India’s ‘Demonetization’ is a people’s movement and is tending to be successful

At November 8th 2016 – 4 hours before midnight, Indian Prime Minister Narendra Modi took everyone by surprise saying Rs.500 and Rs.1000 notes will be banned effective immediately. He added that there would be chaos and appealed for calm. The scale and the timing is unprecedented in the World History. There were showers of praise all across the globe. There were heavy concerns of feasibility and few were skeptical. Nobody exactly can predict how it turns out to be as there is no precedence to such a move. The World is keenly observing the outcome as Narendra Modi has chosen to bell the cat.

It takes an extraordinary political will, a strong mind, clear conscious and strength of conviction to make such an announcement in a politically diverse country such as India where 86% of the currency notes belong to the banned denominations.

The initial reaction from almost everyone has been positive. However what is more surprising was the unity of opposition in demonizing Demonetization. There were arguments whether Demonetization would succeed or fail. However even the worst critics seemed to agree that the is bold, non-political and could augur well for the Indian economy in the long run. Change is not easy. Especially in a diverse country like India where people assume that abusing the government is democratic right.

The “short term pain” as the ruling party would like to call it – has been more than what was anticipated. The government had announced that Hospitals and few other institutions would accept Rs.500 and Rs.1000 notes. But it looks like they were busy readying their books of accounts and bluntly refused to take the demonetized notes. This added to a lot of chaos. Also, people who usually with draw Rs.500 for a week were seen withdrawing Rs.2000 a day – causing the cash to quickly dry out. This caused lot of hardship to the people waiting in the queue. The banks have reportedly submitted the “average” withdrawal pattern and the estimation was done based on it. But as panic set in, the withdrawal was much more than what was anticipated causing the government engines to work overdrive to satiate the demand.

People endured long wait in queues for the first two weeks. However as on date, the crowd has normalized in most places. People are still positive on the move despite the hardship they had faced. A recent independent survey concluded that over 87% of people support this move though over 31% of people felt that the implementation could have been better.

 

Is it worth the Game?

The immediate benefits are pretty much visible. It is a strong indication that the long term benefits would be good enough. In the first week after announcement – Rs.4.5 Trillions (about USD 70 Billions) of cash entered into the banking system. As on date, about Rs.8.11 Trillions (USD 122 Billions) are deposited in about 17 days. The average Income Tax revenue of the government in a year is estimate to be about Rs.1.7 trillion. This is a huge surplus that aims at consolidating the deficit. Also, the second and third week estimates are awaited. Banks have reduced their rates as expected. This could certainly boost spending after the next two quarters.

Fake currency just met its death blow. More than 93% of Fake currencies in India are in Rs.1000 and Rs.500 notes.

It was noticed that cash was being burnt or being thrown into the river. This cash is unaccounted and acts as a direct revenue to government.

http://www.ndtv.com/india-news/sacks-full-of-burnt-500-and-1-000-rupee-notes-in-uttar-pradesh-1623440

The major problem of terror financing seems to have paused. Except one or two incidents the problematic region of Kashmir is largely at peace since the past two weeks.

Apart from this wildlife smuggling and ivory poaching has reduced to a huge extent. All major cities report a significant reduction of crime rates.

http://www.thenewsminute.com/article/illegal-wildlife-trade-affected-sharply-demonetisation-brings-cash-crunch-53513

The sentiment of people still remains upbeat, though people are facing difficulties due to the lack of adequate notes even after two weeks. The sentiment of positivism trumps this annoyance and that is highly surprising. There are no reports of violence so far. Such calm demeanor at issues such as this one are unheard of – in any part of the world.

There have been reports alleging that Pakistan (an enemy state of India) agents have printed fake currency worth trillions of Indian rupees with an intent to flood the Indian market with fake currencies thereby pulling down the Indian economy to precarious lows. These allegations were unofficially confirmed by retired Indian army officials. It has been suggested that Mr.Narendra Modi took a drastic decision to prevent India from going into an economic turmoil due to the influx of such a large amount of Fake currencies.

http://www.newsmobile.in/content/was-pakistan-planning-an-economic-pearl-harbour/

http://economictimes.indiatimes.com/news/defence/fake-currency-worth-rs-167-crore-seized-by-government-in-five-years-pakistan-a-big-contributor-to-it/articleshow/55355933.cms

 

The chaos

People thronged ATMs in absolute panic. There were huge crowd and at places Police had a tough time controlling the crowd. There was widespread chaos.

But contrary to the claims by the opposition parties in India, poor people have not “significantly” borne the brunt. It is highly unlikely that poor people in India deal with those high denomination notes. A survey conducted in few villages brought the fact that majority of people in villages are largely unaffected by this move. Those who had high denomination notes have already exchanged their worth in new notes. Overall, the sentiment of poor people have remained positive. However, loss of potential opportunities for unorganized and contractual workers is a worrying aspect. The lack of “change” (smaller denomination notes) are posing to be the real problem in the whole exercise.

People from Lower Middle economic sections are not obviously aware of the benefits of banking. Coupled with the false propaganda being spread by opposition – especially by Mr. Arvind Kejriwal of AAP and Ms. Mamta Bannerjee of TMC – people were caught in uncontrolled panic. Recently AAP leader Arvind Kejriwal had quoted to people that Banks may take away money from poor people and run away out of the country. Such irresponsible statements caused panic among poor villagers who are not aware of the benefits of banking. As a result, they rushed to the nearby Banks to convert all their money to the new currencies causing a lot of rush and panic.

The rich and the elite are jolted too, though none of them disclose their shock in the media. A few film celebrities vented their frustration and anger to the media. However, the Indian film industry is largely appreciative. The middle class has faced a lot of inconvenience. The upper middle class people are welcoming this step. The lower middle class, though positive on the move, are complaining of the arrangements at Banks and are blaming the bankers for their partial treatment of high net worth customers. Most of the hospitals – though legally are required to accept the older notes – are reluctant to accept them causing pain and anguish to people who want medical treatment.

Senior citizens are affected badly. But they are appreciative of the decision. Many senior citizens complained of the treatment at banks and also expressed their anguish at the lack of separate queue for senior citizens.

The youth are jubilant and are rejoicing at this landmark decision. Most are optimistic about India. A few Non Resident Indians have expressed their desire to move back to India.

In a country like India, it is a miracle that such an issue could be kept as a secret for over ten months. Modi had announced on November 8th that the notes can be exchanged until November 24th 2016 and can be deposited in banks until Dec 31st 2016. Until November 24th the crowd was chaotic and unmanageable. But the crowd has ebbed now and the situation is much more manageable after the “exchange” facility is stopped.

It has to be noted that people subconsciously trust the Prime Minister Mr. Narendra Modi and that is one of the significant reason why people are cooperative. No act of violence has been reported anywhere except for one where a person broke the ATM glass in frustration at the lack of currency notes.

Despite the chaos, majority of the students and working professionals have welcomed this move. An independent survey by C-Voter and Huffington Post concluded that over 87% of Indians support the move despite hardships.

 http://www.huffingtonpost.in/2016/11/22/huffpost-bw-cvoter-survey-87-indians-think-demonetisation-is-h/

 

Incorrect reporting of Death added to the panic

There were reports of deaths due to demonetization. However the authenticity of such claims could not be verified. It was reported that a baby died due to hospitals refusing to buy in old currency notes. However, the hospital issued a statement soon after stating that the parents were referred to a different clinic owing to the lack of medical facility in their hospital.

Similarly it was mentioned by an Indian Mainstream Media that an old man had died before HSBC ATM at a location at Mumbai. The next day HSBC bank clarified that no one were dead and that they did not have an ATM at that location. After reporting the death in headlines the previous day, a leading Indian mainstream print media issued a notification of error in a corner of its 7th page.

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So far no “eye witness” has come forward to report such death and it has remained largely a media speculation. Different media houses quote different numbers ranging from 23 – 70. Hence the authenticity of such claims cannot be verified.

Generally, the sentiment in India is that people do not easily trust the news printed / shown by the mainstream media.

It is alleged that almost all English mainstream media houses unfairly target the Prime Minister and even campaigned against him during 2014 Elections of India.

 

Political Opposition

Politicians across the party lines – including that of the ruling Bharatiya Janata Party – are seemingly upset at this sudden decision. The country is facing three major elections next year and it is routine in India for the political parties to hoard billions of rupees in physical cash. It has been alleged that many regional political parties such as DMK, ADMK, TMC, AAP and others get millions of rupees in cash from the potential candidates to fund their electoral expenses.

Additionally few of these regional parties pay black cash to each voter (to the tune of Rs.500 – Rs.5000) enticing poor people to vote for them. The sudden announcement of overnight demonetization is told to be one of the major reason for opposition parties to be up in arms against the government’s move. Their stash of black cash – if any – are no longer valid.

In a rare display of unity, the opposition parties such as TMC and the Left issued a call for “Bharat Bandh” (Nationwide shutdown) protesting the demonetization. Parties like AAP, DMK, ADMK, RJD and few other regional parties supported the call for shutdown. The call for nationwide shutdown evoked no response from the people. The united opposition converted the shutdown into a protest.

However the protest ended as a miserable failure as people continued working normally. In some places, people have worked extra hours to ensure that the call for shutdown does not succeed. It is to be noted that these people who stayed on for extra hours are not a part of any political party.

 

The Sequence and the Plan

The move is well thought-out (though people have mixed opinions on the execution) and it has been planned for more than 1.5 years.

 

1. “Banking For All” Scheme :

It all started with the Introduction of Prime Minister Jan Dhan Yojana (“Banking for all”) in 2014 – a little more than 3 months after Modi’s election as PM. This a scheme were poor people were included into the Banking System. Jan Dhan Yojana is a scheme were anyone can open a zero balance account and they would be given a Debit Card under India’s own Rupay System. This scheme was hugely successful and it had a spot on Guinness Book of World Records.

 

2. Direct transfer of Subsidies

However, there were several poor people who did not turn up to open accounts as they felt they may not need it. India subsidizes the cost of Gas cylinder to all citizens. Modi later announced that Cooking Gas subsidies (India offers such benefit) would be directly transferred to bank accounts – thereby eliminating middle men. As a result, poor people opened bank accounts to get their subsidies. This model also eliminated black market of cooking cylinders. Before this announcement, a cylinder used to arrive after one or two months after booking. But after the announcement, people receive their LPG cylinders in two days. Government ended up saving a lot of money by eradicating the black market and more people subscribed to banking.

 

3. Free Cooking Gas connection to people Below Poverty Line

However there existed a set of population who never had access to Gas cylinders and hence used firewood for cooking. Modi announced a “Give It up” campaign calling people to voluntarily give up their enrollment on subsidies. The move was a huge success and about 15 million people gave up their subsidies. The amount saved by the government through this campaign was directed at another scheme – Prime Minister Ujjwal Yojana () where LPG connections were given to those who did not have access to it before. More than 10 million people were benefited by this scheme. This scheme applied only to those below the poverty line and this scheme got them into the banking fold as the subsidies would be transferred to their bank accounts.

 

4. Several incremental reforms

After having a significant representation of people in the banking system, several small economic reforms were initiated. These includes stringent background checks, AADHAR card reform (unique identification card) and banking sector reforms.

 

5. Voluntary Disclosure Scheme

Around August 2016, PM warned the nation regarding false tax declarations. He gave a chance to the “black money hoarders” to voluntarily disclose their hoardings. Complete anonymity was guaranteed. People who declare unaccounted income should pay 30% tax on such amount and a 10% penalty on disclosed amount. Effectively 40% of the amount was taken by the government. He asserted that September 30th 2016 is the last day and added that people who hoard cash after that date will lose their sleep.

The scheme was a success in which Rs.630 Billion of unaccounted money was disclosed.

 

6. The Final Bomb against Fake Currency / Black Cash

Apparently, PM had waited until the Indian festival of Deepavali concludes. He made this shock announcement on Nov 8th. Such televised address and the scale of such announcement is unprecedented. The world reacted with shock, praise, panic and caution.

 

The Swelling Deposits

Over 8.11 trillion rupees (about USD 122 Billions) has been deposited in the banks since November 8, 2016 to November 25, 2016 (about 17 days). Government already warned that the deposits over 250,000 rupees will be tracked. If there is no source specified, the government may tax it by 50% and move additional 25% to a specially created “Poor People welfare fund” for a 4 year interest free lock-in period.

https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38727 (official press statement)

The inflation is greatly controlled and the interest rates are falling as well. However it may take one quarter for situation to normalize and almost an year for the economy to gallop back.

http://www.forbes.com/sites/timworstall/2016/11/17/indias-rs-500-and-1000-demonetisation-is-lowering-interest-rates-and-also-inflation/#11e7834d2edf

 

The Path Ahead

It cannot be predicted as to how long the chaos lasts. It could take a month to settle things – if viewed optimistically. Realistically, we foresee that the chaos could last for three months. People have been highly cooperative with the government. India has the highest youth population and the youth are supportive of this move – despite bearing the majority of pain.

Modi is promoting Digital Banking initiative and if this move succeeds, it could change the face of India and would rocket it on par with major world economies. A report by Master Card states that India has less than 2% penetration in cashless transactions. Singapore, for example has over 62%.

Such kind of move is unprecedented in world history. No country has ever demonetized 86% of its currency overnight (in 4 hours). Surprisingly majority of the people are euphoric at this decision of the government. Even hard critics of the government do not question the decision but only question the efficiency of operations. Considering the vastness of India (geographically, population-wise and culturally) – this is a huge operation. The efficacy of such operation are bound to have problems and hopefully government has been reassuring the citizens and are doing all it takes – including transporting new currency notes through Indian Air Force helicopters.

India is bound to exponentially improve on several parameters and the results should start showing in 6 months to an year.