Demonetization on Payday: A Photo Essay

Demonetization on Payday: A Photo Essay

Written by Dr. Seshadri Kumar, 03 December, 2016

Copyright © 2016 Dr. Seshadri Kumar.  All Rights Reserved.

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A few days ago, I wrote a blog article talking about why Indian PM Narendra Modi’s widely-discussed “demonetization” plan was a huge mistake, and suggested an alternative. In it, I discussed the fact that India was completely unprepared for the cashless economy that Mr. Modi was trying to force down its throat. That assertion was made on the basis of exhaustive data, such as the number of bank branches in rural India, the number of Indians who had a bank account, and the like. The study made use of an index prepared by the Reserve Bank of India (RBI), called the JAM-preparedness index, which measured the extent to which India was prepared for a cashless world, relying on the three main infrastructural legs of the Jan Dhan Yojana bank account (J), Aadhar card (A), and Mobile transactions (M). The RBI report mentioned in that article said that even urban India was nowhere near ready for a cashless world, while rural India was woefully unprepared, with all of rural India deemed less than 5% ready by the government’s own estimate.

However, some friends of mine said I was quoting dry statistics, and wanted to rely more on anecdotes. My response to that objection was and is that large-scale, broad-based statistics are more representative of the truth than isolated anecdotes, and that my earlier article, basing itself as it does on hard evidence, is more representative of the true state of India than a friend’s or a relative’s first-hand account.

Although I still believe this, I thought I would also get some anecdotal evidence on the state of things following Modi’s now infamous demonetization move.

So I decided to do a first-hand sampling of banks and business on the first day of December, 2016, or pay day - most businesses deposit their employees’ salaries in their bank accounts by the first of the month, if not a few days earlier. December 1, 2016, was the first payday in India after Modi’s announcement on November 8, 2016. This was thus the first time many employees needed cash for their main monthly expenses after the demonetization exercise began – for monthly rental payments, food from ration shops, fees for children’s schools, and many other needs which often need to be paid around the first of the month. While many people can take care of these through cheques and debit cards, many are still dependent on cash despite having bank accounts, judging by the number of employees trudging to banks to withdraw cash on payday.

I am currently on vacation in Bengaluru, so I decided to investigate in my local area, viz., Malleshwaram. I walked down Margosa Road from 18^th Cross to 6^th Cross, walked on 6^th Cross to Sampige Road, and walked up on Sampige Road back to 18^th Cross. I chose this route because Margosa Road had most of the banks in Malleshwaram, whereas Sampige Road was the business hub of Malleshwaram. In addition to looking at banks, I also wanted to talk to businesses and find out from them what the impact of demonetization on businesses in this highly urban area had been. Here are the results.

Banks and ATMs

I went to several banks in the area on my expedition, starting at 12.00 noon and ending at 1.30 pm. Some banks had more than one ATM outlet. These are the banks I encountered:

1.     Kotak Mahindra Bank

2.     HDFC Bank

3.     Canara Bank

4.     Bank of India

5.     State Bank of India (SBI)

6.     AXIS Bank

7.     Bandhan Bank

8.    State Bank of Hyderabad

9.     Yes Bank

10. IDBI Bank

11.   IndusInd Bank

12.  ICICI Bank

Most banks did not have working ATMs because of lack of cash. One employee at a HDFC bank told me that they were waiting for the supply of the new Rs. 500 rupee notes and for the ATM machines to be recalibrated for the new notes, which might take a few more days. The only banks that had functional ATMs were State Bank of India, Bank of India (both public sector banks), and IndusInd Bank (a private bank).  The bank employee at HDFC also told me that they were limiting withdrawals to Rs. 8000 because of shortage of cash, even though the government rules allow up to Rs. 24,000. It appears that the bulk of the new currency is going to state-owned banks.

Banks are also managing long lines by innovative ways. The HDFC bank I went to would not let anyone linger near the entrance. The employee there explained that they were issuing tokens for service at 9.30 am, 11.30 am, 1.30 pm, and so on. At these times, the bank would issue a limited number of tokens, and only those fortunate to get these tokens would be served. Thus there were no long lines. Bank of India had a seating area inside, and you could take a token for the specific transaction you were interested in: cash under Rs. 2000, cash between 2000 and 4000, 4000 and 10000, and so on.

The only denomination of currency available at all of the banks I went to was the Rs. 2000 note. Nobody had any other denomination available for withdrawal.

So, out of 18 ATMs that I saw, only 3 were functioning on Payday. All banks were allowing cash withdrawals, but mostly with reduced limits in spite of the government notifications.

Kotak Mahindra Bank ATM. Notice the shutters completely down and the guard outside.

Another Kotak Mahindra ATM, out of service as indicated by the half shutters

A third Kotak ATM. Note again the half shutters

Fourth Kotak ATM, attached to a branch. A guard sits in front of a cashless machine.

A non-functional ICICI bank ATM

Citibank ATM

HDFC ATM. The sign says "ATM out of service"

Another HDFC ATM. The sign on the door says "ATM. No Cash. Out of Service."

YES Bank, but NO cash

AXIS Bank ATM. The ATM is behind the closed shutter on the left.

Bandhan Bank. The ATM is behind the closed shutter on the right.

IDBI Bank. The ATM is behind the guard on the left, shutters half down.

State Bank of Hyderabad. Note the sign that says "No ATM."

IndusInd Bank. The only private bank with a functioning ATM.

State Bank of India (SBI) ATM on Margosa Road

SBI ATM on Sampige Road

Bank of India ATM. The other public sector bank with a functioning ATM.

Business Outlook

While walking up Sampige Road, I had a chance to chat with many shopkeepers and ask them how demonetization had affected them. With a few exceptions, most businesses said things were down in the three weeks following demonetization, with an average drop in business of 50%.

Poorvika Fashions is a store that sells a lot of knick-knacks. The owners were very down on the outlook. I asked them how much current business was relative to a level of 100% before the demonetization. They said business was now at 30% - a drop of 70%!!! Most people pay cash at their store, and cash is hard to come by.

Poorvika Fashions, whose sales are down by 70%

All decked up and waiting for customers...

Business is down 60% at this photo frame shop

The owner of this store was very glum as he told me tbat business was down 50%

Prateek Arts and Crafts is a shop specializing in carved wood. They sell a lot of mandaps for home worship. The owner told me that normally, they sell 4-5 pieces in a week. Since the demonetization has happened, they haven’t sold a single piece. “Not even Rs. 100 worth of stuff,” said the owner. I asked him whether he has managed to pay the craftsmen who work in his factory and make these art pieces. He said that so far they have managed to scramble cash from different places to pay them, but he hopes things will improve soon.

The owner of Prateek Arts and Crafts has tons of time to kill as business has completely vanished since November 8

This well-known sports and toys store on Sampige Road has seen business drop by half since November 8

This travel agency is one of the luckier businesses - says business is only down by 25%

There were a few shopkeepers who were not so perturbed by the move to demonetize. One of them was a BATA showroom, who said they had seen no difference in business. Another was a small clothing store selling mostly salwar kameezes. 

The third was the owner of an imitation jewellery store, Sri Lalithambike, who specializes in one gram gold jewellery. The owner is a Gujarati transplant who said that there had been no difference in his business. He said he had seen a dip on November 9^th and 10^th, because people were confused about the new state of things, but then things picked up. He was even happy to pose for a picture. We had a nice chat, and he asked me to point out in my article one potential problem that he had thought of, and I said I would.

He pointed out that he had been using digital technology for a long time now, and even he was recently fooled by scamsters who managed to get him to pay for something through PayTM. He told me that if this could happen to a net-literate person like him, imagine the plight of those who are suddenly moving to technologies like email, internet banking, and PayTM – they could easily lose their life savings to scam artists.

I also talked to the owner of a Kirana store who did not want him or his store to be photographed, but told me business was down by 50%. He said the shortage of cash was the main culprit. He said some people try to give him a Rs. 2000 note to pay for a Rs. 200 bill. He cannot accept that as he does not have enough Rs. 100 notes in change. He said he does sell goods on credit to some customers – but only to regulars. I told him I was from Pune, and some shopkeepers there make use of a black market where you give Rs. 500 and get four Rs. 100 notes in return – was he aware of such schemes? He said no, he had not heard of it in Bengaluru.

The owner of Sri Lalithambike, posing in front of his shop

Overall, businesses have lost a lot in the last 3 weeks and, unless liquidity returns soon in the form of Rs. 100 and Rs. 500 notes, could stand to lose a lot more.

Concluding Thoughts

My 1.5 hour stroll in one of the busiest business areas in Bengaluru showed me that banks are still not functioning anywhere close to normal, three weeks after the demonetization announcement. Out of 18 ATMs that I saw, only 3 were functional, and this was on Payday. Most banks were not allowing withdrawals up to the maximum allowable limit specified by the government because they had no cash. This will doubtless cause more hardship to the already suffering public.

My conversations with most business owners told me that, on average, most had suffered a 50% drop in business in the last 3 weeks. One just needs to imagine what the nationwide impact of a 50% drop in business for 3 weeks will be – and what the impact on the GDP will be if this were to continue for months.

Business down by 50%. Only 3 out of 18 ATMs working. 

If this is the state of things in a busy shopping area in Bengaluru, one of the biggest cities in India, and an IT hub to boot, just imagine the state of things in a rural area where most people do not have bank accounts and where internet penetration is very poor.

The worst is yet to come.

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Disclaimer: All the opinions expressed in this article are the opinions of Dr. Seshadri Kumar alone and should not be construed to mean the opinions of any other person or organization, unless explicitly stated otherwise in the article.

For more articles by Dr. Seshadri Kumar, please visit http://www.leftbrainwave.com

An Alternative to Modi’s Demonetization Plan – Without the Pain and the Deaths

An Alternative to Modi’s Demonetization Plan – Without the Pain and the Deaths

Written by Dr. Seshadri Kumar, 25 November, 2016

Copyright © Dr. Seshadri Kumar. All Rights Reserved.

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Summary:

The money-exchange scheme announced in India by PM Modi on the evening of November 8, 2016, has caused tremendous hardship to the people of the country. More than 50 people have died as a result of the policy, while countless people have been forced into extreme hardship. Much more suffering is to come.

Three questions immediately present themselves. One, does the scheme solve the stated objectives of eliminating black money and counterfeit money? Two, does the country have the capacity to absorb the shock of removal of 86% of the cash stocks in the country and their slow replacement, either by stocks of new money or a cashless economy – a process likely to take months? Three, and most importantly, does a better alternative exist?

There has been much debate on the first aspect – viz., whether the scheme under implementation can solve the black money and counterfeit problem. I will only discuss this briefly, and focus on the second and third questions.

I show in this article that the country simply does not have the capacity to absorb the shock of the removal of 86% of the cash stocks in the country.

Further, I also show that a much better alternative to the government’s scheme exists – a scheme that does not focus on chasing stocks of black money, but on completely eliminating black money and counterfeit money, once and for all, in a painless process that does not involve people starving, losing their livelihoods, or dying.

Large portions of this article recently appeared in a column that I wrote in Frontline magazine – the entire section titled “Flaws of the Demonetization Scheme” is taken verbatim from the aforementioned Frontline article: this article expands on that column in order to provide a comprehensive look at the problem, and a better solution than the one the government has implemented.

The Announcement

On November 8, PM Modi announced a money-exchange scheme, the stated objectives of which were twofold:

1. Elimination of hoarded stocks of black money

2. Neutralization of the circulation of counterfeit money

Later interactions with the government through press conferences revealed a third objective: A move of the country to a cashless economy.

According to Modi's speech on the evening of the 8th of November, all existing Rs. 500 and Rs. 1,000 notes would cease to be legal tender by the end of the day; banks and ATMs would be shut for the next 2 days to stock them with new Rs. 2,000 notes and notes of other lower denominations; and after that, banks would start accepting cash deposits and return up to Rs. 4,000 per person in exchange, the rest remaining in their bank accounts; and ATMs would disburse up to Rs. 2,000 per card per day, up to a total of Rs. 20,000 per week. (These limits have changed since and are very dynamic, with new policies being announced virtually every day, which points to a complete lack of planning.)

The impression given was that people would be inconvenienced for just two days and then the bank branches, working late hours and weekends, along with well-stocked ATMs, would relieve any stress or anxiety on the part of the public.

Since then, there has been much hardship experienced by the public because of this move, and these have been documented very well by other articles in the media. Many have also asked if the move really addresses the larger problem of black money in the country; whether this move is really likely to stop black money; and whether the introduction of the Rs. 2000 note will not actually increase the hoarding of black money. There have also been debates on how much actual financial benefit is likely to accrue to the government.

I will not discuss any of these issues here. My concern is more fundamental – whether the move to take out the Rs. 500 and Rs. 1000 notes out of circulation and replacing them with new notes was carefully considered in light of the existing infrastructure, and whether alternatives exist.

Flaws of the Demonetization Scheme

The decision to remove the Rs. 500 and Rs. 1000 notes left most Indians in the lurch. This was because 86% of all the currency printed by the government was in the form of Rs. 500 and Rs. 1000 notes (by value). According to the annual report of the Reserve Bank of India (RBI) dated 29 August 2016, as of March 2016 the currency notes in circulation had a total value of Rs. 16.42 trillion (or lakh crores). Of these, 86.4%, or Rs. 14.18 trillion was in Rs. 500 and Rs. 1000 notes. This was the amount sucked out of the system at midnight on November 8. It was estimated that, of this amount, about 25%, or Rs. 3.5 trillion, was black, meaning that people possessing it would not deposit it in the bank for fear of attracting huge penalties or jail time. That would mean that the amount of money in circulation that would now need to be deposited in banks and exchanged for new notes is approximately Rs. 10.64 trillion. This is to be done entirely through bank branches and ATMs.

In press interactions since the demonetization move was taken, the FM has informed the people that this move is part of a larger plan to move to a cashless economy, and urged people to start using electronic banking, mobile payment, and credit and debit cards. The attempts by people to exchange their now-worthless money for new, usable notes hit another roadblock as ATMs needed to be recalibrated to accept the new notes, a process the FM estimated as needing another three weeks. In yet another interaction, PM Modi informed the nation that he expected the hardship to continue until December 30^th at the latest.

But is this realistic? Are the two major legs on which the demonetization scheme stands, viz., for citizens to deposit old notes in banks and withdraw their money using either bank account withdrawals or ATM withdrawals, or the transition to a cashless economy for 50 days, relying only on ATMs, bank branches, smartphones, credit and debit cards, realistic at this time? What percentage of Indians actually do have access to these?

The Global Financial Inclusion report, prepared by the World Bank, gives a lot of useful information to answer these questions. The data shows that while things are improving, they are nowhere near where they need to be. For instance, the percentage of those 15 years or above who had a bank account rose from 35% in 2011 to 53% in 2014. The number of ATMs per 100,000 Indians, on average, was around 18. This compares unfavourably to other countries like 66 in South Africa, 129 in Brazil, and 184 in Russia. Clearly India is a lot more unprepared to deal with a situation where 86% of the cash vanishes overnight than any of these nations. Figure 1 shows the availability of ATMs in several countries over the last decade.

Figure 1. Availability of ATMs in Different Countries

Credit and debit card usage does not fare much better. The Global Financial Inclusion report says that in 2014, only 11% of Indians 15 or above made a payment using a debit card, and only 3.4% used a credit card; and only 2.2% used a mobile phone to make payments. Further, it says that in 2014, only 6.4% borrowed from a financial institution, whereas 12.6% borrowed from a private lender; 6.6% borrowed from a store by buying on credit; 5.4% borrowed from an employer; and 32.3% borrowed from family or friends. The Indian economy is therefore dominated by cash and unaccounted transactions, and most people are quite unfamiliar with electronic means of payment and withdrawal. Only 20% received their wages at a bank. Less than 0.2% of Indians used a mobile phone to pay utility bills; just over 4% of all Indians used a bank account for business purposes; just under 4% of Indians used a bank account to receive government transfers; and only 6.7% used checks to make payments.

What is very clear from these figures is that a large majority of Indians are not even in the formal banking/financial net, let alone specialized forms of it such as internet banking and mobile banking using smartphones. Further, it should be kept in mind that these figures, dismal as they are, do not reflect the true desperation of the situation today, because they are average figures for India and do not reflect the urban/rural divide.

Figure 2, taken from the RBI’s “Report of the Committee on Medium-Term Path on Financial Inclusion,” dated 28 December 2015, shows that the bank branch density in rural areas is less than half of the bank branch density in urban areas. Rural India is largely cash-driven. One reason for this is that agricultural income is exempt from income tax, and a lot of transactions are done with cash alone. This is not black money.

Figure 2. Variation in Bank Branch Density in Rural and Urban India

So, the irony of the situation is that bank branches and ATMs are far fewer in the rural areas, but the percentage of wealth that is held in cash in rural India is much greater than what is held as cash in urban India, where people use banks to store their money – and now these rural Indians will have to contend with getting their larger stores of money in and out of banks with little experience doing so and this during a liquidity crisis!

The Jan Dhan Yojana has created a lot of new bank accounts in India, but a lot of them are zero-balance accounts, and people have not yet taken to using them.

It should be clear from the above that rural India was woefully unprepared for the shock of the withdrawal of 86% of liquid currency on November 8, and is unlikely to recover from this situation any time soon.

One of the main thrusts of the economic policy of this government is the JAM troika – standing for Jan-Dhan Yojana, Aadhar unique identification, and Mobile. The RBI’s Economic Survey of India 2015-2016 discusses, in Chapter 3, the JAM approach in detail and presents a JAM preparedness index – i.e., how ready is India for a world in which benefits will be transmitted electronically to bank accounts, verified by Aadhar cards, and accessed by mobile phones – in other words, a cashless economy, of the kind people have been forced to confront themselves today. A JAM preparedness index of 100% indicates full preparation, and 0% indicates complete unpreparedness. 

Figure 3 shows the JAM preparedness index for urban India, and Figure 4 shows the index for rural India. It should be very clear that India, especially rural India, is neither ready for a JAM world, nor was it ready for the world of November 9, 2016.

Figure 3. JAM Preparedness Index for Urban India

Figure 4. JAM Preparedness Index for Rural India

This is going to lead to unbelievable suffering in the next 50 days. People are going to starve and die – many already have; people are going to continue to be refused medical treatment for life-threatening illnesses and pregnancies for lack of liquid cash; and farmers are going to suffer as they cannot sell their produce or buy seeds. Business is going to come to a standstill in both rural and urban India. The worst effects of this measure will be felt by those with the least capacity to absorb these shocks.

An Alternative Solution

One of the arguments put forth by the Government and its supporters is that there was no alternative to all this pain and chaos – that this was the only way.

“Do you not want black money and counterfeit money to be ended?” they thunder. 

Indeed, we do. Every right-thinking person in this country would like a more honest system in which there is no black money and no counterfeit money. But there are many ways to skin a cat. The way the Government has chosen is full of fatal flaws.

Is there a better alternative? Yes, there is – a painless alternative that will not result in anyone losing their livelihoods, their health, or their lives. And I will discuss that here.

It is clear that all these problems experienced by the people are because of the fact that the system simply does not have the infrastructure for people to exchange their money and get new notes in a reasonable time-frame. That is because the necessary tools, viz., online banking, internet connections, smartphones, physical banks and ATMs, and credit and debit cards, are simply not widespread enough. In other words, the problems have happened because the government has put the cart before the horse.

Therefore, the better alternative would have been for the government to first build the necessary infrastructure – to invest in last-mile connectivity for banks; to invest in cheap smartphones (as they did with the Akash tablet) so that every Indian could afford one to engage in financial business; to ensure national internet connectivity; to get every Indian in the banking net; to make all Indians use only debit and credit cards for purchases; and to make all Indians use mobile apps such as PayTM or apps using the new Unified Payments Interface (UPI) to make even the smallest purchases, such as buying vegetables on the street.

This will take time and have to be done in a calibrated manner, by both investing in the infrastructure as well as working on people’s inertia, by gradually closing off alternative means of payment such as cash in sector after sector.

So the government could announce, for example, that all supermarkets and malls would no longer accept cash for amounts greater than Rs. 500 after six months; that in the next one year, the Railways will stop accepting cash for tickets and only accept electronic payments such as credit cards, debit cards, internet banking, mobile wallets such as PayTM or Mobikwik, and payment banks under the UPI; that in six months after that, no government office will accept cash for any transaction; and so on.

This will force more people to go cashless – but it will give them sufficient time to prepare for a cashless economy – to open bank accounts, to get debit and credit cards, to obtain cheap smartphones subsidized by the government, to learn how to use apps such as PayTM or UPI-based apps, to use ATM kiosks for internet banking to pay bills, and so on. Since it will not be an overnight change, it gives people time to learn these new tools and make an orderly transition. There will be no panic and no one will die of shock. If there is a wedding or an operation, people have six months or a year to plan an alternative way of payment, rather than be surprised by a last-minute pulling of the rug under their feet.

Once this is done, cash will die a natural death and there will be no need for a demonetization drive. This also automatically removes the threat of counterfeit money – since the economy is cashless, there is no worry about counterfeit bills. Also, since everything is electronic, nothing can be hidden. Everything is tracked, and there is no black money. People will not offer cash bribes because nobody will accept something that cannot buy anything.

This is exactly what one of the most advanced countries in the world, Sweden, is actually doing – by ensuring that everyone has internet connectivity and the necessary devices, they are eliminating cash. But this is not something that you can do overnight. It takes years, and is gradual. All the objectives of the government are achieved – eliminating of black money (not just a stash, but even the generation of black money); eliminating of counterfeit money; bringing everyone under the tax net; and moving India to a cashless economy. All this without a single person dying.

But it does not fetch you dramatic headlines.

References

1.       World Bank Data on Financial Inclusion. http://databank.worldbank.org/data/databases.aspx

2.      RBI Report on Financial Inclusion. https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=836#CH1

3.      Economic Survey of India 2015-16. http://indiabudget.nic.in/survey.asp

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For other articles by Dr. Seshadri Kumar, please visit http://www.leftbrainwave.com

Disclaimer: All the opinions expressed in this article are the opinions of Dr. Seshadri Kumar alone and should not be construed to mean the opinions of any other person or organization, unless explicitly stated otherwise in the article.