A nation in agony: How demonetisation has hit India where it hurts

Narendra Modi’s “surgical strike on black money” through demonetisation tears asunder the lives of vast sections of the poor, promoting a gigantic transfer of income and wealth from the poor to the rich on a scale unprecedented since Independence.

Published : Dec 07, 2016 12:30 IST

Daily wagers look on as Prime Minister Narendra Modi arrives at Varanasi in Uttar Pradesh, his constituency, on November 8 to supervise the Swachh Bharat campaign.

Daily wagers look on as Prime Minister Narendra Modi arrives at Varanasi in Uttar Pradesh, his constituency, on November 8 to supervise the Swachh Bharat campaign.

For most of November, millions of Indians stood in queues outside banks and ATMs across the country, patiently waiting to collect a fraction of what was legitimately theirs. December came and nothing changed. Considering the scale on which an entire population remained literally on its feet, which also resulted in nearly 100 deaths as is being reported from across the country, what was truly remarkable was the fact that a nation chose to remain sullen instead of turning angry or violent.

As India lurches into the second month of its tryst with demonetisation, it has quickly become evident that this is an unprecedented onslaught on the poor. The country has never faced an economic crisis of the kind it is undergoing now and there is no historic precedent to learn from, from anywhere in the world. Reports from across the country—corroborated by an array of reports from Frontline correspondents, from almost a dozen States—show that the foolhardy and reckless economic experiment has wrought havoc on lives and livelihoods in ways that could not have been even imagined.

Prime Minister Narendra Modi’s clever and cynical use of the image of a beggar with a swipe machine to conjure India’s march to a mythical land of a cashless society reflects a mindset that has only contempt for the poor. The simple point is that a man who claimed to have once been a chaiwala himself at an earlier point in life is just heaping insults on those whose small-scale livelihoods revolve around the fulcrum of cash.

But this is not even just about those at the extreme margins, such as vegetable vendors and people running tea shops or eateries in Indian villages, towns and cities. Farmers, for whom cash is critical, especially now in the sowing season, have been left to the wolves. With the Reserve Bank of India banning cooperatives from conducting any operations, in utter violation of their legal status as “banking companies”, small and marginal farmers have either sacrificed profits from the last harvest or have abandoned or neglected their next crop.

There is a good reason why this is the “wedding season” in the Indian calendar: this is the time when harvests bring some incomes to households. But with cash withdrawals limited to a trickle, reports of abandoned weddings, or at the very least, of tears in the time of joy from families across the country, have poured in. Waves of reports, about small-scale factories in small towns such as Ghaziabad, not far from the national capital, Moradabad (brassware), Tirupur (hosiery), Ludhiana (bicycles, winter wear and sports goods), Firozabad (glassware) and Mandya in Karnataka (jaggery), portray a calamity that is still only beginning to roll. Never before have entire swathes of economic activity been brought to the brink of extinction as now.

In the immediate aftermath of Modi’s announcement of demonetisation, it became clear that a bungling of monumental proportions, right at the nation’s helm, was responsible for the country’s plight. But now, in the light of the manner in which the government has shifted goalposts and added new “objectives” to the agenda, such as the one of a move towards a cashless society, suggest that ineptitude may be only a more charitable explanation for the tribulations heaped on a hapless people. One must move away from a mindset of pity for the forsaken to comprehend the scale of wealth transfers that demonetisation has engendered. This is more about aggressively promoting inequality on a scale that even the wealthiest of the land could not have imagined.

Blundering troika

The blundering troika of Modi, his Finance Minister Arun Jaitley and RBI Governor Urjit Patel, must take ultimate responsibility for the myriad ways in which havoc has been caused, and is still unfolding. To be fair to Modi, he has never shied from taking responsibility for what clearly bears his imprint. Jaitley’s role in this arises from the fact that it is in his name, and under his command, that demonetisation has been rolled out. As for Patel, the man responsible for currency management and much more, his profound silence since November 8 has explained more than he ever could have. After all, Patel headed the Monetary Policy Department in the RBI, which deals with currency management, as Deputy Governor before he assumed his current position. It is simply impossible that the RBI, which filters talent after a gruelling exam (recruiting less than hundred officers annually from about three lakh candidates), did not have within it the elementary skills needed for currency management.

But first, the bungling. As was pointed out in the last issue of Frontline , a colossal failure to print enough of the currency worth the value of what it was supposed to replace is directly responsible for the unending queues at ATMs and banks across the country. This has resulted in the ultimate insult to the Indian rupee. The acute shortage of currency and its arbitrary rationing, not only in geographic terms—rural versus urban—but in terms of which banks (and within banks, which branches) get how much, has reduced the rupee’s status to just being another commodity. This has been aggravated by the fact that almost a month after Modi’s announcement most people have not yet seen the new 500-rupee note, which accounted for almost half the value of currency in circulation and was the fulcrum of the Indian currency system. The new 2,000-rupee is one that nobody wants—not even the driver of the cash van of a bank in Bangalore who escaped with Rs.1.37 crore but chose to abandon more than Rs.44 lakh worth of these brand new crisp notes.

Slowly, because of the utter lack of transparency, information filtered in of the gross bungling in the Finance Ministry, which directly controls the government presses at Nashik (in Maharashtra) and Dewas (in Madhya Pradesh), which were responsible for printing the new 500-rupee notes. These presses were unequal to the task of meeting the huge challenge of replacing the 17.165 billion 500-rupee notes that were extinguished on the midnight of November 8. As reports of glaring errors in the new notes came in, the government was forced to shift production to the RBI-owned presses at Mysuru (Karnataka) and Salboni (West Bengal). The fact that the government-owned Security Printing and Minting Corporation of India Ltd. (SPMCIL), whose printing equipment is of much older vintage compared with the RBI’s units, does not even have a full-time managing director at this crucial hour indicates the utter lack of preparedness in the Finance Ministry and its inability to coordinate currency printing with the Central bank. This blundering is compounded by the fact that while printing of the 2,000-rupee note apparently began soon after Raghuram Rajan’s exit from the RBI in early September, printing of the new 500-rupee note began much later. The acute shortage of currency, especially those of lower denominations, is what is being reflected in people queueing up at banks and ATMs across the country. But the scarcity of money in its most elementary form is not having the same impact on everyone. Those with the means, such as people with multiple ATM cards, for instance, are able to get much more than those who are lucky enough to access any cash at all after spending hours in a queue. Those covered by “relationship banking” services of private banks or those categorised as “high net worth” customers of these banks are obviously enjoying a privileged status in these times of scarcity.

A bank manager told Frontline that attention to basic details, such as designing the new currency notes in identical dimensions and thickness as the ones they were replacing, would have prevented the country’s two lakh plus ATMs from going out of action for almost three weeks.

But the RBI’s culpability in the fiasco has been vastly aggravated by the utterly non-transparent and arbitrary manner in which even the limited currency has been rationed. There is evidence to show that some banks, especially public sector banks, have been discriminated against; moreover, within banks, deployment across branches has been on a knee-jerk basis. Thomas Franco, vice president of the All India Bank Officers Confederation, told Frontline that since November 10 private banks in Tamil Nadu, especially the new-generation privately owned ones, were given more cash than the public sector banks even though the latter had a much wider branch network in the State. Although State Bank of India has the highest number of currency chests (137) among banks in the State, RBI instructed it to source its requirements from ICICI Bank in Madurai and HDFC Bank in Coimbatore, he alleged. By the end of November, while ICICI Bank had been given Rs.4,500 crore, HDFC Bank Rs.900 crore and Axis Bank Rs.700 crore, all other banks put together have been given just Rs.7,800 crore. This, despite the fact that private banks account for just over a quarter of all bank branches in Tamil Nadu.

Dr K.C. Chakrabarty, former Deputy Governor of the RBI, who veteran journalists recall as being outspoken in manner, called upon the RBI in a recent interview to Sucheta Dalal ( Moneylife magazine) to declare how much money, and in what denomination, was being distributed and on what basis. Chakrabarty urged the RBI to disclose details of “production, transportation, distribution and last-mile availability. Only then will you have a snapshot of what is happening at the ground level. Today, all this information is computerised and available; why can’t it be put in the public domain? Do we know where the Rs.100 notes are going? Is it to metro cities or rural areas?”

The enormous vacuum caused by the disappearance of the 500-rupee note and the huge gap between the good old 100-rupee note and the new pink 2,000-rupee note have warped the social psychology with respect to holding cash. This is not merely a problem of logistics for the Central bank; it has huge implications for unequal access to cash in a cash-starved society. There is no doubt that everybody is trying to hoard some cash, especially 100s, simply because the 2,000-rupee note’s worth as a medium of exchange is virtually non-existent. But a person’s ability to hoard in order to simply tide over short-term liquidity is also conditioned by his/her income levels. It is obvious that the poor of all kinds are able to hoard a far smaller proportion of their income than the rich.

Speaking to Frontline , the besieged manager of a small branch of a public sector bank in a village near Mandya said: “This form of hoarding is aggravating the shortage, but I would call this hoarding at the retail level. The much bigger problem of hoarding arises from the wholesale scale of hoarding that is exclusively the preserve of the rich.”

Ever since demonetisation began, there have been reports of a thriving “exchange” racket from across the country. According to a business source in Gurgaon, who has personally encountered the racket, the “commission” for exchanging the outlawed currency for legitimate notes ranges from 20 per cent to 35 per cent, depending on the place. “The rate is most competitive, and in Delhi, Pune and Ahmedabad the rate seems to be higher,” he told Frontline .

But this market for exchanging notes appears to be thriving across the country, even in smaller towns and villages. Enquiring about the possibilities for “exchanging” currency just outside the Malavalli cocoon market near Mandya on November 28, this correspondent met a youth from a nearby village. He said several “brokers” had approached him in the preceding week, asking him if he had any money to convert. Whipping out his phone from his pocket, and pretending to speak on this correspondent’s behalf, he called a local tout. The terms were clearly explained by the broker: he would convert Rs. 1 crore of my currency in old notes and return, within 30 minutes, Rs. 84 lakh, an effective commission of 16 per cent on the transaction.

The thriving “exchange” racket is not merely a convenience for the rich; it means an additional burden for the poor in these difficult times. The exchange of invalid currency is, in effect, sucking out a significant portion of the valid currency that is only coming in a trickle. Just a single case would highlight what this means for ordinary folk. The Income Tax Department’s recent haul of cash of more than Rs.5.7 crore from the residences of two government officials indicated that nearly Rs.5 crore was in the new pink notes. If a person were to stand in a queue and draw Rs.2,000 each day, it would require him/her to queue up every day for almost 45 years, if the person had so much money in the first place. What this means is that demonetisation is a double whammy on the poor: their lives are wrecked, apparently because the government is suddenly determined to go after the rich, but they have to suffer even more because these same rich folks have found ways to escape demonetisation.

“Exchanging” currency is not the only means available to the rich. When a currency is suddenly declared invalid, there would be some who would try and change them into valid forms. But the spirit of enterprise does not stop there; many more avenues are available, limited only by their imagination. Wealth holders, especially of a black hue, would seek any avenue to retain their wealth. Cash may be the most liquid of all forms of wealth, but wealth holders would seek to convert them into other forms; gold was one avenue, but by no means the only one available. In fact, any commodity would suit them just fine, even tender coconuts, as this correspondent discovered in Maddur, about 80 kilometres from Bengaluru.

The arrival of tender coconuts at the APMC (Agricultural Produce Market Committee) yard in Maddur stopped soon after demonetisation. But surprisingly, they picked up about a week later and even came back to the pre-November 10 levels briefly. Mallesh, a small trader, explained that the arrivals rose sharply from November 17 and lasted until November 26. Mallesh said merchants from Mumbai and Pune “bought heavily in this period, insisting on making payments in the now-invalid notes, but especially wanted to dispose off their 1,000-rupee notes”. Mallesh said that the merchants were even willing to “pay a small premium for tender coconuts in order to convert their cash holdings in invalid notes”.

This kind of activity is corroborated from other sources. A top government official in Bengaluru told Frontline that several Karnataka politicians, including State Ministers, have been actively purchasing paddy and other agricultural products in order to “whitewash” their stock of black money.

The conversion of cash to commodity in a situation of a demand compression that has been provoked by demonetisation has serious ramifications for not just the livelihoods of the poor but the manner in which it aggravates social inequality on a scale that would not have been possible without demonetisation.

Thus, cash hoarding is for ordinary folk seems to be the taunt of the rich. It stands to reason that they would have utilised the severe collapse in demand, and hence of prices, of a range of commodities, to hoard stocks of these commodities, which can be sold for super profits at a later stage. Not just that, in the process, they would have converted a significant portion of their ill-gotten wealth. Indeed, the adage in the world of business that a crisis is also an opportunity never rang as ominously true as it does now in these times of mass distress.

The amendments to the Income Tax Act, pushed hurriedly through Parliament recently, amount to a concession to tax evaders. Coming as it does, within two months of the last amnesty scheme that was touted as a “last chance” to black money holders, it is in sharp contrast to what honest citizens have been put through in the last month in the name of demonetisation. Delhi Chief Minister Arvind Kejriwal, a former Indian Revenue Service officer, has pointed out that the penalty, which was earlier expected to be 200 per cent on evaded incomes, has been scaled down to 50 per cent. Kejriwal said demonetisation was a scheme conceived to enable “unscrupulous people” to turn their black money into white.

Shifting the goalposts

It became clear by November-end that demonetisation would turn out to be all drama and no effect. On November 29, Minister of State for Finance Arjun Ram Meghwal told the Rajya Sabha that there were 17.165 billion Rs.500 notes and 6.858 billion Rs.1,000 notes in circulation on November 8. The total value of these denominations on that day was Rs.15.44 lakh crore—Rs.8.58 lakh crore in 500-rupee notes and Rs.6.86 lakh crore in 1,000-rupee notes.

A day prior to this, the RBI said that Rs.8.45 lakh crore in these denominations had been deposited with banks during November 10-27. Moreover, on November 8, banks maintained Rs.4.06 lakh crore with the RBI in order to comply with statutory cash-reserve ratio norms; banking industry sources said most of this would have been in high-denomination notes. In addition, banks’ cash holdings on November 8, meant to meet day-to-day requirements from customers, would have amounted to at least 0.50 lakh crore. Thus, the total amount that has been sucked out within the first three weeks of demonetisation would have been at least Rs.13.01 lakh crore. With 84.26 per cent of the targeted denominations already back, well before the half-way mark of 25 days, the question is: was it for this that millions of people have had to suffer?

From the start, demonetisation was all about shifting goalposts. First it was about black money and its links with counterfeiting and terror financing. Later it shifted to a war on black money, with Modi making the rather brave assertion that the rich and the famous were in queues, just like their poorer brethren. Now it has shifted to moving towards a “cashless society” in which cash would be replaced by card-swiping and app-wielding citizens using mobile phones. Among the goalposts that were shifted was the one by Arun Jaitley on December 2, when he asserted, of course without any details, that a significant portion of the old currency would soon be replaced by fresh notes. But in the same breath, he stated, again without any substantiation, that the total value of the fresh 500- and 2,000-rupee notes need not be equivalent to the total value of the old 500- and 1,000-rupee notes pulled back from circulation. The implicit suggestion is that an equivalent replacement of the currency is not required because India is now on the revolutionary road that liberates it from the shackles of cash, which is preposterous for at least two reasons.

First, Jaitley’s conjuring of monetary policy on the fly is not how it happens in the real and modern world. As any undergraduate student of economics would tell him, if he cares to pay attention, the quantum of money needed in a dynamic economy that is growing is a function of many variables—not just of the level of national income and its sectoral composition or the levels of consumption and investment, but even social attitudes to holding wealth in currency form. Jaitley’s cavalier treatment of these weighty issues suggests that he is simply saying this to evade responsibility for the wholesale bungling for which he is directly responsible.

The second aspect of the new magic panacea that is being spewed from all wings of the government in the last few days, from the Niti Aayog, the institution that is a pathetic caricature of the Planning Commission which it replaced, to Ministers scurrying in damage-limitation mode, is that cash will be replaced by other forms of payments. This is not only blatantly irresponsible, it is positively insecure for the poor. Officials of the Niti Aayog, in the manner of corporate trainers, have been busy conducting workshops in the last few days, “educating” government officials on how to adopt cashless payment systems.

A recent analysis of cashless payment systems, particularly of e-wallet services and of mobile banking services, by Medianama, a portal on digital and telecom businesses in India, warned that a measured and gradual approach would be more prudent. For instance, most of the e-wallet services “read” the user’s phone “status and identity” and track their location. Medianama pointed out that most people are “not aware of the implications of permissions being taken by wallet apps, and have no control over the data that are being collected”. It pointed out that wallet applications can “collect a significant amount of behavioural information on users, which can be used to create granular profiles of users, and market services to them”. The fact that India has no privacy laws means that users have no control over how their data are used by these companies. But this is not merely a problem of privacy as understood in a vague and abstract sense. The sheer scale on which data are being tapped and stored by wallet companies, without any regulation, is also a significant security hazard.

The cashless mirage

Mobile banking apps, which are another approach to a cashless world, also suffer from similar problems that not only compromise the user’s privacy but also pose a security hazard. Arun Jaitley recently regretted that only 45 crore of the 80 crore debit cards issued by banks are in use. If he had tried asking a small trader or a person in a village, he would have understood why. All payment systems come with a transaction cost. Medianama founder Nikhil Pahwa has this to say in a recent article on his website: “There is no parity between cash and digital money: a rupee paid by cash is far more convenient for a user, and affords less costs, as compared to a cashless system.”

First off, the uneven distribution of mobile phones in the country implies unequal access to transaction platforms. Moreover, as Pahwa points out, of the 343 million Internet connections (even discounting for multiple connections in the same household), 192 million are “narrowband” connections, indicating that only a small fraction is ready for the cashless highway. Pahwa also notes that debit card usage is currently about 18 transactions for every 100 debit cards that have been issued; the average number for credit cards is even lower, at 3.18.

While these data pertain to the customer-end of the transaction, the data at the seller-end are pretty disappointing too. There were 1.46 million point-of-sale (POS) machines deployed across the country, which are most likely concentrated in the metros. Pahwa quotes a study by Ernst and Young, which shows that the POS penetration in India is only 693 machines per million persons, compared to about 4,000 per million in China and Brazil. Neither the fans of Modi’s cashless agenda nor the Niti Aayog officials who have rushed where angels fear to tread have cared to point out that even the beggar that Modi cited in his address at Moradabad would have to pay a transaction charge on the POS terminal, apart from the rental (about Rs.400-600 a month, according to one source).

Pahwa makes a point tellingly, thus: “The difference between cash and digital is that cash limits the damage to the loss of a note or of a number of notes. In digital, the risks are higher.” He points out that digital payments do have a role to play, just as cash does, but warns that a headlong rush into digital systems “increases security risks for all citizens”. Almost a century ago, in 1919, John Maynard Keynes wrote in The Economic Consequences of the Peace : “Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.” Although more recent research ( Journal of Economic Perspectives , 2009) indicates Keynes’ attribution of Lenin may have been misplaced, his observation appears laser-like in its accuracy in depicting the Indian plight today. The massive transfer of wealth from the poor to the rich is not confined to just agriculture. Huge swathes of industrial activity that are concentrated in the small-scale sector could lose their business, perhaps permanently, to larger entities whose dependence on cash is much less then theirs. In short, demonetisation paves the way for a further concentration of not only wealth in a manner that would not have been possible by other means. That is why those who favour further concentration have welcomed it as a “masterstroke”.

Sitting outside a crowded bank branch in a village near Mandya, Siddegowda, a sericulture farmer, said he was planning to abandon two cycles of his cocoon harvest (a cycle lasts about a month) because he fears prices would collapse even further. Despite his angst, however, he welcomes “Modi’s assault on black money, but….” His voice trailing off, he does not complete what he set out to say. Perhaps, as the prominent TV anchor Ravish Kumar said recently, mediapersons ought to watch out for the many “buts” that people want to, but are unwilling, to voice. That may explain why people are sullen, rather than angry, now.

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