Monday, January 02, 2017

Demonetisation and cashless economy debate

Yesterday at a meeting in the city which was attended by not many economic experts, it was very interesting to see how different aspects of demonetisation and cashless currency were discussed. It was more of an education, awareness and clarifying session, though the discussions did raise issues that made everybody think and be concerned about the direction the country's economy was taking.

Even though I am not an economist or a person trained in economic sciences, as a concerned citizen and as my intellect permits, I shall be listing out the various points that came up for and against demonetisation / cashless currency during the discussion. I shall also be making an attempt to look at how the future of the country is going to be shaped by these steps. While all attempts are made to remain apolitical, the issue has become very complex and complicated, that I expect to receive adverse remarks anyway !
Demonetisation in the actual meaning of the word refers to taking out higher value denomination currency notes out of circulation and replacing them with equal value of low denomination currency.

Cashless economy refers to a system where transactions are done using the medium of the Internet transferring from one account to the other or other banking instruments like cheques, draft etc enabling more transparency and in the process ensuring better accountability in the system. 
(Ironically in India presently after the Nov 8, 2016 declaration of the Govt of India withdrawing higher value denominations of Rs 500 and 1000 from circulation, due to a glitch in the capability of the system to print equivalent value of currency, the total value of currency withdrawn has not yet been fully replaced and has led to a unique situation that has had far reaching impact on the spending styles of the citizens). 

Even though these are totally different aspects, in contemporary Indian political compulsions, due to poor planning to replace the withdrawn currency with equal value of low denomination currency, the government was forced to mix up the two issues. These two issues have been interlinked to such a great extent that demonetisation and cashless economy have been made out to be two sides of the same coin ..

Points Favouring demonetisation / cashless economy

1. Under a determined and united political leadership, it is bound to succeed.
2. It has helped to forcibly turn black transactions to white bringing revenue for the country
3. Lot of people who were not filing IT returns have now woken up from the slumber and are exploring ways to pay tax.
4. Demonetisation and digital transactions are just two of the arrows in Modi's quiver. More radical and far reaching economic reforms are forthcoming in the coming few months
5. The financial restructuring exercise is so mammoth and 50 days is too short and not a realistic time period to see the success of a massive programme in a country of 125 crore people spread over an area of 3.29 million square km.
6. With more money as deposits coming into the banks, banks have already reduced the lending rates
7. The reduced money in circulation (or less notes chasing more commodities) is likely to bring down inflation to the less than 4 % range
8. If more people switch over to digital transactions, higher tax revenues that can be realised on these transactions by the country.
9. Demonetisation has choked the supply of black money / counterfeit notes in the system from across the border and has effectively reduced terrorism funding in Jammu and Kashmir to a great extent
10. With increased revenues coming, the central govt can even think of doing away with the Income tax in the country (which unfortunately is paid by just 1.25% of people in the country)
11. Demonetisation has reduced corruption in the country in government offices
12.More of digital transactions will get more parts of the economy being open and taxable, profiting the government to generate more revenues that can be used for constructive govt projects like building infrastructure, promoting industries, agriculture, R & D etc.
13. In future by restricting all high value transactions above Rs 50,000 through cheques or other banking instruments, the entire financial system in the country can be cleansed in one shot
14. More transparency in the system will see less of cash flying out of the country in times of economic and political crisis ensuring a stable country and government.
15. An economic exercise of this magnitude afecting 125 crore people (1250 million people) cannot bear fruit in fifty days or two months, it may even go to three to four months in a vast and diverse country like ours.
16. Never in Indian history has any former PM shown such great daring in undertaking a mammoth financial exercise.  Lets be patient.

Points against demonetisation / cashless economy

1. As per an article in The Economist, the globally respected and topmost economic magazine, only 3% of the country's transactions are in digital form, it will be a herculean task to convert at least 20% of transactions to digital mode
2. Even the highly digital transaction countries like US and Europe are aware of the travails of getting a society completely migrate to cashless economy (these countries have less than 50% of their financial transactions in the digital mode). Some of the common transactions cannot be shifted to the digital or cashless mode, like for example paying a vegetable vendor in the village market as different from paying for vegetables in a super market. Any idea of a completely 100% cashless society is this an utopian dream.
3. Digital transactions entail commission / costs to the customer and the client (between 0.5 to 2.5% of value of transaction) while physical transactions are made without any transaction costs.
4. Digital transactions through Point of Sale (POS) terminals and ATM counters, necessitate remembering logins, passwords etc. Majority of Indian aged population are not educated enough to handle all these by themselves. This brings to the fore one of the greatest risks in exposing an untrained section of the population to the advances in IT. This also makes these digital transaction instruments highly prone to unauthorised use, malpractices and criminal acts leading to litigation adding to the burden of the existing legal system.
5. Even the servers of the very sophisticated Public and private sector banks in the country are not enough secure to ward off hacking threats from both within the country and from across the borders . These actions put the common citizens at great risk of losing their money
6. Reserve Bank of India regulations that limit the amount of money withdrawn daily and weekly from the banks has denied the citizens the freedom to use their hard earned money the way they like (as per the undertaking given by the government to protect the freedom of every citizen to transact using the monetary instruments for their needs)
7. The large amounts of money that have been deposited in the banks, more than 13 lakh crores, exact figures not yet disclosed by govt, will give enough freedom to banks to again forward "doubtful"advances to defaulters and to write off unredeemable advances and non-performing assets (NPAs) to the tune of Rs 7.5 lakh crores which is due from the (click on this link) top ten defaulters of the country.
8. Of the 15.4 lakh crores of demonetised Rs. 500 and 1000 currencies taken out of circulation and in turn deposited in banks, almost 100% has been returned (the govt has not yet disclosed these figures) exposing the government claim that about 4 lakh crores, ie. 25 % would never be returned, which constituted the black money in the system.
9. The cost of printing the new notes and increased stress on banks and personnel to control crowds in front of banks and ATMs has run into thousands of crores of rupees which has been colossal loss for the country.
10. The productive time of the citizens that has been wasted by having to stand in queues in front of Banks and ATMs, this has also been a colossal waste.
11. Demonetisation has been done without proper systems, checks, balances and preparations in place, for example not having enough notes of small and medium denomination in circulation. This has created so much panic and fear among the people resulting in more damage to the economy than benefits. The industrial and agricultural productivity got affected in a great way which will show up in the coming four to six months.
12. An unfinished job is definitely going to make the citizens less confident in government promises and guarantees, this will result in confusion and distrust in the country and its leaders
13. Internet access is restricted mostly to the urban masses, limiting the reach of cashless banking
14. Banking facilities are limited to the urban and semi-urban areas in the country and is limited in the rural areas of the country, with the result that  rural people have to suffer hardships and loss of earning opportunity to carry out financial transactions
15. According to data from, only 35% of Indian population have access to the Internet, how can India walk to a cashless society even in thirty or forty years ?
16. Understanding how mammoth it was to succeed in the cause of demonetisation, the government tactfully shifted its focus to digital transactions, which also is turning out to be intractable.
17. By giving false hope to the people first regarding depositing Rs 15 lakhs into their bank accounts and now a clueless government fumbling on how to deal with the mess it has created with poor preparations (partly due to poor research and information in the first place) is becoming a big challenge for the government.
18. Industries having slowed down with slumpish customer demand across the country, migrant workers employed in Maharashtra, Karnataka are being sent back in droves to their parent states of Bihar, West Bengal, Orissa etc. These unemployed youth can be a social problem in these states.
19. Even trading activity across cities having fallen by 25% and in some cases to 40%, the government will find it difficult to get the economy back to good health in the near future.
20. Less focus is presently on developmental activities and infrastructure building operations in the country and more focus is on setting right an intentionally disturbed economic system. This is not a developmental move.The GDP growth is set to slump by 0.5 to 2 % this year.
21. Over the past few months government focus is only on the economy, thereby stifling growth across other sectors of the economy needing urgent attention.
22. If the economy slows down for consecutive two quarters, it will negate whatever benefit this move would have brought in the first instance. With the first quarter after implementation closing up, the govt needs to be extra careful not to let this move backfire.
23. By demonetisation, the government is only targeting 6% of the black money in the system. 94% of black money rests in gold, real estate and in swiss and foreign bank stashings. The government instead of concentrating on this 6% with 125 crore people should have gone after the major 94% with a couple of lakhs of hoarders and anti-nationals, this would have yielded more returns and wealth in the country, (Wilfred Pareto's famous 80-20 rule !!) if that was what the PM's true intentions were.
 24. Getting 100% cashless currency in a country is an utopian dream and is not workable anywhere in the world. Even though it is publicly known that cashless currency was a face saving measure of the government to save itself from failure in demonetisation, let the government not dilute and deviate from its original aim and make a mockery of itself and the system.
25. If the PM had targeted political mileage in elections in UP in the coming months and in a haste had implemented this move, the noble intentions of the PM to help the country is at question ..
The country is looking forward to find out what is the government and RBI's next move to salvage the situation ..
Will the government continue to be in overdrive mode, remaining positive that in the long run, these measures will help cleanse the system of its drawbacks accumulated over the past seventy years or be unmindful of the pain it causes to the citizens by denying them freedom and liberty to pursue their interests and passions with their own hard earned money ?
As the third largest economy in the world, the unique Indian experience is being closely watched and studied globally as to how the present financial cleansing exercise will impact the people of the second most populous country of the world and how the political systems transition to the changed times. Now since the country has already embarked on this adventure,  there can be no looking back. Renewed focus should be now on exposing the black money in real estate, gold and foreign stashings of Indian citizens. Hope the PM would look into it seriously for the betterment of Indian economy.
Dr. Manmohan Singh our former economist PM in 10 years from 2004 to 2014, brought our country from #10 in the world to #3 to world stage and global recognition. Our present PM has shown guts and courage to tie down the ghost of black money.
Let not our offensive be only against black money, let us also concentrate on multi faceted progress in society along social, economic, religious, cultural, health, science and technology lines combined with industrial and agricultural development. Then finally after some years we will become the second largest economy in the world after China, overtaking United States.
I am more than sure that Modi and the peole of India together can help India overtake United States as the second largest economy in the world, helping India preserve its cultural, religious, social tolerance, ensuring scientific technological development, good health, self sufficiency in food and economic growth of its citizens. A tall order, but achievable ..
Let us all pledge our  efforts in that direction !!
To that state Father, let my country awake !!


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