Demonetisation - Much about nothing - RBI report

The Hindu Businessline | August 30, 2018

The RBI, its annual report released on Wed Aug 28, 2018, has revealed that only  ₹16,050 crore out of the  ₹15,44,000 lakh crore (1.04%) of the scrapped higher denomination notes have not returned back into the banking system and therefore remain missing or unaccounted for. This data has raised questions about the overall gains and the impact on the economy, especially the informal sector, because of the disruption 'Demonetization' has caused. 

• The Modi government had framed the dramatic announcement as a move to clamp down on corruption and black money, cut off terrorist financing and tackle fake notes. But with almost all the demonetised notes coming back, everyone wonders whether the stated purpose of demonetisation has been served.
• Modi's hidden objectives of demonetisation were (i) its perceived windfall in terms of an enhanced dividend for the government from the RBI as government expected at least 30% (~₹5,00,000 crores) of cash, black money stacked will not get back into banking system and (ii) disarming opposition parties with all their stacked cash becoming worthless and thus paving his way to win UP elections effortlessly.  
• The initial narrative by the government was that a large amount of demonetised currency will not find its way back into the system. This purported benefit did not materialise in any significant way. It cannot be said that significant losses have been inflicted upon those holding black money.  
• The claim that it would lead to an increase in tax collection, nothing can be anything with confidence.
• During the reporting financial year, 522,783 pieces of counterfeit notes were detected in the banking system, which was 31.4% lower than in the previous year.
• The cash-based terror and criminal activities may have been disrupted for some time, as did cash-based legitimate activity, it is not clear that there has been any significant disruption.
• The liquidity surge in the banking system that came about in the aftermath of demonetisation complicated the RBI's conduct of monetary policy.
• RBI had to introduce many instruments to absorb demonetisation induced liquidity from banks.
• The increase in CRR dented bank's earnings.
• The mopping up of liquidity eroded the RBI’s earnings. 
• RBI's expenditure on printing of currency doubled from the previous year. 
• RBI's income for the year decreased by 23.56% and its expenditure increased by 107.8% resulting in a sharp decline in the RBI’s surplus.
• Demonetisation served as a negative shock to the economy. GDP growth in the Jan-Mar 2017 quarter slowed to 6.1%, and to 5.7% in the next quarter (April-June 2017). 
• A number of small-scale businesses were adversely affected. The unorganised sector especially bore the brunt of the sudden shock. Economic activity shrinkage is over ₹300,000 crores & loss of jobs at over 2 million, this is the worst any PM could do to any nation. 
• The value of banknotes in circulation increased by 37.7% over the year to ₹18,03,700 crore as at end-March 2018. The volume of banknotes, however, increased by 2.1%.
• While there no benefits at all (all pain & no gain), the clear lesson is that tax reforms and effective monitoring of suspicious transactions are a better alternative for addressing the stated objectives. 

What India has done to its money is sickening and immoral - Steve Forbes ... In November 2016, India's government perpetrated an unprecedented act that is not only damaging its economy and threatening destitution to countless millions of its already poor citizens but also breathtaking in its immorality. Without any warning India abruptly scrapped 85% of its currency. It claims the move will fight corruption and tax evasion by allegedly flushing out illegal cash, crippling criminal enterprises and terrorists and force-marching India into a digitized credit system. Human nature hasn't changed since we began roaming this planet. People will always find ways to engage in wrongdoing. Terrorists aren't about to quit their evil acts because of a currency change. There's no misunderstanding what this is truly about: attacking your privacy and inflicting more government control over your life. What India has done is commit a massive theft of people's property without even the pretense of due process--a shocking move for a democratically elected government. (One expects such things in places like Venezuela.) Not surprisingly, the government is downplaying the fact that this move will give India a onetime windfall of perhaps tens of billions of dollars. By stealing property, further impoverishing the least fortunate among its population and undermining social trust, thereby poisoning politics and hurting future investment, India has immorally and unnecessarily harmed its people, while setting a dreadful example for the rest of the world. 

Political narrative slipping out of Modi’s hands

It is not unusual for governments to become unpopular in their last year or two. But what surprised many is that the same thing happening to Modi, the master communicator, the king of narrative, the man who sets the agenda others follow, the slayer-of-demons who won UP despite the failure of demonetisation, and who knows how many rabbits he could still pull out of his hat.

• The gory details of the brutalisation of women, recently at Kathua, J&K and Unnao, UP,  shocked people and angry protests followed. PM Modi maintained stoic silence for weeks as usual, breaking his silence only after public outrage, protests that continued even after the government has woken up. April 2018 could well have been December 2012. The intensity then was much greater, but the pattern is similar.
• The government appears to be out of control and has lost its grip over the political narrative. Every week there’s a new crisis that makes the government look worse than it did the previous weekend. The negative headlines drown out PM Modi’s photo-ops.
• A year ago, after winning UP elections with three-fourths majority, the Modi government looked so powerful people thought it would rule forever. Everyone had exclaimed. Modi and Shah inspired fear and awe alike. 
• On July 31,2017, the provincial princeling of Patna, Nitish Kumar, felt compelled to give into the force of gravity, falling into the BJP’s waiting arms. Nobody can defeat Modi in 2019, he had declared triumphantly.
• Exactly a month later, on 31 August, GDP for the Q1 of 2017-18 were published. India’s GDP had fallen to 5.7%, the impact of demonetisation was writ large. It was clear that things weren’t going to look up anytime soon because the mangled, badly designed and hurriedly rolled out and messy implementation of GST on July 1, 2017 slowed down business activity and hurt job creation. 
• UP voters knew the truth is that demonetisation had failed to save any black money but voted for the BJP for other reasons. But demonetisation and GST hurt everything: jobs, rural economy, private investment, government revenues, consumer confidence and so on. The government cherry-picked economic data to defend itself. Spin-doctoring can make you believe any lies except the bit about the money in your pocket. 
• The government managed to carry the political narrative over disastrous demonetisation and GST as successes, only till the GDP numbers were out. Since then, the Modi narrative has fallen week after week. Less than a year after the stupendous victory in UP, the Modi juggernaut is not looking beyond the pale of the cycle of anti-incumbency that inevitably follows mandates of hope.
• Week after week, the Modi government’s own tall promises made through lofty slogans -- Beti Bachao, Digital India, Re-exam warriors, Co-operative federalism, Na khaoonga na khaanay doonga, Chowkidar of public money, Saffron Ambedkar all have boomeranged on Modi's face.
• I&B minister Smriti Irani’s attempts to muzzle the press with the fake news bogey backfired. An unprecedented press conference by four sitting Supreme Court judges fuelled speculation that the government was interfering with the independence of the judiciary. The government’s attempt to shove Aadhaar down people’s throats without a consensus furthered its anti-democratic image.
• The BJP’s big reply to its critics was that it keeps winning election after election. The party’s good performance in the NE was overshadowed by its humiliating loss of Gorakhpur & Phulpur in UP. Dalit alienation by Yogi government in UP forced the BSP to ally with SP that raising doubts over the BJP’s election machine.
• The Gujarat election result was a victory that didn’t feel like one. Instead of improving BJP performance dropped to below 100 seats for the first time since the party’s rise to power, due to farm distress. The story was repeated in bypolls in Rajasthan’s Ajmer and Alwar. Farm distress and unemployment both became big stories that overshadowed the government’s tall claims. This, more than anything else, cast doubts over the party’s invincibility, and the inevitability of their 2019 victory. 

With an year to go for the 2019 general elections, Narendra Modi landed himself perfectly on a sliding slope, with no hope for him to rise and shine again? 

Read the source article

Modi proved himself as the worst PM India ever had, so far, did nothing for poor, peasants, unemployed youth & common man and focused in only enriching richer people, who hitherto fills his coffers. He ruthlessly destroyed informal sector which provides employment to masses but doesn't pay taxes. He has only empty rhetoric promises for them only to be forgotten in next few seconds. He doesn't care for constitution, democracy, rule of the law, laws of the land, institutions, traditions, allies or anything that comes his way. He was only successful at winning almost all elections till date. When he loses elections in 2019, which is almost a certainty, BJP leaders would be more happier than anyone. 

UP Farmers cheated by Modi & BJP

• Recollect the opinion polls during UP elections 2017, which confirmed absence any kind of wave and predicted BJP as largest single party falling short of majority and SP+Congress combine close behind and BSP at a distance. Few days before start of polling, Modi dramatically promised farm loan waiver for small and marginal farmers of UP that helped BJP rode to resounding victory.
• Astonishingly, farm loan waiver was a failed strategy and Congress style of populism was always thrashed as an ill for the economy and strangely adopted by Modi-BJP in UP elections. Earlier, when Modi denied help to AP CM for farm loan waiver in fulfillment of his election promise, he was hailed for his financial prudence.
• One of the triggers of the farmers’ agitation across India in May and June was the decision of waiver of farm loans by the Yogi Adityanath-led Bharatiya Janata Party (BJP) government in Uttar Pradesh.
• The BJP governments in Madhya Pradesh and Maharashtra announced waivers, following violent agitations by farmers.
• The farmers of Uttar Pradesh, the first beneficiaries of the farm loan waiver of 2017, debunked the government’s announcement with varied epithets such as “sleight of hand”, “treachery” and “downright chicanery”. Unanimous sense of indignation was reflected among farmers due to its tweaking, in terms of the category and the time frame, has not gone down well with large sections of the farming community. The impression that the BJP leadership, including Prime Minister Narendra Modi, gave during the campaign for the Uttar Pradesh Assembly elections, was that there would be a comprehensive waiver of agricultural loans.
• The scheme downright chicanery concocted by vile administrative and political barons. Farmers were more annoyed with the time frame set for loan waiver restricting it to 40% of small and marginal farmers. The time frame had been set in such a manner as to exclude a large number of debt-ridden farmers from the scheme.
• Evidently, this scheme has been devised by a devious brain that knows about this behavior pattern of farmers and they are playing games with honest farmers while promoting defaulters and a culture of loan defaults.
• Though the scheme was announced in early April, no initiatives were taken by the administration or the banks to implement it. When they are going to make a concrete move in this direction? 
• Large sections of the bureaucracy points out that while it was the duty of the official machinery to facilitate the fulfillment of the ruling party’s election promises, its government cannot conjure up resources for it at will. 
• Earlier there was faint hope that the Centre would help out with some allocation because the Prime Minister himself was involved in propping the loan waiver idea in the campaign. But after Maharashtra and Madhya Pradesh followed suit with the scheme and the FM's emphatic statement that State governments will have to find their own funds, UP is practically in a quandary. The initial estimates are that the schemes would cost the State exchequer Rs.36,359 crore, which would meet 25% of the total outstanding agricultural loan of Rs.1,21,000 crore accrued in 2015-16. The scheme would benefit about 86 lakh of the 2.15 crore small and marginal farmers while total number of farmers are estimated to be 2.3 crores. 
• The scheme deliberately leaving out 60% of the small and marginalized farmers is no fulfillment of election promise and UP may well see the emergence of MP-Maharashtra like situations, since the hope generated by the loan waiver announcement was fast crumbling even as the farmer was getting a price much lower than fair for his produce.
• The Adityanath government is fortunate in that there are no spirited farmers’ organisations with militant leadership in the State like in Maharashtra and MP. The existing organisations lack credibility and tenacity. But the sense of hurt that thousands of farmers in UP feel will not subside for long.

My View:
Modi has no habit of walking the talking. Modi suffers from worst possible type of corruption; an insatiable desire for personal glory at any cost; an extremely deep moral and spiritual corruption. Modi belongs to the line of autocratic ideologues rather than the western tradition of revolutionary neo liberalism, or marxist rationalism. He would do anything to win elections and stay in limelight and publicize failures as achievements. Farm loan waiver is an U-turn from BJP's stated objectives of farm loan waiver, which hitherto was Congress style of populism and criticized by all and adapted by Modi only to win UP elections which is having snowballing effect on the entire nation and subjecting state government finances and banking system to severe duress. Development of infrastructure and progress of nation has gone back by at least 10 years. Senseless demonetization and unprepared GST roll out will have its own effects on our economy. Almost his schemes swachch bharat, make in india etc - all failed and bleeds exchequer without any tangible results and yet publicized as successes. With all these Modi is proving again and again as the worst economic manager our country ever had.

Farm loan waiver is a necessity

• About 50% of the population is engaged on agriculture directly, which makes farmers the most influential group of voters. Though not occupationally organised, their votes matter a lot and being perceived as pro-farmer has historically been the necessary requirement for being a popular political force in the country & states.
• In Feb 1990, Madhu Dandavate, V P Singh’s Finance Minister in  NF government, announced a debt relief scheme for farmers covering waiving overdues or outstandings of farmers and artisans up to Rs 10,000, and involved a fiscal cost of Rs.10,000 crore.
• Soon after the Modi government took over, bankers and RBI had warned the Finance Ministry of the dangers of such write offs. There was little support then from Delhi for the huge loan waivers announced by the newly formed states of AP and Telangana. As the Modi government worked on its first Budget, bankers, led by SBI chief Arundhati Bhattacharya and RBI Governor Raghuram Rajan, got together to stymie the proposal — finally forcing the state governments to settle for a rescheduling of the loans.
• Prime Minister Narendra Modi made the first pitch at a UP elections 2017 political rally where he said, “I will make sure that the first cabinet decision after forming the government in Lucknow is to waive farmers’ loans. That pronouncement cast the die for UP, a state already struggling under a huge debt burden, writing off farm loans aggregating Rs 36,359 crore,  up to Rs 1 lakh for about 21.5 million small and marginal farmers.
• Urjit Patel, RBI Governor, has voiced concern publicly over the latest loan waiver — saying it engendered a moral hazard and undermined the honest credit culture. As a matter of policy, nationalized banks do not write-off loans. The states will have to repay them on behalf of the farmer.
• There does exist a distinction between farmers owning five acres of land and farmers owning land more than five acres. Such a distinction is not per se discriminatory. No one has a right to get a waiver of the loan availed by him. 
• Hardly 30% of the farmers access institutional credit. A large section of those who access credit from banks are large farmers. Most small and marginal farmers took private loans as the process of obtaining institutional credit was cumbersome. 
• The UP Govt wants to finance this waiver by issuing state backed farmers relief bonds issued by a state organisation, which the govt repays at a later date. Such a large waiver scheme would negatively affect the state budget deficit levels, endangers its credibility and makes it tougher to obtain loans in the future. But Govt bonds are not debts in the state budget and do not affect the fiscal deficit significantly. At present, UP’s estimated fiscal deficit is Rs 41,400 crores.
• Development economists feel farm loan waivers are short-term measures, but are nevertheless necessary in times of severe drought or floods. However, they said that there was a deeper systemic problem that has pushed farmers strongly into the debt cycle.
• The price for farm produce has stagnated over the years. On the other hand, cost of agricultural inputs have soared. This has drastically pushed up the cost of production. For example, after decontrolling fertilizers in 2010, the cost of a few fertilizers have gone up over 1400%. Whereas the Minimum Support Price for paddy has gone up a mere Rs 470 or 68% in the same period. Unless the government reduces cost of production and increases agriculture profit, farmers will remain caught in the debt cycle and the cycle of farm loan waivers would be inevitable.
• The waiver of farm loans was not wrong in a situation where a debt-ridden farmer is debilitated by climatic conditions. The writing off farm loans adversely affecting the fiscal situation in states is small compared to subsidies doled out by govt for the corporate sector which is not seen as a burden.

What ever can go wrong, has gone wrong with rural India.

If a free society cannot help the many who are poor, 
it cannot save the few who are rich ... John F. Kennedy

Government's view of the economy in a few short phrases: 
If it moves, tax it. If it keeps moving, regulate it. 
And if it stops moving, subsidize it ... Ronald Reagan

My View:

Today in India farm holdings are largely fragmented with 90% farmers owning or cultivating less than 5 acres. The anti farmer government policies on fertilizers & support prices, bankers reluctance to lend aggressively to farmers, rampant adulteration of seeds & pesticides, labour issues arising out of MNREGS, erratic irrigation & agriculture power supply, climatic uncertainties and menace of middlemen in procurement of farm produce have resulted in once profitable agriculture activity into a non-remunerative activity. Improper storage facilities, badly implemented crop insurance schemes are bane to farmers. Lacking skills & capital, farmers are  trapped in agriculture permanently, irrespective of viability. Most government promises are just eyewash and at times of crisis farmers are silently left to their fate compelling suicides. In 1980's & 90's farmers availing crop loans were rare just below 10% and today they are over 90%. With reduced incomes and higher interest burden (70% credit is private credit at higher rates) farmers making both ends meet has become an impossibility. 

Farming is livelihood for vast majority of lower classes, less educated, less skilled people of India (who are hitherto not employable in formal sector) and present policies are farming destructive. For a populous country like India, self sufficiency in food grains is a must. India is just self sufficient in food grains only because 40% of its population who are poor are surviving on just one square meal a day. If all rural people drops their non remunerative avocation and migrates to urban areas in search of livelihood it will be catastrophic for nation to face acute food shortage and its weak urban infrastructure will simply breakdown.

In order to ensure decent livelihood for farmers and at the same time ensuring cheap and affordable food to all spectrum of poor people of country and in the absence of reliable inputs, crop insurance and marketing systems etc it is imperative to provide at least 60% of entire crop expenses as subsidy, 40% paid at the beginning of season and final 20% after verification of before harvesting as direct credit into their bank accounts. This subsidy can be rationalized as reliable systems develop and come into operation. This is not to save or enrich farmers but to stay put farmers in non remunerative agriculture and averting the nation from food crisis. 

Until then periodic farm loan waiver schemes is a necessity and inescapable, no matter what our insensitive economic pundits from air-conditioned ivory towers say.

No evidence of Muslim voted for BJP In UP

• Despite political statements and some stories in the media, there is no evidence for that a single Muslim voted for BJP.
• In all SEVEN Muslim majority (> 50% Muslims) constituencies in UP, SP won all seven.
• Of 82 constituencies (>30% Muslims), the BJP won 62. Muslim vote was split between the SP and the BSP, in all these 60 constituencies, their combined vote share was higher than that of the Muslim population. It is very likely that the Muslim vote got split between the SP and the BSP.
• So rather than strategically voting to keep the BJP out, it could be argued that UP's Muslims actually failed at strategic voting.

MyView:

Massive Hindu vote polarization led to BJP's remarkable winning of 312 of 403 seats in UP Assembly elections 2017 with unprecedented 39.61% vote share. The entire Muslim votes (19.61%) were shared between SP+Cong and BSP with combined vote share in excess of 50%. Their failure to form pre-poll alliance paved way for BJP's winning, otherwise BJP's winning seats would have been below 100 mark.

READ THE ORIGINAL ARTICLE

Modi, the Prime Minister of Gujarat & UP

Centre announced waiver of farmer loans in UP in fulfillment of Modi's election promise in the just concluded UP Assembly election winning with huge majority, at an expense of Rs.50,000 crores. BJP is still unable to finalize CM candidate and new government yet to be formed and union agriculture minster announced in parliament that central government will pick up the bill. While helping distressed farmers is appreciable the same would have been for all farmers in the country, not just UP.

• This is in contradiction of Centre's outright rejecting the demand of AP & Telangana government's request, 3 year ago, for RBI & Banks assistance in rescheduling the loans and eventual waiver by state governments citing banking norms and credit discipline.
• Farmers are in distress and debt ridden in the entire country, not just in UP. This Centre's loan waiver for UP only is grossly discriminatory.
• Going forward, farmers will never pay back loans, even if they can, awaiting waiver in next elections within 5 years.
• This will destroy public sector banks, which are already saddled with over Rs. 6 lakh crores NPAs mainly due to defaults by industrialists.
• Just 3 days ago, SBI Chairman Arundhati Bhattacharya said such sops may disrupt credit discipline among borrowers.

Apart from plethora of issues being faced by farmers, the foremost & utmost is the MSP (Minimum Support Price) of Centre which doesn't even cover expenses where as logically MSP should cover all expenses plus 50% profit margin for decent farmer livelihood. Lower MSP enables produce buyers to buy below MSP prices pushing weak farmers into distress and debt ridden. Mechanism must ensure that farmer is enabled to sell his produce at above MSP, which was forgotten several years ago. Other problems are non-timely availability of fertilizers and substandard seeds, pesticides, non availability of labour due to MNREGA, storage facilities etc. Erratic rains compounds farmers risk. Crop insurance with easy process of claims is a must.

Crop loan waiver has a major devastating effect of non availability of bank credit in future with fear of non-recovery and farmer will slip into hands of ruthless money lenders with interest rates 4-6 times bank rates. Today only 25% farmers (who are owners of land only) gets bank credit for crops and it must be ensured all farmers whether land owner or not must get crop loan if he is genuinely cultivating. Unless all these issues are resolved within short time frame, farmers will continue to be in distress and nation's future food security comes under threat. And uncontrolled rural to urban migration will not only increase rural distress but also stresses weak urban infrastructure.  

The practice of attending farmers issues once in 5 years during election and forgetting them thereafter must be stopped. It must be on year to year basis at budget time and uniform for all farmers of the country.

My View:

Farm loan waiver and rural focus are policies of Congress, never of BJP. Now I see BJP shifting towards rural issues and copying Congress. Anyway, 70% of population are rural & agriculture based and can't be ignored by rulers. All constitutional office bearers must remember that they are oath & constitution bound, not their election promises which are often senseless and mindless.

Modi, Jaitley & RBI have forgotten all the rules, regulations & principles cited while rejecting cooperation to AP & Telangana for farmer loan rescheduling & eventual waiver by state governments where as now centre waiving UP farmer loans without even being asked by UP Government is height of their arrogance & stupidity and doesn't go well with preservation of unity & integrity of India. Centre's discriminating attitude between states ruled by BJP and non-BJP will ignite north-south divide apart from being unconstitutional, illegal and violation of oath. Shamelessness & arrogance at its peak with Modi reducing himself as Prime Minister of Gujarat & UP.

14th finance commission has not made any provision for this type of money transfer from centre to UP and Budget 2017 has no mention about this item at all. How will this be done? When centre could do UP farmer loan waiver without budget & 14th Finance commission provision, why cant it grant special status to AP as promised while passing AP Reorganization Bill in Parliament in 2014? Any answer from Modi, Jaitley, Venkaiah Naidu etc? They won't answer because they are answerable to none.

PS: Unless rules are modified restricting spending money strictly as per provisions of approved budget and discretionary spending money is restricted only during war & natural calamity times by executive orders, irresponsible and unmonitored spending through banks and PSU's will go un-audited by CAG and unnoticed by parliament and is detrimental to fiscal discipline.

UP Elections - Likely outcome

• Hearing 'Modi, Modi' in and around, Muslims got divided between the Bahujan Samaj Party (BSP) and the Samajwadi Party (SP). The estimates are at least 70% Muslims in his voted for the SP and remaining BSP.
• It's enough to make the SP candidate win, because the SP is getting some extra votes beyond M and Y, Muslim and Yadav.
• Regarding Ram mandir to be built in Ayodhya, voters said they have heard this forever.
• Ragrding the decisiveness with which demonetisation was announced overnight, has even more brought about a near consolidation among Hindus. About 65% Baniyas, upset with demonetisation, voted for the SP candidate as a negative vote for the BJP, to send a message to Prime Minister Narendra Modi.
• There are women and youth across caste and community lines who never cared to vote but voted this time for Akhilesh Yadav, to defeat BJP.
• This election is difficult to read in the absence of a perceptible wave, or leher, the only way to understand voter behaviour is caste.
• Not just journalists and psephologists, even politicians don't really know what's cooking inside the voting machines.
• There will be many who will get it right, but by chance. Anyone who claims to be able to read this election is bluffing. Or may be it is just a bad reporter playing it safe.

My View:
BJP is lacking 'slogan' and CM face and burdened with demonetisation woes; Modi's war against corruption, black money, fake currency & terrorism financing proved to be a gimmick; his stoic silence about demonetisation benefits; absence of noticeable anti incumbancy vote against Akhilesh Yadav; Ram Mandir not generating any Hindu polarisation but polarising Muslims against itself; and caste grouping unfavourable to BJP; SP-Congress combine likely to add 6-9% votes etc leaves SP-Congress combine in a hopeful position to sail through the election with a simple majority similar to that of Jayalalitha AIADMK in Tamilnadu six moths ago. However voter behaviour and election outcomes are not easily predictable even to the psephologists.