DHAN KI BAAT - A Year After

With this post, i reach the second mile-stone in my Blog, the 200th post.

On the 8^th November, 2017, the Indian Government celebrated as the Anti-Black Money Day (people on the other side of the political divide observed it as a Black Day). High denomination notes of Rs. 1000 and Rs. 500 (almost 86% of the money-supply) were de-monetised on the 8^th November, 2016.

After this event, i had published 3 blog-posts titled ‘Dhan ki Baat I, II and II on the 8, 9th and 10th January, 2017.

I had been following reports on the effect of this de-monetisation and i was wavering on whether it was beneficial or harmful for the country; however, the scale in my mind was tilting in favour of this decision.

On the 8^th November, 2017, newspapers carried reports of the Finance Minister Arun Jaitley’s statement that demonetization was an “ethical and moral step”. The Opposition Parties led by Congress, a ramshackle party which failed to secure even 10% of the seats in the Lok Sabha in 2014 elections, to claim the position of Leader of Opposition, observed the day as a Black Day. One may dismiss as a mere power-play, what the Congress Vice President Rahul Gandhi said on the subject. But when the seasoned economist and former Prime Minister Dr. Manmohan Singh, who became the P.M., courtesy the Congress President Sonia Gandhi (The journalist Sanjay Baru book on him is titled ‘The Accidental Prime Minister’.) branded demonetization as “an organized loot and legalized plunder”, one would have taken notice. But it seemed that his economic analysis was coloured by the political situation in which he has placed himself. The United Progressive Alliance led by Congress and supported by C P M -Communist Party of India (Marxist) - was in power from 2004 to 2014, with Dr. Singh as P M. Its uncharitable critics dubbed the coalition as having 3 PMs: P M (Dr. Singh), C P M and an ‘S P M’ (Super P M Sonia Gandhi as Chairman of the specially created for her, the National Advisory Council).

However, the reasoned editorial of The Economic Times of the 8th November 2017 analysed the overall picture, took a balanced view and decided my view of de-monetisation. The first sentence of the editorial stated, “On the first anniversary of de-monetisation, it is unambiguously clear that the project has been a resounding success. It sent out a clear message that the government is determined to clamp down on black money and is prepared to take unorthodox measures for the purpose. … The government would now go after benami property.” Most black money is held as real estate, gold and other assets. The editorial went on to say that even most of the amount held in cash came back but at a cost to the black money holders; they had to employ people, directly or indirectly, to deposit the money in banks. And this has left a trail which the authorities are investigating.

This, i think, gives a correct picture.     

Dhan ki Baat III

It Began in 1946


India’s first demonetization was in 1946 in pre-independence era by the colonial British Government. During World War II, businessmen had hoarded black money made out of the prevailing scarcity of household items which were supplied to Government for its war efforts. At that time, notes of Rs. 1000 and 10,000 were demonetized.

Specimen of Note of Rs. 10,000 Issued by British Government of India, withdrawn in 1946

This very first demonetization in India in 1946 figures brilliantly in the film ‘Vijayalakshmi’ where the female protagonist’s greedy father-in-law who finds his nemesis in demonetization of Rs.1000 notes.

The first demonetization after independence of India was in 1956, when all notes carrying the British monarch’s head, were withdrawn.The second came in 1978, when Morarji Desai was the P M. Notes of Rs. 1000, 5000 and 10,000 were demonetized. At that time, these notes constituted a minuscule of total money-supply and hence common people were not affected. At that time, i was posted at Etah in U P. Our Branch had a single such note of Rs. 1000. However, this time, notes of Rs. 500 were in wide circulation and so common people were seriously affected. 

During 200-01, Rs. 100 notes were the most used in value terms. Rs. 500 notes were half of Rs. 100 in use. Rs. 1000 notes were just 4% of Rs. 100 notes in use. During 2003-04, Rs. 500 notes became the most used; Rs. 1000 notes were still only 23% of the Rs. 100 notes in use. During 20014-15, use of Rs. 500 notes increased substantially; Rs. 500 and 1000 notes were 8 times the value Rs. 100 notes in circulation. Apparently, inflation is continuously depleting the value of currency notes in terms of the price of goods and services in India.    

The stated purposes of demonetization were curbing black money and corruption, drying of funds of terrorists and immobilization of fake currency notes in circulation. By December 30, 2016, the last permitted date for depositing the banned currency notes in accounts with banks, it was hard to remember what the original objective was. The black money argument was busted. More than 90% of the banned notes came back to banks. Most of it was likely to be recycled into new notes. Moreover, only 6% of this illicit money was held in cash. Now, demonetization is being termed as a movement towards a cashless – or ‘less cash’- society. It is relevant here to know that in response to an application under Right to Information Act, R B I declined to inform the reasons behind the decision.  

Was it wise to introduce notes of Rs. 2000? The size of the old Rs. 1000 notes were 2.2 times that of the new Rs. 2000 notes. Will this not make the work of people with unaccounted money to stash it away in less space? It would have been better to introduce new Rs. 200 notes, which would have been in conformity of the R-3 Principle which says that currency notes should be in steps 1, 2 and 5. That is to say that the next denomination should be limited to 2 or 2.5 times of the preceding one.

It appeared that people with black money resorted to numerous ways, - investigating officials were awestruck by the ingenuity of these - to skirt the declared main purpose of demonetization. Crores of banned notes were deposited in crores of no-frills-zero-balance Jan Dhan Accounts, small accounts of subordinates, lower level employees, dormant accounts, with a promise to give these Account-holders a ‘reward’ when the money is later withdrawn in new notes. A few commercial establishments paid advance salary for 6 months in old currency notes. It was reported that one political party got a deposit a total amount of Rs. 104 Crore by utilizing services of numerous poor ‘supporters’! Out of the total amounts of Rs. 15.44 lakh crore of demonetized notes, about Rs. 15 lakh crore is reported to have come back to the banking system. In connivance of employees of banks and even R B I, huge amounts in new Rs. 2000 notes were received by people with black money. Huge amounts in higher denominations were unearthed. This, when the total permissible amount of withdrawal was Rs. 24,000 per person in week!  Out of the amounts seized by Income Tax Authorities, huge amounts were in new notes.
  
Substantial amounts of old notes were discarded by the hoarders. These were found in garbage-heaps, rivers and other water-bodies. Early reports speculated that about 25% of the cancelled notes would not come back to the system as it happened in 1978. These reports said that these liabilities of R B I would be transferred to the Government as a special dividend. Later, R B I clarified that its  liabilities would not be extinguished and as such, there would be no special dividend for the Government. Ultimately, it turned out that over 90% of the cancelled notes came back to the system; apparently people with black money used ingenious ways to deposit these in banks. The Income Tax Department is investigating the matter.

Normally currency notes seized by police and Income Tax authorities are preserved by them to be produced as evidence when trials take place. This time however, due to the long time required for printing replacement notes, the seized notes were to be released to ease paucity of new notes.

Demonetization involved enormous human and economic costs. It is widely feared that GDP will go down by 2% because of this. The poor have been hit hard. Gandhiji had exhorted to “recall the face of the poorest, the weakest man and ask yourself, if the step you contemplate is going to be of any use to him.” As one commentator said, when we think of the cost –benefit of this decision in the months to come, this sensitivity to the pain of others will be the one thing that will determine whether the benefits exceeded the costs.

Issuing fresh currency notes - remonetization- has been a slow process. Restrictions on withdrawals are continuing even after December, 30, 2016 - the last date for depositing the withdrawn notes in banks. The limit on withdrawals from ATMs has only been increased from Rs. 2500 to Rs. 4500 but the restriction remains; the limit on withdrawals from accounts continues to be Rs. 24,000 per week. It is believed that while addressing the people on TV on the 8th November, 2016, the Prime Minister had said that those holding banned currency notes could deposit these with Reserve Bank of India till the 31st March, 2017 but now it is said that this facility is available only for NRIs. Unpleasant situations have occurred at offices of R B I over this matter.
 
However, the average Indian was not angry with Modi for demonetization. There was not a single case of rioting as predicted by his opponents. Most of the poor believed that the rich have been affected more than them. Gross mismanagement of a proposed demonetization in Venezuela went awry and had to be postponed due to protests, unrest and riot. Its President, Nicolas Maduro, unlike Narendra Modi, is deeply unpopular in the country. A commentator summed it as the moral of the story – Be popular before you let loose an unpopular move!

It is expected that the present shortage of currency notes and rationing will be over by February, 2017.

HAPPY NEW NOTES IN THE NEW YEAR!!!
  
TAIL PIECE:

The reference to ‘black’ reminded one humorist who writes a regular column in a leading newspaper in India, about the saying, ‘Once you go black, you never go back.’ In this piece, she advises readers to refer to Google to find the meaning of this expression.

ADDENDUM : Rs. 1 Lakh Note!

Dr. Rajiv Srivastav, Professor of Banaras Hindu University has been doing a research on Netaji Subhash Chandra Bose. He has come upon a currency note of Rs. 1 Lakh issued in 1943 by the Azad Hind Government in exile, set up by Netaji. It was issued in the name of 'Bank of Independence' and was printed in Burma. This was recognized by Germany, Italy, Japan, Croatia, Philippines, Ireland, China and Burma (Now Myanmar). Here it is:  

    

POST SCRIPT:

Reports say that Sayeed Mohammad Nuroor Raheman, Sahi Imam of Tipu Sultan Mosque of Kolkata has issued a fatwa offering to pay an amount of Rs. 25 lakh to any person who shaves the beard and head of Narendra Modi, as a punishment for his decision  of demonetization!!! Any takers?

CONCLUDED

Dhan ki Baat II

Queuing for Notes 

In his paper Psychology of Waiting Lines, Prof. David Maister of Harvard Business School listed a few propositions about queues. Some of these are:

-Occupied time feels shorter than unoccupied time;
-Anxiety makes waits seem longer;
-Uncertain waits are longer than known, finite waits;
-Unfair waits feel longer than equitable waits;
-Solo waits feel longer than group waits, etc. 
                                                
There were two kinds of people who queued up before banks, genuine persons who wished to exchange/deposit the banned currency notes. The second category consisted of what the Finance Minister termed as ‘currency mules’ who had come as surrogates with the holdings of people having black money. 

The cash crunch forced some parents – parents who conscientiously taught their children the habit of saving - to borrow from their young children, whose piggy banks are loaded with Rs. 5 and 10 coins, Rs. 10, 20, 50 and 100 notes given by stingy but loving aunts, uncles, grandparents and family-friends. And the children would be very reluctant to consider such loans.

Women – maids to memsahebs – have been traditionally stashing away a little something for emergencies, behind their husbands’ back. They pick up any loose change they see about and stuff them into their blouses or other opaque storage. These are stored in numerous purses, big and small, used and unused, in the folds of sarees, stacked in cupboards, almirrahs, inside books and magazines, in kitchen racks, under mattresses, in crevices and what-have-you – all inaccessible to menfolk, to meet emergency expenses. Stowing away cash is done by women all over the world. In fact, the Japanese have given it a name ‘hesokuri’ or ‘money hidden in the navel’. When a child asks for something and the father denies, the mother, in a stealthy manner, dips into such sources and gives the money. Married daughters get something from their doting dads. Each time they add to this loot, they sleep well. Now, with demonetization of Rs. 500 and 1000 notes, they were forced to reveal about this accumulated loot!

Printing of new notes is a very slow process. Many villagers across the country reverted to the good old barter system to tide over the cash crunch.
Replacement of banned notes with new notes -remonetization- has been a long and torturous process, affecting supply of new notes, particularly in rural and scarcely-banked areas. People started lining up before banks long before opening time – often placing their passbooks, representing them, in the long queues. This is the season for paddy-procurement. Farmers who sell their paddy to government-agencies, faced long delays in receiving payment. Often, they had to spend nights in the biting cold winter before banks, hoping to get the money next morning when the bank opened.

While many were strapped for cash, it was a bonanza for numismatists - people who collect notes and coins no longer in circulation. Samples of the withdrawn notes were added to their albums.

For bankers, demonetization meant work, work and more work for the next few days. It unfolded as an untold agony for a million bankers in the whole country. Banks and ATMs remained closed on November 9; when Branches were closed, bankers spent the whole day planning on how to manage the exchange and withdrawals, particularly keeping the temper in the face an angry crowd. A million bankers at 1.3 lakh bank branches were at work for more than 12 hours a day. Ms. Arundhati Bhattacharya, Chairman of S B I, in a message to the staff said, “People are feeling helpless and many times, that helplessness will manifest itself in unreasonable behavior. It is important for us to retain our equanimity, no matter what the provocation.” The Chief Justice of India, during a hearing on the matter, expressed the apprehension  that there would be riots. Fortunately due to the politeness and helpfulness of bankers, his apprehension did not happen. Bankers handled the situation with a belief that they were doing something meaningful for a societal transformation. Even retired bank staff helped branches in handling the situation. At least 40,000 truck drivers, custodians who fill ATMs with cash and security guards silently worked day and night with pride that they were helping the nation.

In Kolkata, there were reports that unemployed youth took up positions at the head of queues at banks and post offices early in the day and 'sold' these positions for Rs. 150 or 200 to the people who wanted to exchange or deposit banned notes.

Several persons died either while standing in queues or due to the inability to withdraw their money. A P Chief Minister arranged for supply of butter milk to people standing at banks and post offices in queues. Many people supplied water, biscuits and tea to people in queues. In Rajasthan a vegetable seller distributed vegetables free of cost to such people. In West Bengal, a councillor provided chairs to senior citizens in queue; Rabindra Sangeet was played for the people lining up.  Some students helped people to fill up the forms for exchanging old notes. Avdesh Gupta, a businessman at Moradabad deposited a total amount of Rs. 1.55 lakh in notes of Rs. 10, 50 and 100 in his bank which had run out of notes of lower denominations to give to people wishing to exchange or withdraw.   

In Kanpur, a woman who was in the queue at Punjab National Bank, went in to labour. When her labour pains grew unbearable, other women customers surrounded her and helped her to deliver the baby boy inside the bank. The baby was promptly named 'Khazanchi Nath'! Khazana in Hindi means treasure and treasury, where cash and other valuables are kept.   

One good result of demonetization was that banks have received huge deposits from people who have deposited the 500 and 1000 currency notes with them; this means that there has been a substantial rise in the lending capacity of banks. Another benefit is that online transactions have increased and India has progressed towards 'less-cash' economy. People who have tasted the convenience of cashless transactions, will limit their cash-transactions.

To be continued.....