Where is the promised windfall from demonetisation?

The Economic Survey 2016/17 was striking not only for its literary references, but also for its circumspect nature. One of major the drivers of this circumspection (which is not a trait one associates with the Narendra Modi government) was the yet-to-be-ascertained impact of demonetisation. The Economic Survey was cautious in saying that it would take long for us to accurately calculate the gains and losses from demonetisation, but ventured to claim that it would result in at most, a 0.5 percentage point fall in the GDP growth rate.

Of all the benefits of demonetisation that the government has been at great pains to sell, the simplest one is a spike in direct tax collections in the form of both taxes and penalties (on black money declared). The second, is an assurance that banks that are now flush with deposits will significantly lower lending rates to spur consumption. Both these do find mention in the Finance Minister’s budget speech, along with a host of benefits that have repeatedly been promised to us — a war on black money, corruption, counterfeit currency and terror funding.

But the government failed to make good these promises in its own budget, and at the moment, we are forced to conclude that the promised gains from demonetisation have just not materialised. Total Tax Revenue of the government in 2016–17 increased by 17% over the previous year. Next year, the government anticipates a 12% increase. Similarly, income tax receipts in 2016–17 went up by 23% over the previous year, and is budgeted to increase by a further 25% next year.

Chief Economic Advisor the Government of India, Arvind Subramanian in an interview yesterday named service tax receipts as one of the four measures of the impact of demonetisation. He did also admit that because of the impending Goods and Services Tax regime, it would be hard to isolate the impact of demonetisation. Here too, the numbers suggest that the Finance Minister is not expecting a great deal of change. Service tax receipts, after having increased by 17% this year, are expected to go up by only 11% next year.

In none of these collections, or projections, can one see a tangible increase in tax receipts as a result of demonetisation. An important caveat is that for the current year, the figures are based on the government’s Revised Estimates, which may well change by the time the Actual figures are recorded once data from the last two months are accounted for. But the surge that one expected from demonetisation is missing — especially when you consider that the difference in Total Tax Revenue between the Revised Estimates and the Budget Estimates for 2016–17 is only 4%. It does appear that on the revenue side, the government was lucky to receive an unexpected additional Rs. 23,167 crores of non-tax revenue in the form of dividends public sector enterprises.

It is not surprising then, that the Finance Minister has little to no room to give away post-demonetisation bonanzas. Neither are there any significant increase in allocations to welfare schemes, nor are there any big bang announcements that would help the government actually implement some of its high-decibel rhetoric. For instance, the allocation for Smart Cities of Rs. 9,000 crore is actually lower than the Revised Estimates of this year at Rs. 9,559 crore. The record allocation of Rs. 48,000 crores for MGNREGS is impressive only until you realise that the estimated expenditure this year is Rs. 47,499 crore. To take another example, the Start-up India Aspiration Fund, after having used Rs. 100 crore out of its allocation of Rs. 600 crore this year has disappeared from next year’s budget.

In many ways, today’s union budget was Finance Minister Arun Jaitley’s moment of truth. With a budget speech that had to shun rhetoric, Jaitley was forced to admit — in deeds, if not just through words — that several glamorous schemes announced by the government have struggled to match up to their rhetoric. In a way, Finance Minister Arun Jaitley may have presented his most honest budget so far. As they say, numbers don’t lie.

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This column first appeared on Catch News

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How is the government estimating India’s paper currency requirement?

As the government goes about printing new currency notes to replace the invalidated 500/1000 rupee notes, one wonders how this is being done. On one hand, the Reserve Bank of India (RBI) claims that there is “enough” currency in the system. On the other hand, government spokespersons claim that not all currency notes would be replenished because they expect people to adopt cashless payment modes. Several other commentators have pointed out that if the value of all currency notes withdrawn from the economy are to be replenished, it would take a minimum of six months given the capacity of the currency printing presses.

All of the above cannot be true at the same time. The starting point for any discussion on the time required to replenish currency notes has to be an estimate of how much of the Rs.15 lakh crore is going to be put back in the economy in cash. A few different theories are floating around. Many of these theories are in fact just arguments crafted to help see the government through another day (or evening of prime time news), and not the result of any robust research. Most figures put out by the government have crumbled when exposed to sunlight. The magnanimous estimates of the proportion of currency notes being held illegally (unaccounted cash savings) have proven to be false, with the mountain the deposits landing up with the banking system in the last forty-odd days. The estimates of counterfeit currency too, seem to have fallen by the wayside. The latest I heard was that the Ministry of Finance suspected the RBI’s ‘bank deposits since 8th November’ to be wrong. Well then…

One prominent theory seems to be that the government can just print lesser cash since a lot of cash was held in mattresses and not really required in the economy, right? This is theoretically plausible, but only in a world where there is reasonably accurate information on what that proportion of cash is. As with much else related to demonetisation, it is quite apparent that the RBI and the government have no clue if the idle savings in cash is 5% or 35%.

First of all though, it is inaccurate to term these savings ‘idle’, since for those who store away cash, these deposits serve very specific purposes. For instance, the oft-quoted case of the wife who keeps deposits away from the prying eyes of an alcoholic husband, or vice versa. People who like to feel secure (like my parents do) about having some cash kept away for times of need, or when there is a sudden urge to splurge on something the monthly budget doesn’t allow for. There are probably a whole host of social and cultural reasons behind why money was saved in this manner – but quite obviously in India, that is the norm. Yes, these monies are less productive than they would be in bank accounts, but that transition cannot be rushed through, let alone be forced on people.

Before we destroy that stock of money by eroding confidence in the currency as a whole, did anyone look into what impact it would have on the ‘confidence’ of, say, a poor woman who is used to saving money for a rainy day? What would it mean to know that her emergency stockpile no longer exists? What about health emergencies, which can be devastating for those who have no means to access insurance or bank deposits? In the absence of any specific intelligence on how much cash would be enough to restore the economy to its earlier normal state, the government will obviously do what it is doing now – which is to release money as they print it and watch for cues on the ground.

The other factor is the pattern of distribution of this household saving, and the manner in which that might change, say, next year. Consider this thought experiment, where a million families have hoarded about 50% of their monies in mattresses and never used them. Another million families have no such reserves. If in this country of two million families, the government decides to reduce the supply of currency notes by say 20%, it will not impact the former group, but will have harsh negative consequences on the latter group.

Another frequently mentioned theory, currently finding favour with assorted government spokespersons, is that as more people go cashless, the need for paper currency will go down and so the government just will not have to print as many currency notes as before. But by how much? I am not sure anyone has a clue. Those who are using cashless transaction options out of compulsion now may revert back to using cash.

In the midst of all this, the RBI has other urgent priorities too that cannot be ignored. When the Prime Minister decides to go speak at a public meeting some place, the RBI would have no factor that into their plans to ensure there is adequate supply of cash there. Just so there aren’t any unexpected protests which might result in the speaker having to cancel or alternately, address people through a mobile phone, perched away somewhere in safety. As the RBI does all of this, and goes about the unfinished task of reconfiguring ATMs and importing paper to print currency notes, they are fervently hoping they wouldn’t have to replenish currency notes to the same extent as before. I am not sure we can run on hope alone.

A big bang attack on corruption, or is it?

ON 8th November 2016, at 8 pm, Prime Minister Narendra Modi suddenly announced to the nation, that the government intended to eliminate the 500 rupee and 1000 rupee note – dramatically, in four hours’ time. These two denominations account for about 90% of the currency in circulation in India currently. Various details have emerged since, and there are enough gaps in the argument for one to question whether this really is an attack on corruption as it is being touted?

Here are some thoughts, and questions:

On the intent behind the move:

  • Taking away currency notes of higher denominations are a step in the right direction – they are easier to hoard, easier to move, and lend themselves far easier to various nefarious cash transactions. But the 2000 rupee note confuses me. Isn’t that going to negate the point above? Why not just go with a new 1000 rupee note if you are worried about large paper currency denominations.
  • Also, exactly how big is the fake currency problem? Did RBI believe that our notes were just completely compromised, security wise? In fact, this morning, when the government announced that a new batch of 1000 rupee notes will be introduced, it does seem that the main issue is one of fake currency, and replacing which should have been a routine RBI-led operation.

Logistics to alleviate chaos and the pain:

  • Exchanging those currency notes are going to be a pain. An average urban household probably holds more than INR 4,000 – so would have to make multiple trips to the banks. Also, there is far too few 100 rupee notes in play. So expect plenty of chaos and confusion. What about people who are travelling away from home, in another city say, with cash in hand, and either have no access to ATM, or do not know how to use one? Images of people queueing up outside banks are everywhere, with people complaining bitterly of the inconvenience.
  • Even so, one could argue that the inconvenience of the urban middle class is a minor sacrifice. But clearly, that is not the case for the poor. The government needs to direct public sector banks to go out there to make the transition as smooth as possible – hold camps in every ward, every village to help exchange these 500/1000 notes; be available to allay anxieties; not harass people trying to change notes; etc. How will bank and post office staff help those without ID proof? So far, we have heard little on what the government intends to do to make it easier for the poor who are likely to be the worst hit due to this sudden hit to their immediate cash liquidity situation.
  • Far from the famed ‘efficient implementer’ image that Modi and his PR have cultivated, this has been a massive tumble in the dark. No one knows when ATMs will be back in order, no one can say if new 500 rupee notes being printed are enough, or whether there are enough 100 rupee notes to meet the demand. POS machines are crashing because servers cannot deal with the additional load. Far cry from the digital cashless society we have already become if you go by Modi/Jaitley speeches!
  • A bunch of analysts have basically responded with – “you asked for a fight against corruption”, and yet completely ignore the chaos and confusion caused by the manner in which this fight was launched. The Prime Minister in his address essentially said that the 500/1000 rupee notes were now mere pieces of paper, which no doubt, resulted in some panic amongst people and a rush to the nearest bank. At the bank (or the post office), people are now being asked to fill out forms to exchange their money (irrespective of the amount), which refuses to acknowledge not only the prevalent rates of adult illiteracy, but also those who cannot produce a proof of identity.

Use of plastic currency in India:

  • The reach and functionality of zero-balance accounts at the last mile (which in India is a HUGE population) is still suspect. Even for those using bank accounts, to what extent do they have debit cards, and how many places can they use it at? RBI data from July 2016 shows just under 70 crore cards, which on the face of it, appears quite high, even though one must remember that middle class and richer households obviously hold multiple bank cards, and so penetration is not as high as it looks.
  • The same RBI data from July 2016 shows that INR 17,092 crores worth of POS transactions and INR 2,19,165 crores of ATM withdrawals took place. The average POS transaction then is about INR 244, and the average ATM withdrawal, INR 3,130. In reality the pattern of transactions would look quite different, obviously, and just reflects the distance cards need to yet cover before they can truly be considered an alternative.
  • As has been pointed out by several people, India is by no means alone in trying to go cashless. However, India’s readiness to go cashless is in doubt. Could we have waited until the Unified Payment Interface was in place,and RuPay was firmly established? Should we not have ensured that the zero balance accounts are in use, and strengthened the network and functioning of banking business correspondents?

Politically speaking:

  • This is a bold step by the Prime Minister, because there is certainly going to be some short-term pain, especially for the poor. This then, is a bold gamble just ahead of the Punjab and UP elections.
  • The element of surprise and the big bang announcement was inevitable though, as they serve a dual purpose – that of catching those hoarders (including political parties getting ready for electioneering) off-balance; and that of generating plenty of noise around it.
  • This does skirt the bigger issues though, of election finance. Also, big crony capitalists don’t really use cash in suitcases these days to influence those in power. Their methods are far more sophisticated, and these measures will do next to nothing to hurt them. At best some of the black money that people hold in cash will have to be disposed, and by no means can that be a significant sum.
  • The political logic of appearing to be an anti-corruption crusader is a sound one, one that Narendra Modi successfully used in the 2014 general elections too. On that count, expect a mish-mash of the language of surgical strikes and kaala dhanin all upcoming election rallies and posters. It is also not too fanciful to imagine that the BJP has (once again) taken advantage of a routine operation and hyped both its scope and potential consequence.

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How does one reconcile with this kind of advertising?

The greatest tragedy is that this pain could have been avoided. Even if you didn’t believe in any of the political conspiracy theories, you can easily see the shocking levels of incompetence at the highest levels of our government and the Reserve Bank of India (RBI). For some time, lets assume that this step to discontinue the existing 500/1000 rupee notes was necessary. In that scenario, consider this: all 500/1000 rupee notes can be deposited in the bank by 30th December 2016 (and even beyond, with additional paperwork). Instead, we have reports of shops and establishments refusing to accept those notes, causing great hardship to those who primarily operate with cash. If you are a shop owner who can explain your income and cash balance, you can continue doing business as usual, and deposit your cash later.

Why is this not happening? There could be many reasons. One of them surely must be the Prime Minister’s speech on 8th November where he announced that the 500/1000 rupee notes would be worthless pieces of paper from midnight, sending people into panic, and the economic systems that the poor depend on, into a tailspin.

Finally, amidst all the columns in support, please do read Prabhat Patnaik’s stinging critique of this demonetisation plan, where among others, he argues that those who hoard ‘unaccounted money’ are bound to find ways of getting their money changed to acceptable currencies within the time-period given.

Also, read Prosenjit’s column asking questions regarding the intent behind this scheme, and Madhavan Narayanan’s column where he argues that the government has essentially created a 50-day hawala window for the old currency notes.

SMS Unhappy Service

A new customer grievance redressal mechanism to be introduced by State Bank of India through its Local Head Offices (LHOs)

Under this system, LHO’s have so-called “Happy Rooms” that deal with the customer grievances. Any customer who wants to lodge a complaint sends the message “Unhappy” to a specified number (8008202020 ). The Happy Room then calls the customer and records the details of the complaint. The complaint is then forwarded to the branch in question

Central bankers can be funny too

YV Reddy is the former Governor and D Subbarao, the current Governor of the Reserve Bank of India


On YV Reddy’s second book on the economic crisis

“publishing books on crisis is a minor growth industry.”

On what being a central bank governor means 

Mr. Subbarao said. “I go to some international meetings and the consensus is that if you are a good, virtuous God-fearing economist, you are born as a central banker in an emerging economy. If you are a wicked economist, you are condemned to manage a central bank in a developed economy.” 

On the relationship between the executive and the central bank… 

“There was once a common friend of Dr. Reddy’s and mine, sitting in his office when he was governor. Dr. Reddy’s phone rang and the friend could hear only one side of the conversation which went like this—Dr. Reddy kept saying ‘No, no, no, no, no, yes, no, no, no.’”

Mr. Subbarao continued: “At the end of the conversation, the common friend asked what was this about? Dr. Reddy said ‘The finance minister was asking me to do all these things and I would say no.’ The friend then asked what was this ‘yes’ about? And Dr. Reddy said ‘The finance minister asked me if I was able to hear him!’”

 Wait, is the central bank really independent?

“I say, ‘Yes. I have the permission of the government of India to say so,’” he said. 

From WSJ,

Considering IRMA?

Its the season of MBA entrance exams in India once again. Hundreds of thousands of students vying for few thousand MBA seats in the belief that its going to secure their future. I graduated from the Institute of Rural Management, Anand (IRMA) in 2005. I loved my two years there and in this post, I am rehashing an older note I had written for IRMA aspirants. 


While IRMA was established in 1979 to supply trained managers to rural cooperatives and (later) NGOs in India in the 1980s, its graduates now work for a diverse universe of organisations. When I joined IRMA, it was only with the expectation that it would expose me to a sector that I would find interesting and meaningful to explore. I did not anticipate the daunting challenges the development sector throws up, nor did I assume that I would walk out of the campus and change the world. My naive reasoning was that selling soaps and shampoo was not something that could get me excited and keep me awake at night and I wanted to spend two years engaging with issues that were more interesting and most importantly, with people that shared this passion. 


However, soon enough, I learnt that depending on who was producing them, where they were being sold and who were sharing the proceeds, there is nothing less-meaningful about selling soaps or shampoo or cars, loans and insurance. So it doesnt matter whether we advertise IRMA as an institute that imparts education in rural management, rural development, social work or just management – if IRMA gives us a little of all of this or in varying degrees, we ought to be able to use the components as and when required – just like one uses multiple linguisitic and regional identities and affiliations with different institutions in our lives as and when applicable.


It goes without saying that every IRMAn is entitled to follow his or her chosen path, not only during the PRM, but also, obviously, after graduation. For sure, IRMAns are in anything and everything to do with rural areas and probably, not just there, but also in areas which have little direct links with rural areas. The IIMs dont say that none of their graduates can be NGO-wallahs, nor do the IITs. Today though, rural is big. Every marketer wants a piece of the pie. The possibilities are endless – in whichever sector one chooses.


Is IRMA then right to restrict placements? I think that as an institution, IRMA has the right to have a vision for itself and a direction it wanted to guide its programme participants towards. In the end, though, what IRMA does is to expect young aspirants to make a choice. Whenever anyone asks me about applying to IRMA or when they are considering their offer, I try to warn them that if they are not sure, they may get disillusioned. I am aware it may make it tough for the decision-maker, but I think it is important that people think through their choices at that stage (with whatever is the available information and whatever is the levels of conviction they can muster).  


This of course does not mean IRMA graduates and/or development workers should be placed on a pedestal. As I have said before, there is nothing intrinsically holier or self-sacrificing about working in the development sector. IRMA is not the only way in. And today, that’s not the only road out of IRMA either.

Rating the Raters

All that Paul Krugman says in the NYT is this

It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt — which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages — could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job.

Right now, it looks quite like the relationship between the film industry and the media which reviews movies every Friday, often amidst allegations that reviewers have been paid off by powerful film producers to give them favourable reviews. But even for something as trivial as that, I never watch a movie without reading at least three different movie critics. I usually watch them anyway – but that doesn’t take away from the fact that I value getting at least three different perspectives on the same product.

Clearly, a free market system for rating agencies to compete in was bound to fail and inflict heavy collateral damage. Ideally, rating agencies should not be making money from the very agencies (whose products) they are supposed to rate, much like say, advertisers, lawyers or consultants – only that a rating job expects a competent and impartial judgment. Not sure then, why Krugman shies away from advocating specific reforms – he merely says that we need ‘a fundamental change in the rater’s incentives’. What he does say, but only at the very end is this (once again, stating the obvious) –

It’s comforting to pretend that the financial crisis was caused by nothing more than honest errors. But it wasn’t; it was, in large part, the result of a corrupt system. And the rating agencies were a big part of that corruption.

Now, even if the raters were being paid by their clients, we should have had systems in place for them to disclose their financial statements to regulators and the general public. Was there no such system in place in the US? Or did everyone just take it for granted that rating agencies would do an impartial and thorough job. Everyone – not just the general public, but also financial institutions that made lending decisions based on these ratings! Krugman calls it corruption. I think there is corruption as well as utter incompetence – of the kind that just cannot be excused as ‘honest errors’.

I have always been curious about microfinance rating. I once asked a friend who works in one of the leading commercial banks in India, about the extent to which they relied on microfinance rating agencies’ ratings when making lending decisions. His bank is among the top five lenders to the microfinance industry in the country and he handled a heavy and growing portfolio. He laughed and said – “about 5%”. Part of the reason could have been that at that time,the microfinance rating industry, although steadily growing, was still a nascent entity and lenders had to watch out, even when they were scrambling for clients. As microfinance institutions start transforming into large financial corporations, float IPOs and are rated by standard credit rating agencies, I hope the mistakes of the big banks are not repeated.