Monday, 21 November 2016

Demonetization: A bad idea even badly implemented

In the past, the Soviet Union, North Korea and Zimbabwe and other nations also took draconian steps to retire large bills, but most were responding to crises marked by hyperinflation, and were ruled by dictators. India may be the first democracy to attempt this kind of purge in stable economic times.

Prime Minister Modi in his televised address to nation on Nov 8, 2016 announced demonetization of Rs.1000 & Rs.500 currency notes to eliminate (1) black money (2) corruption (3) fake currency and (4) Terrorists operating cross border but failed to give any justification how these complex things will be achieved by a single step with devastating effects on states revenues, agriculture, real estate, retail, informal sector, cine industry and many more effecting 850 million people very badly.

On some simple analysis it would be clear that the stated objectives i.e. four objectives will not be achieved by this step but this action has political undertones with eyes on forthcoming UP elections, then RS elections, followed by President and Vice President elections.
  • Black money which is over 20% GDP ($2.25 trillion or Rs.150 lakh crores pa) amounts to Rs.30 lakh crores pa. Out of which is it is in the form of cash by only 6% of cash in circulation (Rs.17 lakh crores) and i.e. lakh crores.
  • With Rs.2000 and Rs.500 new notes replacing existing Rs.1000 & Rs.500 only black money stocked in cash gets emptied but corruption & black money generation will remain unaffected.
  • Fake currency is just 0.028% of cash in circulation (Rs.17 lakh crores) i.e. 476 crores only, a minuscule component. Printing Rs.2,000 notes alone costed Rs.12,000 crores apart from logistics & exchanging expenditure. 
  • Terrorist fake money mainly printed by ISI from Pakistan will only get effected and the existing stocks held in Pakistan will be effected. With respite of few months it will come back to normal state. Needless to stay 1,400 km border mostly on plains is impossible to seal. Only active vigilance can control this menace.
  • Bulk of the terrorist money is routed through normal banking channels reaches sleeper cells in various cities. The demonetization have no effect on them.
Demonetization might give some instantaneous benefits - cash profits to central government due to unchanged cash (estimated at 20% i.e. Rs.3.5 lakh crores) for reducing its deficit, strengthening banks base and still have surplus cash hand during the year of demonetization. But taking into consideration significant reduction of states revenues, GDP growth reduction and its devastating effects like impact on cash sectors like agriculture, retail, informal sector, real estate, cinema industry and almost all aspects of economy and more importantly enormous difficulties faced by 30 crore people in exchanging notes and disruption of services, the losses far out weigh benefits and it is nothing but insanity to resort to this unscientific political step during stable economic times eyeing only on political benefits, which may or may not accrue. Immediate deflation followed by inflation violent volatility pushing the economy to brink of collapse, is another aspect. This is like jumping into well and committing suicide, in the name of radical measures.

Almost all the bank loans have real estate as mortgage which is over valued by at least 4 times. With real estate values plunging to below 50% mark, the willful loan defaults will increase and banks viability gets threatened.

Scrapping large currency notes may destroy some hidden wealth today, but the black economy will start regenerating itself tomorrow. Only as a nation gets less poor do corruption, black money and the role of cash decline. There is no shortcut. The least corrupt countries tend to be richest countries from Singapore (Per capita $85,382) and Norway (Per capita $68,591). They are small too 5.40 & 5.16 million. In contrast, India is country with 130 crores population, per capita income of $1,718 (Rs. 114,000), 26% illiterate, 29.5% below poverty line of Rs.32/47(Rural/Urban) etc. corruption and black money will exist in some form of other. The prudent way is to keep them under control with strict processes and vigilance.

  • GDP of India is $2.25 trillion (Rs. 150 lakh crores) and per capita income of $1,718 (Rs. 114,000).
  • India ranks 7th and contributes 2.65% of total world's GDP.
  • India shares 17.5 percent of the total world population and 2.4 percent of the world surface area.
  • Cash in circulation amounts to 12% of GDP.
  • The black economy is about 20% of the formal economy.
  • Tax collections amount to 16% of GDP, at least 5 points less.
  • Bank deposits amount to 60% of GDP, strong for a poor country.
  • India currently ranks 76th in corruption.
  • Rs.1000 & Rs.500 notes constitute 86% of Rs.17 lakh crores currency in circulation.
  • 20% i.e. Rs. 3.5 lakh crores is unlikely to return to banks for exchange leaving windfall to RBI & Central Government.
  • Black money in the form of cash is 6% of cash in circulation i.e. Rs.1.02 lakh cores.
  • 90% of transactions takes place in cash. Remaining in credit/debit cards and other modes.
  • Fake currency is just 0.028% of cash in circulation of Rs.17 lakh crores is just Rs.476 crores.
  • Cash stocked with naxalites extortion is of Rs.5,000 crores.
  • Printing new currency alone costs Rs.12,000 crores apart from logistic and exchanging expenses.


Demonetization of  Rs.500 and  Rs.1,000 currency notes, it seems to have dealt a body blow to nascent Telangana State, pushing its finances deeper into turmoil. The sectors or schemes expected to be severely affected are major and medium irrigation, Mission Kakatiya, Mission Bhagiratha, roads and buildings, housing, social welfare schemes such as Aasara pensions, Shaadi Mubarak and Kalyana Lakshmi, pre and post-matric scholarships and fees reimbursement, partial waiver of farm loans, power subsidy for farm sector, release of funds for panchayat raj and urban local bodies, interest payments and servicing of debts, etc.

The revenue will be just enough to pay salaries, allowances and pensions of government employees. Drought in the previous two years and flash floods in the current year have impacted the state's economy. Demonetization has compounded the woes.

Modinomics is literally bleeding the Telangana State red!
KCR is flabbergasted with all his next election winning strategies blasted and in rubble, apart from he, his family and his party's accumulated black money gone.


Replacing Rs.500 notes, printing of which started on Nov 10, 2016 is likely to take at least 6 months with all four security printing presses going on 3 shift basis with 80% load factor. That means currency woes will ease by May 2017 only. Economy with acute shortage of cash for 6 months is likely to undergo violent volatility of deflation and inflation and collapse is not ruled out. Coming back to pre Nov 08, 2016 level is at least two years away.


Anil Bokil a member of the Pune-based ArthaKranti Sansthan, has propounded the concept of Artha Kranti – an economic solution designed to end the vicious cycle of corruption with specific focus on black money. It seems Prime Minister Modi granted 9 minutes and extended to 2 hours audience and and made up his mind for the proposed the demonetization of high value currency notes.

Making payment systems miserable for transactions leads to bartering or using gold as medium of exchange or a combination.  As long as corruption is a low risk and high profit activity it will flourish. Systemic modifications should result in increasing the risk and minimizing profits apart from ethical education and convincing the people that paying taxes is for their well being. Today, no Indian believes this.

It is so much easy to design variety of mathematical models ignoring people's psychology. Modi himself escalated to throne with the help of corruption money, rogue politicians and greedy businessmen. Today talking scriptures is no use. What is important is to modify system with built in incentives for tax compliance and at the same time increasing the chances of getting caught and penalized to bring corruption to unprofitable levels.

  • In a democracy, not consulting economic institutions and legal experts and driving the nation to this type of brink of collapse is nothing but madness and committing suicide. 
  • Where is the detailed plan with risks and its mitigation? 
  • The procedure has been modified 13 times in 6 days of panicky management. 
  • RBI Governor is hiding. 
  • PM cries and invokes patriotism and begs for 50 days patience.
    Patriotism is to be invoked during emergency situations only.
    On Nov 8th situation was very much normal.
  • PM evades his presence in Parliament. 
  • PM announces his life is at threat but doesn't let us know why the matter is not handed over for investigation? 
  • FM & others simply says people need to make short term sacrifices for long term benefits. Does they mean to say that in short term poor & peasants have to sacrifice and in long term rich, educated, rogues and loafers will garner benefits for themselves? Why no body is taking responsibility for the situation which landed 90 crores of people standing in streets under hot sun for several hours for nothing.
  • Today, after 13 days of demonetization, cash and economic activity situation is totally out of control and fortunately rites haven't erupted. Despite 55 deaths, Government has not announced any mitigation steps except making some speeches of patriotism and patience and long term benefits after 2 years. 
  • Poor and peasants are left to the mercy of God.
    Shamelessly they say easing would take 50 more days.

It is worthwhile to recollect how much caution Israel Prime Minister Yitzahak Rabin exercised before approving "Operation Thunderbolt" a daring military rescue operation of hijacked hostages of Air France plane and held about 100 Israeli passengers & French crew at Entebbe airport in Uganda in 1976.

On the contrary, on Nov 8, 2016 our flamboyant "chaiwala" Prime Minister Narendra Modi announced "Demonetization of Rs.500 & Rs.1000 notes" based on some body's presentation about structural changes in economy without any deep study and understanding repercussions plunged the nation into economic chaos and mitigation would require about six months and recovery is at least two years away. It is just like jumping into a well and committing suicide.

Finally, the currency is an instrument issued by RBI and Government has no role in managing that except by an Ordinance followed by an Act of Parliament. Modi announced demonetization by an executive decision which is grossly illegal and its legality will be scrutinized in courts.

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