DEMONETIZATION 2016

Demonetization is the new buzz word and it is being used as a service to motherland or as the greatest disservice to the nation, as per the political leaning of the person using it. In 1969 when Mrs Gandhi took the bold step of nationalizing 16 private banks of India, there were political connatations to it as well a serious economic reasoning. Similarly the step taken by Mr Prime Minister regarding the declaration of 500 and 1000 rupees notes as no longer being legal tender needs to be put in the right perspective. As soon as the Prime Minister addressed the nation, all hell broke loose and before the common man could even get the whiff of the magnanimity of the announcement, the cash registers of jewelers got ringing as cash was transformed into bullion. Now how the gold shop owners will show these transactions will be very interesting to observe. As analysis started pouring in by buckets, most of them were in black or white depending on the ideology one followed, sane, balanced analysis has been few and far between. The opportunities and pitfalls that will be created by this decision need to be put in proper perspective so that forecasts can be made regarding the Indian economy. Here it needs to be mentioned that even the biggest critic of the present govt has to appreciate the timing and the element of surprise, now whether the real money stock holders were surprised, only time will tell.

There are a few questions that are titillating me for the past one week. The first is that whether this move will wipe off black money from the face of our country and my answer is a big NO because black money is just not horded cash, it is much bigger evil. Approximately about 3 % of the entire black money is in liquid form and hoarding it is mostly done b corrupt bureaucrats, small traders, middlemen, jewelers and the likes. 97% is still out of the govt net right now. When we were classroom students of Economics, our Public Finance Prof would often say that for every 1 rupee in white, there are 3 rupees in black. And who could forget the famous or infamous quote of Mr Rajiv Gandhi that out of every rupee spent by the govt, only 15 paisa reaches the beneficiary. Now the question is whether the entire 85 paisa is hoarded or part of it gets parked offshore, gets converted into bullion or in benami assets? We all know the answer to this, so that settles the question of black money=block money.

Individually for me the biggest question is how will govt inject back liquidity in the market? Post 1991, emphasis has been on consumerism and EMI backed consumption has become the norm. high GDP growth rate has been fueled by consumerism which is based on money flow. The contribution of Tier II &III cities in this growth rate has been their spending capacity which has quadrupled in the last two and a half decades. Now when money stock has been targeted, consumption, at least in the next quarter will be badly affected. Retailers have already started feeling the pinch as in the past one week the sales has dipped by 60 to 75 %. In this sector too it is the unroganised sector that is facing the worst time. Be it the nukkad ki dukan, roadside food stalls, chaiwalas, the vegetable hawkers, road side tailors and the likes. The situation will improve for sure but how much and how soon is the question. So my contention remains the same, is how is the government going to support the business of the small unroganised businessmen? Quick estimates coming in from commerce bodies is the daily loss in revenue is to the tune of 26000 cr, so we can all do the math and calculate the loss.

Secondly in the short run employment is lost, again more in the unorganized sector which happens to be the largest recruiter. About 40 percent of the jobs are generated by this sector and if money flow comes down, so will employment, especially in the real estate market. Another labour related problem is the no of man-hours lost in standing in queues for exchanging currency, but this may be overlooked in the broader perspective if corruption and black money gets removed.

Thirdly why did the government issue a larger denomination currency to replace the smaller ones? Whenever demonetization takes place, government replaces the big denominations by smaller denomination currency so as to curb hoarding. Moreover there is actually replacement and not demonetization, as 500 and 1000 rupee notes are being reintroduced, albeit in new colour and design. The cost benefit analysis must have been done by the team of experts so that banks may earn some extra revenue by printing new notes and distributing them. In 1978 when the last demonetization took place, banks earned something to the tune of 28000 crores, I am hoping that this time too the banks earn as already the banks are in bad shape and this will do them good.

Another problem that has come up and I am sure the govt did not anticipate it is the debt trap in which the tribal’s, poor people have fallen because of some sleazy work of politicians. There has been national news that politicians in two states have disbursed loans to them in old currency and obviously they will be repaid in new currency, a smart way to convert black into white.

In this entire quagmire, a very big positive that has come up is the correction that will take place in the real estate market. Currently property in India is highly overprices and most of the purchases are for the sake of investment and not for living purpose. And in this entire process, the people who really want a roof of their own, either get trapped in debts or it is beyond their means. I am sure my friends from the real estate market won’t like my writing this but that is the truth as I see it.

I have left out the main actor of this entire Demonetization act, the Banks from my analysis as it requires another write up for which I have to go back to my notes on BASEL norms, cashless economy concepts, the indigenous moneylenders, agricultural sector and many more. Looking forward to reading these things again with a new perspective.