‘We have land.
We have water.
And we make mud.’
– Ivan Kulekov
The November 8th announcement by the Indian Prime Minister and subsequent decisions and statements by the government will remain etched as landmark events in the economic and political history of India. While some went to the extent of measuring one’s patriotism with long winding queues before bank branches, very soon the initial euphoria gave way to the exasperation. The tone has changed noticeably. Some of those who praised it as a ‘bold, master stroke’ have later started grumbling about ‘bad execution’.
The discussion about the government’s decision and its consequences will invariably be coloured by one’s beliefs and perspectives. Yet, it is important to understand the background before one comes to a concrete conclusion. The truth behind the proclamations needs to be ascertained based on the ground reality and the consequences.
What ails the banking sector? The IMF and World Bank have been mentioning about the Non-performing Assets (NPA) for a long time. According to IMF, Non-performing assets amount to 5.9% of the total amount of loans in India. The World Bank estimated that the bad debts accounted for 2.4% of the total lending by the banks in year 2010 and it rose to 4% by the year 2014. The bad debt ratio is double that of countries like Indonesia, Malaysia and Thailand that rank next to India. The Wall street Journal estimated that the public sector banks account for 90% of the NPA in India. Reuters reported in June 2016 that the bad debts rose to staggering 11.3% for the public sector banks in India (as cited in the Indian Express). The Wall Street Journal wrote on February 13, 2015 that the Indian government estimated the need for an infusion of Rs. 4.5 lakh crores (US$ 75 billion) during the next four years for them to recover. It is in this context that banks wrote off Rs.1.14 lakh crores during the years 2013 -2015. While Rs.2.11 lakh crores bad debts were written off between 2012 and 2015, more than half those bad debts, Rs.1.14 lakh crores were written off during the years 2013 and 2015. Certainly, achche din! Of course, the question is for whom? The Indian Express sought to know the names of defaulters who owed more than Rs.100 crores to the banks through an RTI application. The Reserve Bank washed off its hands stating that it doesn’t have the details. One has to be a ‘patriot’ without any questions and needs a willing suspension of disbelief!
With the current government decision, the cash registers are ringing in with forced deposits. Rs.3 lakh crores were deposited in the first three days. Thus, this is a disingenuous solution adopted by the government to infuse capital in to the banking sector enervated by reckless lending to the super rich and the big industrialists followed by subsequent write offs. Concomitant to this are the other potential political benefits that accrue to the ruling party by affecting the ‘preparations’ of rival parties in the ensuing elections in various states along with the creation of a political environment that precludes any discussion in the name of patriotism.
Surgical strike? The current measures are being touted as a ‘surgical strike’ on the ‘black money’ and a death blow to the ‘terror’ funding through counterfeit currency notes. Can one believe in such propaganda unleashed through a media blitzkrieg when the government displayed such alacrity in writing off the debts of the superrich in the name of NPAs? Does it not aid the ‘black money’?
Firstly, it wasn’t such a ‘surgical strike’ as it is made out to be. Leaving aside the speculation and the reports that some of the ‘friends’ of the government knew of the decision well in advance, here are some hard facts that need to be considered.
• There was an ‘unusual’ activity on the banking front during the months of September and October, prior to the declaration on 8th of November. These can be gleaned from the data from the RBI itself. If one takes the banking deposits, the fortnight of 2016 September 16 – 30 witnessed a spike in the deposits to the tune of Rs. 3,55,570 crores when compared to the previous quarter. The same was observed in the month of October 2016 as well. The Minister of Finance attributes it to the payment of arrears to the central government staff. Incidentally, the arrears account for only Rs. 35,000 crores . This becomes even more obvious if one looks at the deposit rates during the previous quarters.
• Similarly, the banks also witnessed in a spurt in the cash withdrawals during the days prior to the announcement on 8th of November. The withdrawals by 28th October 2016 were twice the five year average of cash withdrawals in the same period in the previous years. While the five year average of cash withdrawals stood at Rs. 1.16 lakh crores, they reached Rs. 2.56 lakh crores in October 2016 . One plausible explanation can be that these hurried withdrawals were made to convert the same in to assets of other form. Further, cash could be deposited back in to banks by them as it can be shown as income from the known source with a hefty commission of 20 – 30% for those requiring a cover!
It can be easily understood that there was a concerted effort and activity to create even more ‘black money’ before 8th of November. That too in name of a ‘surgical strike’ on the black money’!
Now let us look at the question of ‘black money’. As many a economists say, it is naïve to imagine ‘black money’ in the form of currency notes stashed in bags. It gets created in both the realms of production as well as circulation. The Whitepaper published by the Ministry of Finance in May 2012 defined black money as ‘assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession’. It further noted, ‘in addition to wealth earned through illegal means, the term black money would also include legal income that is concealed from public authorities’. Apart from the income not shown in books of accounts, it gets created even through numerous manipulations of books of accounts (like manipulation of sales and receipts, manipulation of expenses, bogus expenses to foreign entities, manipulation of capital, manipulation of closing stock and manipulation of capital expenses). Thus the roots of ‘black money’ should be located in the system and the policies adopted by the government. The 1990s added huge sums of ‘black money’ as the government aggressively implemented privatization. It continues to exist in the form of moveable and immoveable assets. Global Financial Integrity, a Washington D.C. based research organisation, estimated that illicit outflows from India total over US $50 billion (Rs. 3,30,000 crores) annually . Some estimate that about 72% of ‘black money’ could take the form of illicit foreign assets. Some estimates further say that ‘black money’ held in the form of currency would not exceed 6% of total ‘black money’ .
• It needs to be noted that current measures do not aim to touch the ‘black money’ that moves/ moved out of India. The current government increased the outward remittance limit for individuals twice from US$ 75,000 to US$ 1,25,000 and then to US$ 2,50,00 in June 2014 and February 2015. This limit was enhanced under the Liberalized Remittance Scheme (LRS). Reserve Bank noted that, FY16 witnessed a 3.5 fold jump in remittance over the previous year from US$ 1.3 billion to US$ 4.6 billion , . The scheme allowed for purchase of immoveable assets in foreign countries. This includes amount sent for students (studies abroad), which roughly accounts for one fourth of the outward remittances. Other remittances in the form of foreign deposits, gifts, travel, maintenance of close relatives, equity/ debt witnessed an increase ranging from two to sixty times. It becomes clear that, those with intimate relation with the government knew of the current ‘surgical strikes’ much earlier, more than a year in advance, to be precise!
• The current government waived off corporate taxes to the tune of Rs. 5.92 lakh crores during the financial year 2014-15. This needs to be added to further write off of Rs. 1.14 lakh crores in the name of bad debts. If this not aiding the creation of ‘black money’, what else can we describe this as? This contrasts with the wicked position the reserve Bank and central government took in opposing the waiver of farmers debt in states affected by severe drought. Can one expect such policy makers to strike at the roots of ‘black money’?
• There are varying estimates on the quantum of ‘black money’ in India. The estimates range from 25-30% of GDP to 75% of GDP. On the other hand the currency in circulation accounts to 12% of GDP. In this, the old high denomination notes (of Rs. 500 and Rs.1000) amount to 85% total notes in circulation, i.e., 10% of the GDP. In this what is the percentage of ‘black money’ stashed away in the money bags? No one has a clear estimate as yet. Of the Rs. 17,50,000 crores total money in circulation, the current ‘demonetisation’ rendered Rs. 14,50,000 crores which is in the form of Rs.500 and Rs.1000 notes. Some estimate that ‘black money’ of around Rs. 3,00,000 crores would cease to exist with the demonetisation. This is yet to be ascertained. What is the value of this money when one considers the estimate that the ‘black money’ in the form of currency notes does not exceed 6% of total ‘black money’? Even if one considers the lowest estimate of ‘black money’ being 25% GDP, this does not account for more than 10% of it. What is the price that is being paid by the poorer people for this? Who are those standing in long queues for days and hours? Who are those people dying in distress? On the other hand, we see an ostentatious display of wealth without least being affected by the ‘demonetisation’?
• There is yet another propaganda in the name of patriotism and dealing a death blow to terror funding. It is being said that the government of the neighbouring country and Dawood Ibrahim are making a concerted effort to induct huge amounts of counterfeit currency notes in to India to fund terrorism. Even the Reserve Bank statistics belie such propaganda. As per the RBI statistics, the total number of counterfeit notes identified during FY 2015-16 are 6,32,932. This just amounts to 0.0000070% of total notes in circulation. Hardly two weeks in to the introduction of new series of Rs. 2000 notes, there are already reports indicating the identification of counterfeit notes for the same. So much for the ‘master stroke’ dealing a death blow to terror funding!
Who bears the brunt? The current decisions are being justified in the name of short term pain and difficulties leading to significant long term gains. Who gains and who pays the price with the pain is the question that needs to be asked. There are various analyses assessing the implications and negative effect on the informal sector, consumption based businesses and contraction in the revenue of the states. It is being said that the replenishment of cash to reach the preexisting levels will take at least an year. This is further going to exacerbate the challenges faced by the people and the economy.
The measures taken by the government in the name of technology and financial inclusion are mere hogwash. The irony is not lost when the famed Jan Dhan Yojana accounts once touted as a big success earlier have now apparently become conduits to deposit ‘black money’ in to banks!
The rural areas and the agriculture are going to be hard hit. The financial services and the banking sector have been urban centric and the cooperative sector has shrunk due to utter neglect. There has been an attempt by the main stream banks to remain focused on urban areas through licenses for ‘small banks’ and ‘payment banks’ meant for rural areas. The response for the licenses for such banks has been lukewarm. On the other hand, the current government announced its plans to reduce the its stake the public sector banks to just 52%. As 27 public sector banks account for 70% bank branches and deposits in the country, these decisions are further going affect rural credit facility badly. The ‘surgical strikes’ are going to further the strangle hold of usury in the rural areas. Underdeveloped regions, rural areas and poorer sections will have to bear the brunt. The situation could take a further dangerous turn if the ruling party doesn’t reap the benefits it expected with the current measures. It would whip up the ‘nationalist’ sentiments with further escalations across the border, there by suppressing any internal dissent and debate on its mala fide, ill-conceived and badly executed policy measures.