RBI Annual Report 2016-17 confirms demonetisation disaster

Andhra Jyothy dt Aug 31, 2016 - Headlines

• On November 8,  2016, the Modi government kicked off a massive demonetisation exercise in a move that was aimed at curbing black money, fake currency and corruption. Since then it has been a widely debated topic, with analysts and economists wondering whether the benefits trumped the costs.
• The Reserve Bank, which has so far shied away from disclosing the actual number of junked currency deposited after November 8 last year, said in its Annual Report for 2016-17, that Rs.15.28 lakh crore out of the Rs.15.44 lakh crore of the junked currency had come back into the banking system, leaving only Rs.16,050 crore out.  This means that 98.96% of Rs 1,000 and Rs 500 notes that were banned as a result of demonetisation were returned to the central bank by the end of June 2017.
• In the immediate weeks after demonetisation, one school of thought believed that if a sizeable amount of demonetisation notes didn’t return to the RBI (presumably because the owners of the notes feared getting caught for tax evasion, this could translate into a “windfall gain” for the Modi government. The government itself believed that roughly Rs 2 -3 lakh crore would not return, according to statements the-then attorney general made before the Supreme Court in November 2016.
• Former Finance Minister P Chidambaram said, "RBI gained Rs 16,000 crore, but lost Rs.21,000 crore in printing new notes! The economists deserve Nobel Prize." He also tweeted "Rs.16,000 crore out of demonetised notes of Rs.15,44,000 crores did not come back to RBI. That is 1 per cent. Shame on RBI which 'recommended' demonetisation."
• A collateral damage as a result of rise in printing and other cost was dividend RBI pays to the government. RBI said its income for 2016-17 decreased by 23.56 per cent while expenditure jumped 107.84 per cent. The RBI paid Rs.30,659 crore dividend to the government for the year ended June 30, 2017 against the expected Rs.74,901 crore. In the previous year RBI paid dividend of Rs.65,876 crore dividend to the government.

• Demonetization has destroyed Agriculture, Informal economy, Small Industries, and unquantifiable effects on each and everyone. No one is benefited. CMIE estimated costs incurred by Nation during demonetisation period of 50 days is over Rs.128,000 crores that achieved nothing. Yet our PM Modi lives in a fools paradise publicizing what ever small good is happening around as an achievement of DeMon while maintaining stoic silence on bad effects that surface.
• Series of  farm loan waivers by states to mitigate farmer woes is actually pulling down our otherwise vibrant economy. Another effect is the NPAs have virtually destroyed public sector banks. Today they are doing nothing but counter banking.

Demonitization 2016: Arrogance, Audacious & Atrocious dt Nov 30,2016

Demonetisation process adopted by Modi giving undue importance to secrecy rather than meticulous planning for its seamless implementation, betrayed constitution, violated laws of the land, undermined RBI & other institutions, cabinet made irrelevant and parliament denied its right to discuss and vote it. With in few days of DeMon, it was clear that it is headed for its monumental failure and Modi had opportunity to 'restore status-quo ante' and deliberately ignoring it indicates his arrogance and contempt for people of India and their sufferings. He was so much blinded that he has not even considered mitigation aspects except making an emotional speech asking people 50 days but problems persisted for over 8 months. Charismatic he is, he was able to campaign and win UP elections that DeMon is hurting and making rich sleepless and is the tool in his hands fighting corruption which is a total lie. His apathy towards not appointing Lok Pal & Lok Ayuktas for the past 4 years is the true indicator of his corruption fighting attitude. It is a matter of shame that, the one man Modi who unleashed mindless & unwarranted economic disaster 'demonetization' on otherwise vibrant Indian economy resulting in the nation losing lakhs of crores of rupees, impacting poor & peasants is walking amidst us proudly unpunished and pretending as a great achiever. 

Growth may not be in 6.75-7.5% range: Economic Survey

Read in English - Economic Survey says growth may not be in 6.75-7.5% range

• GDP Growth during 2015-16 was 7.9%. GDP Growth during 2016-17 was 7.1% ... against anticipated 8.5% due to demonetization. 
• GDP Growth during 2017-18 is projected to be 7.7%, but the Economic Survey has a pessimistic view on growth forecast with downward risk to the earlier estimated growth range of 6.75-7.5% GDP growth for 2017-18. Growth is expected to undershoot the earlier range.
• CPI inflation to be below 4% by March this fiscal, which only indicates anemic condition of economy.
• The challenges included are appreciation of the rupee, farm loan waivers, rising stress on balance sheets in power as well as telecom and transition issues arising from implementing the Goods and Services Tax (GST).
• Fiscal slippages due to series of deflationary impulses that are weighing on an economy yet to gather its full momentum.
• Farm loan waivers by states would touch Rs. 2.7 lakh crore and could cut economy demand by up to 0.7% of GDP.
• Fiscal deficit will be 3.2% of GDP in 2017-18 as compared to 3.5% last fiscal.
• Since February 2017, the rupee has appreciated by about 1.5%.
• The bank NPA's rose from 9.2% in Sep 2016 to 9.5% in Mar 2017.
• Reliance Jio’s entry with free voice and data has led to a brutal price war in the telecom industry, hurting revenue and profitability of incumbents amid ballooning debt, increasing the sector’s share of non-performing assets, which is a cause for worry, the Economic Survey said. Ironically, Reliance Jio was funded by same banks to the tune of Rs.1.80 lakh crores which has exposure in telecom sector to the tune of Rs. 5 lakh crores and their diminished EBITDA has lost its ability to service massive debt. 
• A positive unintended consequence of demonetization is that about 5.4 lakh new tax payers* have joined the tax net post note ban, which probably could have been achieved even without note ban.
  *mostly between Rs.2.50 & Rs.3.00 lakhs taxable income with aggregate tax payment less than Rs.100 crores.

Read - Economic Survey is a wake-up call for Centre

Even as the unintended consequences of  arrogant, audacious & attrocious demonetization of Modi are surfacing at regular intervals and estimated to normalize in about two years time, the hurriedly implemented mangled GST, with in six months of note ban, has created avoidable numerous troubles to trading, manufacturing and informal sectors disturbing supply chain of commodities is unpardonable another adventure by Modi for political and personal glorification gains rather than in public and national interest. Almost all segments of economy are suffering and the most prominent being loss of millions of jobs and distressed agriculture. For increasing speed of travel, if your car driver presses brakes instead of accelerator, again and again, what will you do? Simply change the driver. Right. Driver Modi must be replaced, if our nation needs to progress.

NPA's: Govt's all talk and no action

• Infrastructure and capital-intensive industries are imperative for development but too difficult a responsibility for the private sector to shoulder because of long gestation period and low returns.
• During financial year 2016-17, when demonetization disrupted banking activity, banking sector grew by just 1.7%, which was a 20-year low. 
• Most of the banks involved in NPA's are public sector entities with the perception that the liabilities of these banks are backed by a sovereign guarantee, that has prevented a run on these banks.
• The ratio of stressed assets to gross advances in the banking system has crossed the double-digit mark and few borrowers account for a large share of defaults. 
• As banks are grappling with the defaults, they tried to retrieve themselves from this mess by lending more to potential defaulters or converting part of their debt into equity which did not work. On the other hand, the deficits on the balance sheets of these firms became even larger. When banks decide to make a case for liquidation to recover at least a part of their loans, the net assets were not even a fraction of the value of their exposure, especially since resources have often been diverted out of the firms concerned.
• Bank NPAs are not a new issue, though the magnitude of the problem was revealed when Raghuram Rajan, the previous RBI Governor, imposed new guidelines on identifying NPAs. 
• Given poor shape of public sector banks the price at which they could be privatized is likely to be indefensible.
• The only way out is banks recapitalization by government and writing off NPAs and going forward diligently. Money lost once is generally irretrievable.
• The new bankruptcy law, forces a settlement must be reached within 180 days. These 12 large defaulters account for around a quarter of NPAs and quick resolution of these NPAs even with a discount, that would reduce government's recapitalization requirements. Little is likely to be recovered from absconding individuals, like Vijay Mallya of Kingfisher Airlines. 

The reform-induced failure of the government to mobilize adequate resources, through taxation or borrowing, to finance capital expenditure is the root cause of the current bank's crisis. Private sector firms borrowed high value banks funds and invested in infrastructure and capital intensive projects with long gestation where the profits have been volatile and difficult to come by, and firms have found themselves unable to service their debts. Today almost all infra and public utility companies are in red. Restructuring of debt etc works rarely and generally postpones collapse of firms and banks. Most important problem is inflation of project costs, corruption and siphoning of funds by promoters. It is well known that promoters take back their investment, albeit illegally, even before project construction takes off.

Jan Dhan Yojana fails to deliver!

• Pradhan Mantri Jan-Dhan Yojana (PMJDY), launched by the Prime Minister of India Narendra Modi on Aug 28, 2014, is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner. Account can be opened in any bank branch.
• The plan envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension facility. In addition, the beneficiaries would get RuPay Debit card having inbuilt accident insurance cover of र 1 lakh.
• PMJDY accounts also allow an overdraft facility of up to Rs 5,000 in one account per household, preferably held by a woman member. 
• The Prime Minister personally mailed to Chairmen of all PSU banks to gear up for the gigantic task of enrolling over 7.5 crore (75 million) households and to open their accounts. He categorically declared that a bank account for each household was a "national priority". 
• Total of 7 Crore (70 million) bank accounts have been opened with deposits totaling more than ₹5,000 crores as of Nov 6, 2014. As the government met the target, Govt revised the target for opening of bank accounts under the PMJDY, 7.5 crore to 10 crore by Jan 26, 2015. Almost 75% of the accounts or 5.66 crore, have no money.
• In the name of financial inclusion, the government has created more problems for the poor. The project is well intentioned and perhaps necessary for a country in which 40% of the population is unbanked. But, in the hurry to roll out the project, proper communication, especially to the undereducated and the poor, could not happen. Significant percentage of people haven't returned to the branches to do serious transactions.
• The scheme has been criticized as an effort to please voters that has created unnecessary work-burden on the public-sector banks. It has been claimed that the poor deserves food more than bank accounts and financial security. Further, these accounts have not yet added considerable profits to PSU banks. Offers like zero balance, free insurance and overdraft facility would result in duplication. Very few people are eligible to get the life insurance worth ₹30,000 with a validity of just five years. The claimed overdraft facility has been completely left upon the banks and only those people would get the overdraft facility with satisfactory transaction record.
• While JDY has inflated the number of account holders, it has done nothing to boost the volume of transactions. As on March 24, 2017, public banks, regional rural banks and 13 private lenders reported that 92,52,609 accounts were frozen under JDY due to lack of transactions.
• In the first two weeks of demonetisation, the total balance in no-frills accounts under the JDY increased to Rs 72,834.72 crore, a jump of Rs 27,198 crore in 14 days, of which most money was deposited in an effort to convert black money into white money by black money holders. The scheme, took 16 months until Dec 2015 to accumulate a balance of Rs 27,283 crore, 
• The total cost of operation of Jan Dhan accounts by State Bank of India is Rs 774.86 crore, Parliament was informed on Mar 28, 2017. Banks had to incur a cost of at least Rs 200 on opening each account apart from the manpower cost and this totals roughly Rs 1,500 crore for just opening the accounts.
• The profligacy of Modi on his hurried, ill conceived schemes without adequate preparation and then projecting failed schemes as successes impoverishing nation is highly despicable. The quantum of money spend for campaign & publicity by all related agencies is too much for developing economy like India. India needs a statesman as Prime Minister, not a rogue politician.
• Public Expenditure Wastage Control Commission must scrutinize all waste expenses of public money by any one and every one for compliance of procedure and economies of expenditure observed including PM & CM. And if not followed, it must levy immediate financial penalties on such person and also recommend to competent higher authorities to consider and take punitive steps against such persons. All within a time frame of three months. Only disaster management expenses, certain defense expenditures and nuclear related expenses could be exempted.

Thrift is my guiding principle ... Indira Gandhi 
What ever is worth doing, is worth doing slowly.

My View:

Banks are ill equipped to handle this huge number of new account holders leading to deteriorating of services. The costs of managing these accounts are huge for already NPA stressed banks. Most of the Rs.5,000 over drafts per account will turnout to be irrecoverable and unless centre absorbs and writes off these amounts bank's margins will again come under severe stress. Poor banking connectivity is another constraint. Significant number of people had opened multiple accounts under the scheme, adding to the existing problem of dormant accounts. When Indira Gandhi got elected from Medak (Telangana) in 1980 she compelled PSU banks to open branches in Medak district. After few years almost all branches were wound up would due to lack of business and viability, booking significant losses. Needless to say any scheme prior to implemented should be researched, tailored to suit local needs and planned to implement over a time frame for producing lasting results. But unfortunately almost all Modi's schemes are announced hurried and launched without any preparation with massive national & international publicity costing hundreds of crores of rupees to nation and then they just fail. This is no way a democratic government should function. Hence, every government expenditure must have prior legislature approval and budget provision voted so that sufficient discussion of priorities takes place before announcement and implementation. The only exception could be defense, disaster management and nuclear related matters.

Modi unveiling cash restrictions and police raj

Cash is one form of wealth like gold, house, land, bank deposits, stocks, bonds etc. It is citizen's right to hold his wealth in what ever form he wishes. In fact no sane person will hoard cash or in bank deposits with inflation corrected bank deposits yielding negative returns. Prudent person will either invest cash or rotate it to earn more returns. In the recent hearing of Jayalalitha's disproportionate assets case, the Supreme Court Bench observed that merely possessing assets disproportionate to known income does not amount to corruption unless the source of that income is illegal.

Our Indian banks has of late became precariously unsafe with NPA's increasing manifold leading to downgrading of ratings to a notch above junk status. No prudent person will keep his wealth in bank deposits. However India has many weak, old and vulnerable persons who hold their wealth in the form of bank deposits. RBI's deposit guarantee is limited to just Rs. One lakh per person. In the absence of returns & safety, government coercing its citizens to maintain their wealth in bank deposits with negative yields is nothing but cruelty.

Cashless transactions is another fraud. In a country with 40% illiteracy and 80% internet banking illiteracy compelling electronic payments without reliable infrastructure, robust privacy laws, unbearable transaction charges and high level of frauds is nothing but enabling corporate's flourish at the expense of poor & needy and in violation of fundamental rights.

No one in the world pays taxes willingly and smilingly. Tax evasion in India is primarily due to unreasonable high tax regime, uncourteous and blatantly corrupt tax administration with umpteen loopholes deliberately meant for corrupt activities. Make taxes reasonable and taxmen citizen friendly, infrastructure reliable,  robust privacy laws protecting citizen rights, and cashless transactions affordable and people will use them as they see benefits. Without these in place, pressurizing citizens compromising their freedom & rights will prove counter productive.

Most of the cash wealth is getting rotated in informal economy which contributed 45% of GDP and employs 90% of people who are mostly less educated, less skilled and under qualified who are otherwise not employable in formal sector. Migrating them into tax compliant formal sector is slow process and government must promote the same with incentives and creating awareness rather than sudden changes of laws and unleashing taxmen & policemen with long sticks.

Almost all black money hoarders are from cities & towns and none from rural areas. Enacting laws which make all these men criminals and taxmen chasing them doesn't produce any positive results except for publicizing the government's efforts to fight corruption which any way doesn't yield desired results.

The recent demonetization has diverted large portion of working capital of informal economy into banking channels. Deprivation of working capital has crippled informal economy, which hitherto was booming since a decade, with millions losing livelihood and returning to their villages, and those who survived are making earnings at half level. No announcement was made by government to provide them with working capital infusing arrangements. Informal economy and formal economy are so much interdependent on each other, formal economy is likely get affected with a time lag of two quarters. The devastating effects and unintended consequences will surface incessantly for next two years and nothing can be done except dazing at them.

Modi's restrictions on cash at Rs. 3 lakh level will do no good to economy except it seems to increase tax compliance. Govt might get higher income tax collections but overall reduced economic activity will result in indirect taxes crumbling, offsetting gains and overall tax collections looking southward. On other hand increasing government will have disastrous effects like citizen harassment, legal entanglements, increase in corruption, ease of doing business looking southward, FDI's reduction and ratings remaining at junk level will do no good to any one. Authoritarian type of decisions will yield quick results in dictator ruled small countries but while doing no good, will run into legal tangles in large democracy like India.

Modi has ignited 'spiraling down' of economy with his senseless, authoritarian, illegal actions destroying institutions like RBI, without even pretense of process of law and now he has no 'magic wand' to control it or stop it and normalization is two years away and in the mean time common man is the casualty.

All dirty politics!!


My View:
Modi badly managed Indian economy during past 30 months, despite favorable crude oil prices and retaining 85% in the form of increased duties, and growth of over 7.5% highest in the world, inflation fairly in limits of below 8% mainly due to his industrialist friends defaulting on bank loans with NPA's rising alarmingly manifold and crippling banks with no funds even for their normal operations and not taking any solid action against willful defaulters despite warnings. Even in 4th budget revenue deficit is at unacceptably more than 3% of GDP. He is under pressure from World Bank and rating agencies to set house in order and unleashed quack advised senseless demonetization for quick benefits of Rs. 4-5 lakh crores as disclosed in affidavit filed in Supreme Court. With deposits exceeding 97.5% of cash in circulation his scheme failed miserably and is dramatizing with cashless transactions and as lone crusader against corruption, which requires focused efforts continuously for few decades.  In a hurry to make quick financial and political gains Modi is resorting to half baked actions with loop holes which will end up in fiascoes and citizen harassment. He is not bothered about long term national gains but focusing on the immediate political mileage needed to win UP, Punjab elections in the aftermath of demonetization pain inflicted on rural masses and urban poor. Attempting to manage country's finances in this botched fashion will only end up horribly both for people and for himself, with no gains whatsoever.