Wednesday, December 7, 2016

Debates, Discussions, Demonetisation and Distress

Debates, Discussions, Demonetisation and Distress

Most discussions and debates on demonetisation have a few things in common: the move is right; it is the worst planned event in India’s economic history; calculations on black money went wrong; and rural masses are in distress unable to meet their daily needs. I am a strong votary of demonetisation. I am, however, not a supporter of complete digitisation or cashless economy. Less cash economy can be a target of gradualism and not maximalism.

Former Governors of RBI, C. Rangarajan, Y.V. Reddy, and Subbarao also lent support to the move in their articulations in the Press and media. Kenneth Rogoff, renowned economist also supported the move, but the mechanism suggested was gradualism and not a sudden action like the currently engineered measure. However, would all these articulations, mine not excluded, alleviate the distress of the vast rural masses?

Both houses of Parliament demanded a discussion, but were unwilling to discuss demonetisation for reasons that the common man was unable to understand. The distress of those who had to bury their dead or had imminent marriages in the family, not to mention the plight labour on daily wages has been immense. 


A few important macro-economic and demographic aspects deserve a recap to understand the implications of a cashless economy. Cash to GDP ratio of Indian commerce is 10%. Only 4.3% of people pay tax and all they have deposited all their cash savings into their bank accounts during the first 15 days of demonetisation. 30% of the population is illiterate; only 17% of the population has smart phones that can use mobile apps for money operations. In the past credit cards, debit cards and net transactions have all been victims of cyber-attacks putting the customers and banks to huge losses and causing fear among users.

From priests to prostitutes, informal and small businesses and many others will continue to deal in cash for ages to come. The cash economy has not been extinguished even in developed nations that have the highest density of mobiles. 

Wealth inequalities are very high in India. The richest 1% owns 58.4% of India’s wealth and the richest 10% of Indians owns 80.7% of wealth. The bottom half of the population owns a mere 2.1% of the country’s wealth (according to the latest data on Global Wealth by ‘Credit Suisse Group, EG, a financial company based in Zurich, Switzerland’. Hence introduction of ‘wealth tax’ and ‘estate duty (inheritance tax)’ is essential.

Pertinently, 25% of the population is poor and does not come under the tax net. Another 20% of the earning population is below the tax threshold. This leaves approximately 51% who evade or avoid paying taxes and these should be the target of the government. Where are these persons? Movie producers who declare often that they spent hundreds of crores of rupees in producing movies; actors who receive lakhs and crores of rupees; real estate; professionals like high flying advocates; chartered accountants, politicians, doctors and several businesses in hardware, waste and scrap, wood and wood products, hawala merchants, politicians of all hues etc., all come in the evasion bracket of 51%. 

Are the Prime Minister and the Finance Minister ignorant of these facts? I imagine not. Can the digital economy be accelerated in just 50 days by strangulating cash economy? Any increase in digital payments, can, at best be just icing on the cake. Digitisation should be a long term goal. The immediate objectives of demonetisation, like containing inflation, preventing access to terrorist havens and bringing to book tax evaders are all laudable and the entire country supports the move.

The Planning Department, Government of Telangana, carried out a quick survey on the eve of the visit of a Secretaries’ Committee of the Union Government on the impact of demonetisation. The survey done in Warangal, Siddipet and Rangareddy (urban) districts throws not merely the difficulties of the affected persons but also provides solutions worthy to note for immediate implementation. 


The quick survey with 15 questions covered 26 staff members at secretariat representing all cadres in planning department; 480 persons representing domestic households, farm households, retail traders in vegetables, kirana etc, and self-help groups and women in Siddipet, a similar number in Warangal that also covered education sector and R.R. Districts. The sample is spread at random in the mandal headquarters. Options include: Option 1: Good policy and good implementation, Option 2 Good policy but bad implementation, Option 3 Bad policy and bad implementation. 

38% of Farmers, 42% of Agriculture Labour, 27% of Self-employed, 88% of Business people and 23% of Employees said that they are facing a “severe problem in their day to day life” after demonetisation. The Integrated Household Survey by the State Government in 2014 revealed that 46% did not have a bank account. After Jan Dhan Yojana the percentage declined to 25%. It is well-nigh impossible for this 25% of the population to open bank accounts before December 30, 2016 as the coverage of bank branches, Banking Correspondents, BFs, Post offices and even much-maligned cooperative societies have no access to this population. 

The survey revealed that about 73% of respondents welcomed the demonetisation initiative but felt it is badly implemented. About 19% thought it faulty both in policy and implementation; this constituency is mainly educated persons with post graduate degrees. Income stratification reveals that 40% of persons earning less than Rs5 lakh per annum find that the policy is poorly conceived and badly implemented. About 79% of the staff having income levels between Rs5 lakh to Rs10 lakh and 83% of the staff having income levels between Rs10 lakh to Rs15 lakh said that the policy is good but poorly executed. (see the chart).

The government has an archaic Treasury Code that is incompatible with digital operations of State Governments. This Treasury Code should be revised on a mission mode if the reform agenda has to be placed on a firm footing. All budget sanctions and releases of both the central and State governments should shift to digital banking.

Some suggestions made by respondents to the survey cited are of great value and the PM and FM may like to pay heed to them:
·        Reduce income tax rates and introduce wealth tax for the super-rich.
·        Withdraw all incentives provided to the high-end housing schemes
·        Remove service charges, surcharges and all other taxes on credit / debit card transactions.
·        Government should provide POS machines to each vendor to encourage online / cashless transactions.  Digitize the transactions of the value of Rs.500 and above.
·        Mobile ATM services may be extended to rural and hard to reach areas and frequency may be increased.

What surprised many was that Banks like HDFC Bank, ICICI Bank, Axis Bank, Yes Bank, which boasted high volume of online transactions were doled out higher volumes of currencies of lower denominations compared to PSU and private banks that predominantly cater to cash-using segments of society. Undue favours from the RBI were patently seen in some places. 

It is not too late to take effective steps to mitigate the pain and suffering that is expected to continue for another 28 days by taking note of what people have to say.