Many economists and Nobel laureates have propounded their view on the issue, many a times more of a rhetoric than pure reasoning. Reading all those comments, speeches by someone renowned for his qualification in economics and skills in administration, such as Dr Manmohan Sigh, calling the exercise as an organized loot and legalized plunder, make me laugh and wonder whether an economist of his status would stoop down such a level of political jingoism far away from the facts.
I am reminded of a story where a group of blind men attempted to describe an elephant!
Everyone is bound to argue that he is right, but the truth is not right in entirety the true picture is different from perception when you view it in totality. Invariably many have been eager to vent out their personal opinions, often not supported by research, past / present data, facts and figures.
I am not an economist and not affiliated to any political party. Instead of explaining the logics, I shall start addressing the claims by pundits of the adverse effects and unpreparedness etc., and disprove them one by one with facts and figures.
MYTH 1- INDIAN POOR ARE THE MOST AFFECTED
1. India's per capital income rose by 7.4 per cent to Rs 93,293 in 2015-16, compared to Rs 86,879 in the preceding fiscal, government data showed today. [1]
2. As of Nov 2016, India is the second-most unequal country in the world. The richest 1% of Indians own 58.4% of wealth. The richest 10 % of the Indians own 80.7 % of the wealth. This trend is going in the upward direction every year, which means the rich is getting richer and the poor is getting poorer [2]
Understanding the above two statistical numbers, we can infer the so called poor people of India earn far less than the average of Rs 93,293/- or a monthly income of less than Rs 7,750. Let us understand that it is not their savings but income. After providing for their living how much money would be left with in their hands at any point of time and that too in Rs 500 and Rs 1,000 denominations? Hence the poor are stranded with old currency in their hands could well be unfounded. We all know that the poor of India do not use cash as store of value; they convert it into livestock or gold. The so called poor might have had a couple of notes which they could have exchanged in the window of time provided for exchange.
The immediate question is the big queues at the banks and ATMs. The point to be noted here is that the currency exchange queue surprisingly vanished once the indelible ink came into picture. The correct fact is that the exchange window was exploited by the black money hoarders using the so called poor as mules. Our gullible population was very happy to do the service for a small crumb that might have been thrown at them. Now the majority of the queue is on account of conversion of black in to white by hawala agents. In my opinion government should stop accepting old currency at banks and leave it to RBI only.
MYTH -2 ADVERSELY AFFECTS THE GDP AND IS DISRUPTIVE
Currency in circulation as on 8-11-16[3]has been furnished in the table below. I have used the numbers presented at the parliament on the high value currencies as at 8th November and correlated with the published figures of RBI as at 11-11-16 (Reserve money components).
Money taken out of system by demonetizing the old 500 and 1000 notes was Rs 15.44 trillion. If I look at the RBI’s report of money in circulation as at 18-11-16 total reserve money supply is 14.269 trillion as against 17.877 trillion as at 11-11-16. Implies that the net money sucked out of the system is just 3.60 trillion only
It should be noted that the Finance Minister Mr. Arun Jaitley, during his interview at HT Leaders summit, has stated that the entire money that has been demonetized will not be remonetized, certainly providing for the increase in use plastic money, e-wallets, online transactions and also black wealth that might have been eliminated from the system. With the above numbers of just 3.6 trillion effectively sucked out of the system, I tend to confirm that RBI has provided adequate money supply in the economy, which would be quite sufficient to sustain normal economic activities.
Theoretically there should not be any adverse impact on the economy or GDP as feared by many so called pundits and scholars, on account of withdrawing Rs 3.6 trillion worth of currency from the system because:
1. Increase in use of Rupay cards is over 118%[4], debit and credit cards by over 70% (means cash transactions are being replaced by card transactions), in the first week of demonetization. A point to be noted is that there has been a substantial increase in POS transactions not just ATMs, which implies that the people are doing commercial transactions and not just cash withdrawals.
2. Also out of the Rs 15.5 trillion that has been demonetized, Rs. 8.5 trillion has been deposited into the bank accounts[5]and Rs 2.16 trillion has been withdrawn, implying that the cycle of in and out from the banks has started. The difference between the deposits and withdrawals which is approximately Rs 5 trillion would be the additional deposit with the banks.
Data on currency exchange and deposit (In Rs. crores)[6]
3. Another unsung hero is the increase in domestic savings deposited on account this demonetization, which is over Rs 5 trillion as of writing this report, which is equal to approximately USD 73 billion. So much money will be available to the banks for further lending thereby spurring an unprecedented economic growth. We always crave for FDIs which was the highest in the FY 16, totaling USD 55.4 billion. In contrast to that in just two weeks Indian public have brought in funds worth USD 73 billion to the banking system. The move has unleashed the unutilized internal wealth.
4. One key indicator that has been showing a steady increase over past decade in India is the bank deposit to GDP ratio. From around 45% in the year 2001 it has grown to 71% in the year 2016[7]. Hence increase in bank deposits would have a direct impact on the GDP growth of India.
5. Even though there are no clear numbers to support my argument, the loss of GDP that is expected on account of such demonetization exercise, could well be compensated by the hitherto uncaptured GDP data / cash economy data which would now be captured on account of online / card transactions.
6. Rs 3.6 billion which has effectively been sucked out of the monetary system is just 25% of the total old value of 500 and 1000 denominations, which is more or less equal to the black money hoarded and kept as currencies as per best estimates. (My estimate corroborates closely with the assessment done by India times in its article which places the black money sucked out of the system to be at Rs 4 trillion). http://www.indiatimes.com/news/india/rs-4-lakh-crore-that-s-the-amount-of-black-money-that-will-be-eliminated-from-the-indian-economy-after-demonetisation-266677.html ). There is no valid proof for this claim that the hoarded black money is 25%, even though it has been widely spoken and accepted number, but would be validated on 30th December when final numbers will be available. So in theory the cash notes that have been demonetized have been replaced in a week, the question is has it reached the last mile?
7. Elimination of fake and counterfeit currency.
Source: Reserve Bank of India; Note: Assuming number of Rs 2 and Rs 5 notes to be equal
The above table represents the fake currency detected and reported in the system during the last financial year, a point to be noted is that just three banks Axis, ICICI and HDFC reported 80% of such counterfeit notes, which implies that such notes are not detected fully in other banks. A data from Indiaspend reports that the only 6 out of every 250 fake currency is reported. Going by that percentage the estimated fake currency that would have been eliminated would be Rs 1.2 trillion.
Adding it up with anticipated 3.6 trillion black money, the total counterfeit and black money that would have been eliminated would be Rs 4.7 trillion.
8. Several key sectors such as cement have shown rebound in the growth after an initial impact for about a week. Rabi sowing has been 8% more than the previous year implies that the rural India has not been hit as badly as propagated in the news media[8].
9. If not anything else, the move has improved the tax collection of all civic bodies across India. Municipalities, metropolitan corporations, and other civic bodies have reaped a higher tax collection[9] post November 8th.
A summary of above mentioned points would indicate that there may not be any adverse effects on the economy and GDP, rather there would be growth of GDP. .
MYTH -3 UNDER PLANNED AND IMPROPER IMPLEMENTATION
Everyone has liberty to speak in a free democracy, however if they speak with facts, rather than rhetoric it would sound nice. I have tried substantiate my counter claims on the best available and authenticated numbers.
NOTE PRINTING CAPACITY OF RBI:
One of the criticisms widely discussed is that it will take about a year to replenish the demonetized notes, which is totally incorrect according to the number analysis that I have provided hereunder. RBI has not made it specific on the details of how much preparation it has made prior to the announcement. Even if we consider the exercise started immediately after Mr. Urjit Patel took over, (since the notes are signed by him), it had full two months and it would have easily made up the required currency notes.
I am able to access one of the presentations made by RBI[10] in the year 2004 which mentions the capacity of government press to print currencies. Assuming that the capacity has not been augmented after that which is unlikely, the present printing capacity of RBI is 42 million notes per annum working three shifts per day. (The presentation states 28 million in 2 shifts). The appended table shows the MO or reserve money supply in the country before demonetization and after demonetization. The table shows that effectively Rs 3.6 trillion has been withdrawn and not replaced.
Money value in 500 and 1000 prior to demonetization – Rs 15.4 trillion
Money sucked out of the system Rs 3.6 trillion
Net new money supplied Rs 11.8 trillion
Notes that could be printed in 2 months Rs 7.0 billion
5 billion X Rs2000 + 2 billion x Rs500 Rs 11 trillion
Hence by just printing more of Rs 2000 notes, RBI could have easily met the cash requirement in the preparation time it had i.e. two months. The reserve money supply data by RBI in the above table suggests that RBI might have done the same by printing more of Rs 2000 notes.
INDIAN RURAL POPULATION IS UNBANKED:
This is the second most talked about issue that majority of the population in India is unbanked. The numbers available prove contrary to this. The following table provides the population of India as well the adult population in India to be approximately 800 million.
Number of adults in India as at 2016 is 808,146,000[11],
When we need to speak on the number of bank accounts, for transaction purpose, we need to consider the number of households rather than the total population of the number of adults. The number of households in India is approximately 250 million. In one single stroke Jan Dhan Yojaan over 250 million accounts have been opened.
Pradhan Mantri Jan - Dhan Yojana Accounts Opened as on 23.11.2016 (All Figures in Crores)
For arguments just 250 million individual bank accounts would suffice to tide over any banking emergency for unbanked population. The following table presents the number of bank accounts in India as at March 2015.
India had 1.17 billion savings accounts against a population of 1.3 billion. The number adequately covers the adult population of just over 800 million and households of 250 million.
However after March 2015, which is the date of this report, Jhan Dhan Yojna has now opened over 257 million accounts. Adding this number to the available number as at March 2015 we would have over 1.4 billion bank accounts in India. To put it in a nutshell we have number of savings account to the tune of 1.42 billion against the adult population of 800 million and household number of 250 million. From the above numbers we can safely assume that if not 100% of the population, a vast majority of the population have been covered by banking system.
NOT ALL HAVE PLASTIC MONEY / CARDS TO OPERATE
The table presented in the next page provides the number of cards issued as at August 2016 (source RBI). 712 million debit cards and 22 million credit cards are in operation in India which adequately covers the adult population in India, and covers the number of households by three times. The important point to be noted is that all Jhan Dhan Yojana accounts which constitute the rural population and the poor have all been mandatorily been given a rupay card. A total of 738 million debit cards and credit cards have generated close to a billion (981 million) transactions, which is a fairly good number for such a cash dependent economy.
NOT ENOUGH POS EQUIPMENT / ATMS TO SUPPORT CASHLESSSOCIETY Another standard argument is the low penetration of ATMs and POS machines in the country to adequately support the demonetization effort and emergence of cashless society. The rapid emergence of E-Wallets have reduced the need for POS and ATMS to a great extent.
There are some 20 to 30 mobile payment / e-wallet companies in India the enrollment to them has leapfrogged post demonetization. The following are some of the numbers
Number of ATMs - 202,801
Number of POS -1,461,672
Value of ATM transactions - Rs 2,199,618 million
Value of POS transactions - Rs 441, 194 million
Number of PayTm Users - 158 million[12]
Number e-wallet users - 405 million[13]
Number of merchant registration PayTM - 1,000,000[14]
As we have seen from the above numbers, India is skipping plastic cards and are moving towards e-wallets. Hence it is not necessary to have the number of POS and ATMs to have a digital payment system. Simple payment systems such as e-wallets and other payment initiatives by government such as Unified Payment System, which works on USSD technology have the capacity to replace the need of more ATMs and POS machines. In just over one year, a single e-wallet company PayTM has added 1 million merchant registration which in turn is equivalent to POS for cards. Considering the market share of 39% for PayTm we could deduce the total number of merchant registration with all the e-wallet companies put together to the tune of 2.5 million. Hence all the above points would sufficiently counter the myth that the government was not prepared, had not planned well and has not implemented well.
DEMONETIZATION WILL AFFECT FARMERS THE MOST
There is yet another argument that the demonetization has been introduced during the Rabi sowing season, which would severely impede the farmers ability to buy seeds and plant hence would affect the food production. The appended table presents the data on Rabi sowing season which indicates the area has actually increased by about 9% in this season[15].
Lakh hectare
Sowing season could not have registered any increase had there been any strain in the commercial transactions at rural levels.
MYTH -4 GDP WILL SLOW DOWN – TRADERS WOULD BE HIT HARD
Plethora of views from self-proclaimed economic gurus, Nobel laureates political pundits and the list goes portend to a drastic, disruptive shock to the economy and GDP growth. I tend to rely on the research and data published by Nielsen, an apolitical research organization of repute. Nielsen published its first report within 48 hours of the announcement of demonetization and the second one after three weeks of the demonetization announcement.
In the first report Nielsen had predicted the following points after a quick survey done in 48 hours.
· Priority 1: Low impact - Grocery and other household Food items such as packaged grocery, edible oil, tea-coffee etc.
· Priority 2: Medium impact - Home and Personal Care categories like Toilet Soaps, Toothpaste, Detergent, Shampoo, etc.
· Priority 3: Highest impact – Impulse and Non-Essentials like Biscuits, Chocolates, Soft drinks, Frozen Foods, Packaged Foods, Snacks etc.
It followed up the research with it second report two weeks into demonetisation, the salient features are furnished hereunder:
GOING DIGITAL:
Roughly 1.2 crore more Indians started using digital wallets in a single week. The reach of mobile payments increased by 6% in the week of the announcement as compared to the previous week, to peak at the highest ever reach of 70%. Usage frequency also surged by 15%.
Indian society is highly adaptive and the shift from cash to digital on a very short period of time indicates the resilience and adaptive nature of Indian population. Apart from any other point, the public on general have bought into the concept and have reposed the faith in the Prime Minister Modi. The second survey conducted by Nielsen has tabulated the consumer sentiment on the whole exercise, which has put an end to the much criticized survey done by the PM on his private portal. 74% of the Indian population have rate the demonetization exercise as positive development.
MODERN TRADE
· Foods witnessed the highest increase in growth during the demonetization week at 19% vs. year-ago. Within the food basket, packaged grocery and cooking medium saw a big upswing. Tea, packaged atta and rice, baby food, milk food and non-refined oil also contributed to the growth.
· Impulse categories (biscuits, chocolates, salty snacks and confectionery) also grew, but at a much slower pace. Soft drinks’ slowed down significantly; however, the onset of winter could also be contributing to this slowdown.
· Volume growth patterns in foods indicated a shift to bulk packs. Much of this could be driven by retailer private labels or the ongoing offers in the demonetization week.
· Non-food sales grew as well, driven by personal care (17% in demonetization week vs. a 4.8% growth year-till-date before demonetization). All non-food categories including essentials like detergent powders and cakes, toothpaste, shampoo etc., saw a healthy double-digit growth (despite demonetization falling right after the monthly shopping period).
The sample data for selected group of essentials during the first week of demonetization Vs the yearly average, shows an increased sales growth in all sectors but for impulse food such as soft drink etc.,
Nielsen also analyzed the impact of the demonetization initiative on FMCG sales in organized wholesale stores, otherwise known as Cash and Carry in India. Cash and Carry provides an early indication of any slag or spurt in demand arising from changes in the domestic environment. An initial read during the week of demonetization from Nielsen’s Scantrack Cash and Carry service, which offers a weekly read of Cash and Carry POS sales from 100% of organized wholesale stores across India, threw up some interesting findings.
· Cash and Carry FMCG value sales slowed down due to demonetization.
· Retailers stocked up on essential products in anticipation of higher consumer demand of essentials in the weeks following the note ban. As a result, the slowdown was primarily due to non-food categories. Among non-food categories, personal care women was least affected while personal care-general saw a bigger impact.
· Food categories received a mixed response with certain categories having witnessed positive tailwinds while other categories saw a dip in demand from retailers. Impulse food witnessed the steepest decline in demand, while cooking oil and packaged grocery saw an exorbitant demand from retailers on the back of the belief that consumers would prefer to stock up on essentials in wake of the cash crunch.
CONCLUSION
Going by the above points we can come to the following conclusion
1. RBI has and might have adequately replaced up to 75% of demonetized value with the new 500 and 1000 notes within the two months it might have had.
2. People of India are very much adaptive and is evident from the massive support for the move and quick change to e-wallets
3. Even in the first week of demonetization some sectors of the economy have shown growth while some other sectors such as impulsive purchase sector (biscuits, soft drink etc.,) have shown decline.
4. Farmers and Rabi sowing do not seem to have been affected, reflected by the increase in sowing area
5. Net increase in the bank deposits of over Rs 5 trillion is expected to increase bank credit and hence spur overall development
6. Even though many of the hoarders have used Jhan Dhan accounts to evade tax, we presume that the tax base of the government would increase form the present 5 crores to 10 crores in the coming financial year.
7. Despite the hype created in various media, the numbers indicate a different picture.
[1]http://economictimes.indiatimes.com/news/economy/indicators/indias-per-capita-income-rises-7-4-to-rs-93293/articleshow/52524152.cms
[2]https://en.wikipedia.org/wiki/Income_inequality_in_India
[3] From the statement of Mr. Arjun Ram Meghwal in parliament and RBI money supply data as at 11-11-16
[4]http://economictimes.indiatimes.com/industry/banking/finance/banking/rupay-card-usage-jumps-118-per-cent-in-1st-week-of-demonetisation/articleshow/55757235.cms
[5] From the statement of Mr. Arjun Ram Meghwal in parliament and RBI money supply date as at 11-11-16
[6] Data from RBI
[7]https://datamarket.com/data/set/28m2/bank-deposits-to-gdp#!ds=28m2!2rr3=16&display=line
[8] Speech by minister of coal Mr. Piyush Goel at the HT Leadership summit
[9]http://www.hindustantimes.com/india-news/demonetization-windfall-civic-agencies-record-268-increase-in-tax-collection/story-O3YsryY0WtdefZy8vdBMFM.html
[10]https://www.google.co.mz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwiGib_Z6tfQAhVJL8AKHcWCBYsQFggoMAI&url=https%3A%2F%2Fwww.rbi.org.in%2Fcurrency%2Fpresentation%2FCurrency-presentation.ppt&usg=AFQjCNEEwdQYvR326suF88shlowVki05qw
[11] Credit Suisse – Global wealth data book 2016
[12]http://www.bloombergquint.com/business/2016/11/28/the-party-has-just-started-for-digital-wallets-in-india
[13] As per Nielsen report, PayTM has 39% market share and hence 100% of the market has been computed
[14]https://blog.paytm.com/journey-to-1-million-merchants-bringing-in-the-cashless-revolution-adce3ae9221#.a3m4ejh84
[15]http://economictimes.indiatimes.com/news/economy/agriculture/sowing-of-rabi-crops-rises-27-despite-note-ban/articleshow/55760472.cms
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