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. Rs.one 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.

INDIA - STATISTICS

• 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.

TELANGANA SEVERELY EFFECTED

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.


NORMALCY RESTORATION IS MORE THAN A YEAR AWAY.

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.


ECONOMISTS IGNORED

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.


NONE TAKES RESPONSIBILITY

• 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.

PM Modi announces demonetization of Rs 1000 and Rs 500 currency notes

PM Modi announces demonetization on Nov 08, 2016.

PM Narendra Modi said the move was aimed at curbing the negative impact of fake currency, black money, corruption and terrorism on the nation's economy. New notes of Rs 500 and Rs 2,000 would be released and circulated soon.

Pakistani spy agency ISI was pumping counterfeit notes of Rs 500 and Rs 1,000 to finance terror activities within, even earning a handsome profit of around Rs 500 crore per annum in the process. While RBI spends Rs 29 to print a Rs 1,000 note, terror financiers incur a cost of Rs 39 per ever Rs 1,000  – but manages to sell it in India through various illegal channels at Rs 350-400.

While the told reasons are impressive and in the interest of the nation the untold reasons are purely political.

The principle untold reason is UP Elections scheduled for Feb/Mar 20017, just few months away. The recent UP Election survey has put Mayawati in the lead, BJP just able to achieve 170/402 and followed by Samajwadi Party in the forth coming UP General Elections slated for Feb/Mar 2017, paving the way for formation of coalition government by Samajwadi Party, Mayawati and Congress thus relegating BJP to opposition benches. Samajwadi Party and Mayawati had access to lots of black money for election spending and for BJP it would be an uphill task to form minority government. The recent surgical strikes by Indian Army on Pakistan based terrorist camps has its telling effect on BJP fortunes improving in UP election prospects but still falling short of absolute majority for BJP. Now with demonetization effectively disarming rivals Samajwadi Party and Mayawati will push BJP prospects towards absolute majority. This would also nullify any possibility of Samajwadi Party, Mayawati and Congress forming coalition government thus relegating BJP to opposition benches.

Govt notifications and Circulars dated Nov 08, 2016.

The devastating immediate effects are felt by near zero business in all shops & establishments, Malls and dwindling state government revenues. Upset KCR met Governor and expressed his displeasure due to projected revenue loss of Rs. 3,000 crores per month which effects salary payments, funding on going projects & new projects on drawing board. Ironically TS govt is solely dependent on revenues from Hyderabad city which are either real estate or commercial & other taxes with black money as its base, which will vanish immediately and recovery is slow process and will reach different levels. Realizing that he is too small to take on Modi, his office denied having spoken this matter with Governor following day. I don't think CM meets Governor just to have a cup of tea ignoring all teething issues.

My View:
Aside political gains for BJP, demonetization of Rs 1000 and Rs 500 currency notes effectively evaporated the entire 'silly money' in the hands of corrupt politicians, corrupt officials and unscrupulous businessmen that has been parked in real estate and housing markets. 

In India, every body talks bad about black money and tax evasion and there is no body who doesn't deal with black cash and evades tax at every opportunity. This reminds me of Dhirubai Ambani challenging members of FICCI in 1970's, who hasn't dealt with him for profit, if he was unscrupulous.

The other good & bad effects are

• BJP disarmed cash rich (silly money) opponents Samajwadi Party and Mayawati in the forth coming UP elections improving its own chances of winning.
• Corrupt politicians, corrupt officials and unscrupulous businessmen hoarding gunny bags of black money are left with waste paper not even worth toilet tissues.
• Real estate deals have collapsed especially in secondary small deals market hurting small players. Real estate recovery will take at least six months and will never be the same again.
• Real estate will become affordable to some middle class people for some time at least.
• Property valuations with 50:50 white & black have lost valuations by more than 50% and owners are impoverished.
• State government will end up losing lots of money towards stamp duty collections of real estate deals.
• While black money hoarders & users are not more than 10% population, remaining people are subjected to enormous difficulties during the transition at toll gates, small shops, small traders small people who doesn't use cards at all and depend only on cash transactions, non availability of small change. Added to the infrastructure in banks & post offices is grossly in sufficient to process currency exchanging/depositing for genuine 90% people. Daily wage earners life is severely disturbed during this transition which may last about 2 months for no fault of theirs.
• While urban people are less dependent on cash with usage of cards & net banking, rural population is solely dependent on cash only. For no fault of theirs they need to go nearest town for exchanging currency and if lucky they will be successful same day else they may have to make several trips before completing exchanging.
• Almost all retired & old people keep about a lakh of rupees at home for managing medical emergencies. They would be subjected to make a trip to bank for depositing this old money and later with drawing new currency. In the intervening period they would be cash less.
• All contractors etc will general disburse lots of cash as weekly wages to their laborers. These laborers weekly earnings will get delayed and consequently even their food will get effected.
• The list could go on and on. 
• The rich seemingly might lose some money (earned effortlessly with manipulations and connections) and continue to live in comfort and the losses any way they will make it good again and, it is the poor and middle class who would bear the burden of the process and its defects arising out of politically motivated gimmicks and adventures.
• Jaitley and Urjit Patel could have done some research to mitigate the process burden on poor, middle class, rural people, pensioners & senior citizens, patients, traveling public and daily wage earners are least effected. 
• The benefits highlighted by Modi, Jaitley & Co are just imaginary and exploded where as real benefits could be far less to the nation especially after discounting negative effects. If all this cash goes into our banking system, as highlighted by Jaitley, it may or may not generate more taxes to exchequer, but banks runs the risk of collapsing with falling prey to vultures like Mallaya etc around.
• Recall January 1978 Janata Party demonetizing Rs.1,000, Rs.5,000 & Rs.10,000 notes and I never felt any positive effect except that Indira Gandhi & Congress leaders lost all their cash meant for political expenditure. However, she returned to power within two years despite loosing all silly money.
• Finally, even though government is empowered to take hard decisions in the larger national interest, subjecting common people especially vulnerable classes to unbearable hardship is neither appreciable nor pardonable.
• Bulk of the corruption money is in gold & diamonds, real estate, benami bank accounts or in foreign country accounts which is safe now. How Modi will attack this? No answer. Let us see.
• If Modi & Jaitley were about black money menace and corruption, they would have demonetized Rs.500 & Rs.1000 notes and and replaced them with Rs.50, Rs.100 & Rs.200 notes only proving difficult for corruption transactions and hoarding that money as well. Demonetization of Rs.500 & Rs.1000 notes had definitely eliminated black money stocked but replacing with Rs.500 & Rs.2000 notes will aid generation of black money & corruption deals and hoarding much easier in future. A loophole deliberately left for their own convenience but will be helpful to all scoundrels.
• Worst of all is that our consumption market is mostly driven by spending black money and never white money. Consumption market will shrink by almost 50% resulting in loss of state revenue, loss of GDP, loss of jobs etc leading to immediate deflation followed by stagflation and managing these are not as easy as managing inflation.  Economic spiraling down at times could result in collapse of economic systems and even country.

Politically motivated gimmicks will usually yield partial results.
The told reasons are different and real underlying reasons are different.