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NEWS ALERTS | Motive behind demonetisation is justifiable but there may be collateral damage
Motive behind demonetisation is justifiable but there may be collateral damage

Motive behind demonetisation is justifiable but there may be collateral damage

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published Published on Nov 14, 2016   modified Modified on Dec 6, 2016

There are reports from all over the country that the recent decision by the government to demonetise currency notes of Rs. 500/- and Rs. 1000/- denomination has affected everyone. However the consequence of this financial measure is lopsided and it will be mainly borne by the farmers, informal sector workers, women and the financially excluded.
 
Please check the links/ urls below this news alert to know everything about demonetisation.

Till a few days back, farmers were busy harvesting their kharif crops for sale and getting their agricultural fields ready to sow rabi crops. However, the sudden cash crunch in the economy has impacted their purchasing power.

Many farmers are unable to sell the harvested crops now (since traders and middlemen have been equally affected by the recent demonetisation decision) so as to purchase essential inputs for sowing rabi crops such as seeds, fertilizers, pesticides etc. The preparation of crop fields has, therefore, slowed down in many states. Purchasing diesel to run water pumps/ gensets has become difficult because in many states petrol pumps are refusing to accept currency notes of Rs. 500/- and Rs. 1000/- denomination.     

It has been reported that farmers are complaining about harvested crops getting damaged if not sold in time. If farmers are unable to sell their harvested crops and sow rabi crops in time, then it will not only affect their incomes but the food security of the entire nation will be at stake, claim experts. One may also expect spurt in prices of essential commodities since apart from farmers and middlemen, the transport business too is facing the brunt of demonetisation.

Most agricultural labourers, who do not have bank accounts, are facing difficulty in exchanging the currency notes of Rs. 500/- and Rs. 1000/- denomination (which they have received as wage advances) because the spread of banking network is limited and uneven in rural areas. As a result, agricultural activities have come to a standstill at many places.     

Status of financial inclusion

While the recent move to demonetise Rs. 500/- and Rs. 1000/- currency notes is done with an objective to curb the growth of black money and flush out counterfeit currency from the economy (that funds terrorism), there are many who have raised their critical voices against this ill-prepared, poorly-timed but well-intentioned move.  

After the demonetisation of currency notes of Rs. 500/- and Rs. 1000/- denomination, citizens across the country are seen queuing up in front of banks and ATMs so as to exchange and deposit Rs. 500 and Rs. 1000 notes and also to withdraw cash for meeting daily expenses. The government has asked everyone to make use of credit and debit cards as well as mobile & electronic wallets in order to overcome the difficulty of cash deficit.

Given the uncertain situation that has arisen due to demonetization, the Inclusive Media for Change team has checked the status of financial inclusion in India based on a 2015 report from the Reserve Bank of India, which was prepared under the chairmanship of Deepak Mohanty. According to that RBI document entitled Report of the Committee on Medium-term Path on Financial Inclusion, dated 28 December, 2015 (please click here to access):

* In 2014, over 50 percent of Indian adults held an account with a financial institution, compared to close to 70 percent of adults in various BRICS economies, and an even higher percentages of adults in the United States and United Kingdom. Therefore, demonetisation may mean a lot of difficulty for the ordinary Indians who are financially excluded in the backdrop of Rs. 500 and Rs. 1,000 notes accounting for more than 80 percent of the currency in circulation.

* The latest Census of House Listing and Housing Survey 2011 data shows that the proportion of households availing of banking services has grown from 35 per cent in 2001 increased to 59 per cent in 2011. It means that still a large proportion of the entire population is outside the purview of banking, who are likely to face relatively more difficulty as compared to the financially included as a consequence of demonetisation.  

* As of 2014 there were only 18 ATMs per 100,000 adult population in India against over 65 in South Africa and over 180 in Russia. Similarly, 10 percent of individuals aged 15 years and above had made payments through debit cards in India as against approximately 40 percent in South Africa. Therefore, it will take a long time for India to make the transition to a cashless economy. The informal sector workers and the petty producers & traders still rely on cash instead of debit or credit cards (plastic money).  

* The number of branches of Scheduled Commercial Banks (SCBs) per lakh population has increased from 6.4 in 2001 to 9.7 in June, 2015. Although the number of branches of SCBs per lakh population in rural and semi-urban areas (combined) has increased from 5.3 in 2001 to 7.8 in June, 2015, the number of SCB branches per lakh population in urban and metropolitan areas (combined) went up from 11.7 to 18.7 during the same span. That is why persons from rural and semi-urban areas will be affected more vis-à-vis persons from urban and metropolitan areas following demonetisation.

* Over time (i.e. between 2006 and 2015), considerable improvements in terms of account density, i.e. the number of account per thousand of population, have been achieved. Although the account density for females has more than tripled, these numbers are far lower than the account density of males. Thus, the fallout of demonetisation would be mainly on females as compared to males.

* The states having a relatively higher share of rural population and a higher share of female population generally have a comparatively lower level of financial inclusion.

* At the national level, the number of female's savings bank accounts per thousand female population has risen from 143 in 2006 to 196 in 2010 and further to 536.

* While geographic penetration can be interpreted as a proxy for the average distance of a potential customer from the nearest physical bank outlet, higher demographic penetration would imply easier access. While demographic penetration has increased one-and-a-half times during 2006-15, the north-eastern states as well as states such as Bihar, Jharkhand, Uttar Pradesh, West Bengal and Madhya Pradesh are less penetrated in terms of the number of branches in relation to their population. Even the state-wise numbers for Basic Savings Bank Deposit (BSBDA) account density as on March 2015 suggest that several north-eastern and eastern states lag behind. Therefore, the demonetisation of Rs. 500 and Rs. 100 currency notes will adversely affect populations from north-eastern and eastern states, particularly the poor, the women and the vulnerable/ marginalized.   

* During 2014, only 3 percent of the rural population in India had directly received wages into their accounts, as against 14 percent in Brazil and 23 percent in South Africa. The low use of accounts in India is also evidenced from the fact that in 2014 over 40 percent of accounts did not witness any ‘movement’.

* While in India and globally only 2 percent of adults have a mobile money account, in Sub-Saharan Africa and in Kenya, it is 12 percent and 58 percent, respectively.

* In South Africa, over 80 percent of beneficiaries receive government transfers into an account and it is as high as 88 percent in Brazil during 2014. Mexico's shift to digital government-to-person (G2P) payments led to a cut in spending on wages, pensions, and social benefits by 3 percent annually. Compared to this, G2P payments comprised less than 10 percent of the total transfers for India. Therefore, persons who have received such G2P payments in Rs. 1000 and Rs. 500 notes (i.e. non-digital payments) by the end of October or early November, 2016 would be facing difficulty to convert them into notes of lower denomination.   

The Economic Survey 2015-16 says that despite the achievements of Pradhan Mantri Jan Dhan Yojana, basic savings account penetration in most states is still relatively low – 46 percent on average and above 75 percent in only 2 states (Madhya Pradesh and Chhattisgarh). The Economic Survey has cautioned that the policymakers should be aware about exclusion errors due to direct benefit transfer (DBT) not reaching unbanked beneficiaries.

Can demonetisation end black money?
 
Economists have argued that since a large proportion of black money is kept in the form of real estates, gold and precious metals, jewellery, diamonds and precious gems/stones, paintings and antiques, benami investments/assets and undisclosed foreign assets, targeting only unaccounted currency of higher denomination would be a folly. 
 
Professor emeritus Prabhat Patnaik of Jawaharlal Nehru University (JNU) has said recently that there exists a misconception about black money among the citizenry and this misconception also affects the highest level of the government. He has explained that black money is not just stashed in trunks, suitcases etc. (as stock) but it is also invested in various undeclared activities (such as illegal mining) and illegal activities (such as drug business, gold & arms smuggling etc.) for which taxes are not paid to the government. Patnaik has said that black money is not a stock but is a flow as it is continuously invested in various illegal / undeclared activities that are happening around. The activities undertaken with black money are unrecorded in the official statistics and are absent from the government’s reckoning. Therefore, getting hold of the stock of currency will not affect black economy since black activities occur continuously to generate profits and incomes.       

Please check the links below to access Prabhat Patnaik’s views on demonetisation.   

Karl Marx said that a miser thinks that one can get rich by holding money but a capitalist thinks one can become rich by throwing money into circulation, explains Patnaik in one recent interview given to Jahnavi Sen of thewire.in. Therefore, black economy operators are like capitalists and not misers. Such operators throw their black money into circulation to generate incomes/ profits. Demonetisation, according to Prabhat Patnaik, cannot curb black money or black activities.

There has been a proliferation of black activities after the demonetisation of Rs. 500 and Rs. 1000 notes. For example, in the underground economy, a Rs. 1000 note is exchanged for Rs. 700, which is given in currency notes of lower denomination.

If the recent measure has been taken to flush out counterfeit currency, there is no guarantee that the new currency won't be counterfeited, says Prabhat. The currency demonetisation should not have been done hurriedly as there was no imminent threat of counterfeit currency flooding the Indian economy. The conversion of old currency into new one could have been over a period of time i.e. exchanging existing legal tender into new legal tender, says Patnaik.

The currency demonetization has done huge damage to the economy. The Rs. 500 and Rs. 1000 notes comprise nearly 85 percent of the currency in circulation. In one stroke, the government has impounded 85 percent of the currency which is with the public. The currency deposit ratio that exists in the economy is 12 percent of the total money supply. So in a single stroke, the government has destroyed 12 percent of the money supply in the economy and 85 percent of the currency in circulation. This amounts to taking away the purchasing power from the hands of the people, which precipitates a recession in the economy. The recession is going to affect the small traders, and people who deal only in currency like informal sector workers. The poorer segment of the population would suffer due to recession caused by demonetisation.

This entire process is symptomatic of the transition to a cashless economy, which the Indian elites dream about, says Patnaik. However, the United States is not a cashless economy. The poor people (like daily wage labourers) do not own credit or debit cards in India. They operate in the economy with cash. The transition to a cashless economy would affect the petty producers and small traders too. The transition to a cashless economy cannot be forced on the people. The decision to demonetise was taken without considering the problems that are now being faced like: recalibration of ATMs, timely printing and release of the new Rs. 500 currency notes etc.
 
The Inclusive Media for Change team has put together the following links and urls of recent news reports, opinions and analysis on demonetisation, which could be useful to researchers, general readers and media persons.

Press release: Withdrawal of Legal Tender Status for Rs. 500 and Rs. 1000 Notes: RBI Notice, please click here to access

Withdrawal of Legal Tender Status for Rs. 500 and Rs. 1000 Notes - Related Links, please click here to access

Report of the Committee on Medium-term Path on Financial Inclusion, Reserve Bank of India, dated 28 December, 2015, please click here to access

Economic Survey 2015-16, Volume-1, please click here to access

Economic Survey 2015-16, Volume-2, please click here to access

Prabhat Patnaik, economist and professor emeritus at Jawaharlal Nehru University, interviewed by Jahnavi Sen, TheWire.in, 12 November, 2016, please click here to access

Prabhat Patnaik speaks in JNU on Demonetization, SFI JNU Unit, 12 November, 2016, please click here to access

Demonetization: Witless and Anti-People -Prabhat Patnaik, TheCitizen.in, 9 November, 2016, please click here to access
 
Abhijit Sen, economist and former chairman of the Commission for Agricultural Costs and Prices, interviewed by Lola Nayar, Outlook, 21 November, 2016, please click here to access
 
The Political Economy of Demonetising High Value Notes -Jayati Ghosh, The Hindu Centre for Politics and Public Policy, 14 November, 2016, please click here to access 
 
Shock and oh damn -Pronab Sen, Ideas for India, 14 November, 2016, please click here to access
 
In the Long Term Indians Might Lose Faith in Cash and Turn Towards Gold -Ravinder Kaur, TheWire.in, 14 November, 2016, please click here to access
 
In hunt for big sharks, livelihood of the poor becomes small change, The Hindu, 13 November, 2016, please click here to access
 
Demonetisation hits onion farmers, Deccan Herald, 13 November, 2016, please click here to access 
 
Note demonetisation: What of the women who hide cash to feed their children or to escape abuse? -Nishita Jha, Scroll.in, 12 November, 2016, please click here to access

Demonetisation damage greater than its benefits, says Kaushik Basu -Arup Roychoudhury, Business Standard, 12 November, 2016, please click here to access

Demonetisation Fallout: Cashless Villagers Loot PDS Shop in MP's Chhatarpur Village -Manoj Sharma, News18.com, 12 November, 2016, please click here to access
 
Demonetisation hits transport business; Truckers fail to pay -Megha Manchanda, Business Standard, 12 November, 2016, please click here to access
 
Dead since birth, Jan Dhan accounts now flush with cash -Yogesh Dubey & Aditya Dev, The Economic Times, 12 November, 2016, please click here to access

Why govt's demonetisation move may fail to win the war against black money -Appu Esthose Suresh, Hindustan Times, 12 November, 2016, please click here to access

Demonetisation leaves lakhs of tea, jute workers in Bengal, Northeast unpaid -Snigdhendu Bhattacharya, Amitava Banerjee and Rahul Karmakar, Hindustan Times, 12 November, 2016, please click here to access

Show me the money -Ila Patnaik, The Indian Express, 11 November, 2016, please click here to access

Will Modi's big currency-scrapping gamble yield results? -Roshan Kishore, Livemint.com, 11 November, 2016, please click here to access

Rs 500 and Rs 1,000 ban: Narendra Modi govt has created 50-day hawala window for old notes -Narayanan Madhavan, Firstpost.com, 10 November, 2016, please click here to access
 
Modi's 'surgical strike' won't make a big difference to black money -TT Ram Mohan, Business Standard, 10 November, 2016, please click here to access
 
In one stroke, demonetisation has shaken the trust our monetary system is based on -Devangshu Datta, Scroll.in, 9 November, 2016, please click here to access

Demonetisation of Rs 500 and Rs 1000 notes: Farmers fear missing out on sowing time -Sahil Makkar, Business Standard, 9 November, 2016, please click here to access

Entire speech of PM Modi announcing large notes banned, Posted by Abhishek Chakraborty, NDTV, 8 November, 2016, please click here to access
 
International payments industry expert Guillaume Lepecq interview by Kanika Datta, Business Standard, 16 April, 2016, please click here to access
 
 
Image Courtesy:  Inclusive Media for Change/ Shambhu Ghatak


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