs.1000 notes had ceased to be legal tender in 1946 when the first spell of the demonetisation was floated in pre-independent India.
The Background
In 1978, The then Prime Minister Morarji Desai banned high-value notes such as 1000s, 5000s and 10000s. Thirty-eight years later, the wheel has come full circle. However, the impact and aftereffects are different between then and now. In 1978, people never even knew that 10000 and 5000 currency notes existed. The majority in that generation neither had seen nor heard about those high-value notes. Banning of 10000s notes in 1978 was like prohibiting Patek Philippe’s watch or forbidding Bugatti Veyron Sports car today in India.
India's GDP was $135 billion in 1978 with 665 million population and $200 per capita in contrast to 2016, where GDP swelled to $2.260 trillion with 1.324 billion population and $1700 per capita. On the administrative front, I.G.Patel, the RBI governor in 1978, did not buttress the fellow Gujarati, Desai's action, unlike Urjit Patel bankrolled in 2016.
The ugly side of Demonetisation
Horrendous queues across the country, blighted people consisting chiefly of women and senior citizens. It's worth mentioning that the ordinary people had to face the brunt and difficulties due to excruciatingly painful process, but they were amazingly resilient and calm throughout those 54 days. The Government machinery raced against time to get new currency sewn for the play. However, it was in such a hurry that they had printed new currency without changing the security features, this will only perpetuate the counterfeits. The detection of 199 and 638 counterfeit notes of Rs 500 and Rs 2,000 respectively is unnerving and a cause for worry. There was lack of coordination between the machinery of government and RBI. The policies and notifications were issued almost on a daily basis. Nonetheless, altered the prior announcements with lightning speed. RBI has a daunting task ahead to arrest the excess liquidity problem due to the flood of deposits and the foreign investments, short-term consequence, though not adverse.
The positive side of Demonetisation:
According to RBI, 99% banned notes were returned, and notes worth 16000 Crore did not come. RBI's spends on printing and logistics of new currency notes will be offset by the savings. So does the balance sheet tally. There is no additional burden on the Exchequer or the Government on this front. While one can argue that almost all the black money found it's way to the RBI but not without a trail. Never mind Black Money; We knew that demonetisation would not impact big fish. But India successfully eliminated the unaccounted-for counterfeit old currency.
The average joe need not deal with the chillar issue anymore as the paperboy, milkman, tea stall, boutique, salon, vegetable vendors, the neighbourhood grocery shop and others adopted the new found technology and swiftly got equipped with mobile wallets and card swiping machines. Since years, salaried people were envious of those who earned in cash, because the salaried paid one-third of salary to the treasury towards taxes, and the latter didn't. Barely few months after demonetisation new assessees came into the purview and were brought into the Income-tax net.
There is no more risk of thefts and perils as people need not carry bundles or a pile of cash. This initiative, in a way, gave a fresh lease of life to the promising startups, financial technology and other sectors.
The winners and losers of Demonetisation
In the economy where cash is the king, the move was a kind of nervous breakdown, primarily to agriculture, SMEs, transport, media production, and other unorganised sectors that contribute nearly 40 percent to GDP. Moreover, unemployment soared in those industries, in the aftermath of the demonetisation. As per RBI's latest data, credit and debit card transactions registered 15 percent growth since digitisation. Furthermore, the volumes of mobile banking transactions surged 100 percent. I saved the best thing for last. The mobile wallets, whose business, I disapproved and dismissed all these years, stood out from the crowd and has continued to flourish. The demonetisation provided mobile wallets with a massive shot in the arm, as mobile wallet's volume grew by 350 percent during the year.
The common man or Aam Admi emerged as the clear winner right from the beginning of the Demonetisation. Never mind those massive lines in front of ATMs and Banks. Notwithstanding inconvenience caused, middle-class Indians were cheery and hopeful that the Government's efforts bear fruit someday if not immediately. The Income Tax department has already witnessed 25 percent increase in tax returns filed, after demonetisation. Advance tax collection of personal income tax and self-assessment tax surged 41 percent and 35 percent respectively. These figures are a testament to the outcome of Demonetisation. Demonetisation was the only way to track and unearth those shell companies and its money syphoning routes. This exercise has brought to the fore a bevvy of the shell companies and fictitious accounts. More than 5800 shell companies are being probed for alleged money laundering.
The Foreground
It's all right to shoot at the tyres of a racing car, when it was hijacked and off the radar. We can always accelerate from zero to top speed under a guided and transparent route.
Let's hope to see that there are substantial economic gains to the commoners as a result of Demonetisation which I find akin to De-worming of the financial health of the nation.
