Demonetisation has pushed India in the race towards a digital economy. It is unprecedented in various aspects such as efficiency in management, tracking of economic transactions and real time information about the illegal activities being perpetrated under the nose of the Government agencies.
Digital Economy | Forms of Transactions
The most convenient form of digital transactions is internet banking. Through this money can be transferred to any account through RTGS, IMPS and
Mobile wallet services provided by banks and other private service providersfacilitate furnishing funds into the mobile wallet from the bank account or utilise private mobile wallet services providers. This sector has seen a massive growth after demonetisation. Various such service providers have been accorded the ‘Payment Bank’ status by the RBI.
Most common form of digital transactions is the use ofdebit cards and credit cards which are referred as plastic money cards. These cards can be used in Point of Sale (PoS) machines that are maintained by various vendors.
Government has come up with a transformative mobile platform providing exercise known as Unified Payment Interface (UPI) through which money can be transferred from one account to another such that both the users are connected to UPI platform.
For those who do not own a smartphone, Government has also facilitated USSD (*99#) service to make digital transactions directly linked to your bank account and phone number.
Digital Economy | Challenges
We are yet to fully realise the potential of mobile phones. There is no legislation passed by the parliament which legalises mobile payments. It’s a contractual payment. India must come forward with a forward looking legal framework to support mobile payments at a time when 67% of all Indian online users are accessing internet from the mobile devices. If we do that the mobile payments will permeate across all urban sectors and will further go down to the rural and panchayat level.
The majority of the mobile payment service providers are non-compliant with the strict provisions for dealing, handling and processing sensitive personal data including financial data as mandated by Information Technology Act, 2000 and rules and regulations made under.
Moreover, the Government has also failed to ensure cyber security of transactions and a dedicated Pan-India helpline for cyber complaints which facilitate one-point grievance registration for the new users.
Digital Economy | Need of the Hour
RBI has mandated certain parameters for information security. There is an Aadhar ecosystem which is available with more than 107 crore citizens which becomes a unique methodology to engage in participatory governance and also use Aadhar as a mechanism for promoting digital payments and mobile payments.
It is important that the existing frameworks must provide for adequate effective remedies and redress mechanisms available for customers per se. The banking network and nation as a whole needs to have a dedicated cyber security law on place which mandates the Rights, Duties and Obligations of all stake holders. At the end of the day effective remedies have to be given to the customer because in the entire digital ecosystem the customer is the king.
All the stake holders in the digital payment ecosystem have to go for the cyber insurance in a big way. Through this they will be able to provide redress mechanisms and relief to customers who are made victims to cybercrime in the digital payment ecosystem. Today there is no mandate to have cyber insurance covers which complicates the scenario.
Cyber insurance is the big way forward for providing consumer protection and for providing massive covers to the mobile payments service providers which help them to reduce their losses. In the longer run this helps in the robust growth of mobile payments and digital payments in India.
Digital Economy | Government Efforts
The government has announced that those who use online payments for buying railway tickets or insurance will be given specific discounts. This is a step in the right direction. This encourages citizens not just save money by doing online payments but also move broadly in the direction of digital payments.
Financial technology by start-ups has been used to link the information sources of bank accounts and mobile wallets so that there can be a reception and transmission of electronic payments.
Government has also started monetary rewards for those who are moving towards the digital economy. The initiative is managed by NITI Aayog.
On the other hand, various State Governments have also started similar monetary rewards and awareness campaigns to facilitate easier transition of people towards a digital economy.
Digital Economy | Conclusion
The customer wants his money to be secure, comfort in doing digital transactions without any hurdles and wants to be reassured that if there is a problem then some agency should be available where he can go through. If we are able to address these concerns, we will go a long way going forward in digital payments.
Rural economy accounts for about 70% of employment and 50% of GDP with agriculture being the main driver followed by services and manufacturing. It is largely unorganized and hence it is quite complex given the fact that most of the dealings are done in cash and while there has been some intrusion of credit cards, debit cards and ATMs; dependence on technology driven payment systems is still limited. The recent demonetization drive has hit them the hardest.
Rural Economy | Current situation
A number of states have been declared drought hit. Over a long period of time after having an increase in wages in the rural areas as a consequence of recession worldwide, India witnessed a decrease in the level of wages. This is a fact which has been reconciled by the policy makers of the country also.
The outcomes of MNREGA speak in terms of the fact that the number of work days on an average for a family has been 49 far lower than what it optimally should be for a particular period given that there is a crisis of sorts.
The MNREGA has also contributed towards creation of minor irrigation works, check dams etc. which has helped in enhancing the irrigated area under cultivation within our country.
Initially the agriculture had the spillover effect of droughts of last two years which had hit the farm economy very severely.
Indebtedness of farmers increased and now in this particular monsoon season, the kharif season was better because of which agricultural output improved and it is expected that rabi season will be good because of improved soil moisture.
To some extent, demonetisation has hit the rural economy as it thrives mostly on cash and because of this, their harvest is not getting good price and the labour and transportation costs are also not getting covered even in the areas with close proximity to the cities.
From crop farming, an average family earns Rs.3081 per month which is very low and for marginal farmers, it is very difficult to survive. Whatever they earn is spent on day to day consumption without savings.
Unless there is a drastic change in the approach of farming like technological breakthroughs which reduces the cost of production for farmers improving their profitability like soil health cards. This can also be done by reducing the rates of interests or removing it.
Co-operative banks are not so successful because they have been captured by political people at the top which needs to be checked.
It was being hoped that due to good monsoon, this year would become the recovery year, but demonetization has shattered this hope.
Rural Economy | Steps to be taken ahead
Long term credits should be forwarded by NABARD and the Regional Rural Banks. Until this situation of lack of credit improves, private investments will remain negligible.
Insurance sector needs to be strengthened. Though there is Pradhan Mantri Fasal Bima Yojana but more has to be done with regard to implementation of schemes.
The net of National Agriculture Market should be widened to include e-marketing which is a very good thing for integration of markets.
Marginal farmers should be taken out from the clutches of moneylenders who are harassing the farmers in the name of credit. Post-demonetisation, Government has an added advantage to address this issue.
Co-operative institutions have to be built at the grass root level and sharing of common facilities like tractors, micro irrigation etc.
Dairy, poultry and agro-processing sector can be improved side by side.
MGNREGA like employment flagship programmes have to be used efficiently.
Government should consider giving short term loans to the farmers can be given by increasing the priority sector lending threshold (of agricultural loans).
Government should also try to build consensus over passing of the long pending ‘Model Agricultural Land Leasing Act’ to formalize leasing of agricultural land.
Rural Economy | Conclusion
The rural economy in India should target to generate better momentum in the next few years with the help of increased investments in agricultural infrastructure such as irrigation facilities, warehousing and cold storage. Factors such as reduced transaction costs and time, improved port gate management and better fiscal incentives would contribute to the rural economic growth. Furthermore, the growing use of genetically modified crops will likely improve the yield for Indian farmers.
Demonetisation has given short term shocks to the economy across many sectors. One of them is the EXIM trade of India. The sceptical economists have argued that such a shock therapy to reinvent unaccounted wealth has given a shot in the arm for India’s exports, whereas the imports suffer reduction too, bringing joy for India’s balance of trade. Let us look at the short term effects of the demonetisation scheme on Indian exports and imports. We are discussing only the short term effects because the long term effects on the economy are very dynamic and depend on multiple factors which cannot be predicted at this nascent stage.
Demonetisation | Effect on Exports
In the short run, the overall exports may suffer due to lower liquidity in the market. Lower liquidity means lower purchasing capacity of the exporters. An exporter would find it difficult to arrange the factors of production due to liquidity crunch, leading to lower productivity and hence lower volume of exports. All this is happening in the midst of a situation when Indian exports became competitive in the international market due to Chinese slowdown and lower crude oil prices.
Exports from the primary sectors of the economy such as agriculture, animal husbandry among others would find it difficult to market and service their production for exports in the international market despite ample steps taken by the Government. Liquidity crunch would force them to sell at below market price in the domestic markets funnelling them into an enigma rural distress.
The informal middlemen such as traders at the borders who procure the finished goods for export in the international market will find it difficult to procure such goods due to unavailability of liquid cash (an economy that works mostly on black money) and it would be difficult for them to honour their previous commitments, which would further lower the trust on Indian markets.
Unavailability of liquid cash in the market will bring the price of rupee into a stable frame due to lower demand of foreign currency in the international market. This would be a boon for Indian exports in the long run, contain inflation in the short run and improve India’s balance of trade in value terms.
Lower exports in the short run would enable the competitive economies like Bangladesh, Vietnam to penetrate deep into the international markets and replace Indian exports as a sustainable and committed mode of supply. This might lower down trust in Indian exports.
Micro and small industries that thrive on export business would be the worst hit because many of them are isolated from formal banking channels and the liquidity crunch is bound to hit them the most.
Exporters who thrive on procuring finished goods from a least developed country (LDC) and exporting the same at a higher price after value addition to a developing or developed country would find it difficult to sustain their business due to unavailability of cash in the system and thereby lowering down their ability of procurement.
Demonetisation | Effect on imports
In case of imports also, they would fall down because of usual cash crunch. Currently, the domestic economy would start hoarding cash again (i.e. in savings mode) and the people would not be willing to spend money freely which would reduce demand of domestic as well as international products.
Lowering down of imports would save India of its precious foreign exchange, hence accelerating India’s foreign exchange currency basket. This would mean stability of rupee and possible appreciation of the currency.
In case there is an appreciation of the domestic currency, it would make our exports costlier and seize off the tag of price competitiveness of our exports in the international markets, hence affecting the overall exports from India.
Decrease in essential imports like plant and machinery would seriously affect business expansion plans of Indian companies due to unavailability of technology required to start and expand a business. Note – Plant and machinery is one of the major component of various factors of production.
Businesses in India that thrive on procurement of raw materials from outside and production of finished goods inside India would suffer a major blow in the short run due to unavailability of cash. Hence, this cash crunch might force them for a temporary shutdown and lower productivity in the near term.
Again, those exporters who import finished goods from a least developed country (LDC) to be further exported to a developing or developed country would find it difficult to import the goods due to unavailability of cash in the market therefore, hurting the entire chain of value addition business.
The losing sheen of the Indian market and declining imports by India might push few major business conglomerations outside India because of business losses to explore other attractive markets. This would be a big blow to ‘Make in India’ dream.
Demonetisation | Conclusion
Economists are discussing the long term effects of the demonetisation move. While some are in favour, some are against this scheme in context of the Indian economy. Commentators are making future predictions without taking all the factors into consideration. An acceleration requires the catapult to be slowed in the beginning to realise its maximum potential later when it is fired at the right time. This whole exercise has pulled money out of the economy from both formal and informal sectors. It all depends how the Government plans to push this hard earned economic resources back into the economy and at what speed. Till then, it is an exercise in futile to speculate about the long term effects of demonetisation on the economy.
Demonetisationeffects have turned the world into two halves one for and the other against. Finance Minister has tried to water down the dis-beliefs by few economists who are sceptical. His argument being that demonetisation effects will be to help in curbing unaccounted wealth and become a new hallmark for white transactions. One of the Demonetisation effects is the potential to kick-start economic growth if the economy adopts white transactions and public spending by the government is accompanied with this bitter pill.
Demonetisation Effects | Analysis
Demonetization drive in isolation may not yield effective results. There should be a stringent follow-up from the Finance Ministry and RBI officials regarding the steps to be supplemented with the demonetization drive for the realising the effective objective of a white, traceable and cashless economy.
Low interest regime due to supply of high deposits. It should increase investments both domestic and foreign in origin due to decrease in cost of borrowing.
If anticipating reduced corruption levels, the foreign investors find it comfortable investing in India, it would be the success of the demonetization drive.
If the demonetization scheme helps cleaning the system especially in the political spectrum and bureaucracy, the investor confidence would be increased.
Demonetization drive should be accompanied by multiple other actions – Efficient tax system, proper circle tax rate, curbing benami property transactions through the mandatory use of Aadhaar Number in property dealing, use of Aadhaar in transactions of imports and exports, penalising those who evade tax and most importantly a tight control on participatory notes funding black economy.
If cash supply chain is broken, people will lose jobs due to inadequate currency available for MSMEs. If the government is able to tackle the cash crunch in the economy, this side-effect can be tackled.
How the Government uses the money accumulated through demonetization for health, education, waiving off farmer loans, public welfare activities and other social programmes has to be seen. This is an important issue because lower circulation of money in the economy affects demand in the economy and affects overall investment cycle.
How the Government handles the rural distress post-demonetization period also needs to be seen. Effective social sector schemes through a tightened control and regulation regime should be made. Example – Universal Basic Income (as discussed in an earlier article)
It is also to be seen if the RBI gets initial success in opening the ‘Islamic window’ for gradual expansion of ‘interest-free’ banking in India which has its own merits such as – availability of huge funds through investment, less volatility in market, lower cost of borrowings etc.
If there is enough cash to flow in the economy and Government can avert the crisis that poor people are actually facing, then only this structural change can be deemed to be successful in the long run. Till then, it can be said that it’s a work in progress. Any economic policy cannot shoot an arrow in the wind without preparing for the effects of it on the ground. The Government is preparing the ground for its success, but few more decisions need to be merged in the leap towards a cashless economy.
The recent demonetisation has spurred the fears of decreased demand, i.e. low circulation of money supply as one of its effects, especially by the erstwhile hoarders of black money. Lower money supply can impact GDP growth by reduced consumption expenditure in the near term as there is a temporary liquidity crunch because of the government strictures. The government and the banking system might accumulate a huge sum of deposits (depends on how much old currency is not exchanged). Example – Government had 16.5 billion notes of 500 rupees in circulation but after cancelling the legal tender, many would not come to the banks to get their notes exchanged due to the fear of penalties. The money hoarded by such people is the surplus for the Government and the banks. In a nut shell, Government has financed the Indian economy at the cost of black money hoarders.
Getting back to the topic, we are facing a serious threat of low consumption expenditure, the signals of which are already in the air. So, how can we fight this issue? The answer is ‘Universal Basic Income’. What is Universal Basic Income (UBI)?
A basic income is an income unconditionally granted to all on an individual basis, without means test or work requirement. It is a form of minimum income guarantee that differs from those that now exist in various European countries in three important ways:
1. It is being paid to individuals rather than households;
2. It is paid irrespective of any income from other sources;
3. It is paid without requiring the performance of any work or the willingness to accept a job if offered. Main features of UBI:
• It is Universal and not targeted. In the Indian context, this makes sense because of the less-than-satisfactory experience with targeting welfare services. This would not only be more appropriate; it will also reduce the burden of the bureaucracy in so far as it is engaged in identifying the deserving beneficiaries of any targeted programme.
• Another important feature is cash transfer in lieu of in-kind transfer. There are standard arguments in favour of cash transfers over in-kind transfers (food stamps or grains provided through the Public Distribution System) as they are supposed to be much less market-distorting than in-kind transfers.
• UBI is unconditional. Cash transfers are not tied to exhibiting certain behaviour, and the people are free to spend the cash as they want. An example of conditional in-kind transfer in India would be the mid-day meal scheme, where the meal—an in-kind transfer—is conditional upon attending school. Why is this the right time for UBI?
• The estimated budgetary requirements for providing UBI to all adults (roughly 69% of the population) is in the range of 11% of the GDP amounting to Rs11,000 billion.
• One of the main stumbling blocks was the need to rationalise subsidies which accounted for 14.4 per cent of the total expenditure of the central government and use the savings thus generated to provide a UBI. But now, the fiscal space that has presented itself due to demonetisation is an opportunity that should be utilised and it is that rare occasion when the imperatives of economic theory (to buoy up consumer demand and start on the path towards a long-term rationalisation of subsidies) and political willingness coincide perfectly. How to implement UBI at this stage?
• As on November 9, 2016, there were a total of 255 million Jana Dhana account holders of which roughly 60 million (23.5 per cent) were zero-balance accounts. As a first step in the provisioning exercise, a fourth of the anticipated liquidity gain (through demonetisation) should be transferred to these zero-balance accounts by the end of Q1 2017. This would mean an additional fiscal space of Rs 625 billion in the first year.
• Non-Plan subsidies (including those on food, fuel and fertilisers, was Rs 2,578 billion in 2015-16 (RE) of which 54 per cent was contributed by the food subsidy bill (Rs 1,394 billion). For starters the government could target the phased removal of the food subsidy bill. A plan to phase out the food subsidy over four years would mean that the government can aim to save at least Rs 350 billion in 2017-18 Budget.
• Once, the implementation is set in motion and people become aware of the advantages of the scheme, conditions such as Aadhaar seeding can be built on the initial framework to phase out ghost beneficiaries. Conclusion-
A gradualist approach will help recalibrate the UBI in a manner suitable to the challenges that can crop up in its implementation. If the present demonetisation exercise is the first step in the long road to a cashless economy, then transferring amounts for the UBI will be an assured progression in the journey. The monetary behaviour of individuals remains unchanged over very long periods of time. To actualise the move towards cashless transactions, the government has to encourage making transactions through their accounts using facilities such as RuPay, which are add-ons to the Jan Dhan accounts. Implementation of the UBI using the fiscal resources freed by demonetisation will be the manna that government provides for its needy citizens.
Let us take the five key criticisms of demonetisation – Flow vs stock, price of real estate and money, SME impact, lower consumption and inconvenience – are more than negated by the long term effects of formalisation. Let’s look at each criticism in diminishing order of importance in more detail: Flow vs stock:
• Analysts suggest that demonetisation is “merely” a one-time intervention that reduces stock and does nothing about flow (the fresh creation of black money with new currency). They are right; but dealing with stock creates conditions for even more aggressive action on flow. How? You can expect further curbs on cash payments, a smaller number of high-value notes put back into circulation, the application of big data algorithms to saving, consumption and investment data, and much else.
• This builds on previous actions such as goods and services tax (GST), tax deducted at source (TDS) and PAN requirements, the Undisclosed Foreign Income Act, Benami Transactions (Prohibition) Amendment Act, multiple multilateral information exchange agreements, ease of doing business, and the voluntary disclosure scheme. None of them are perfect or complete alone, but seen together, the flow plan is nicely complemented by this stock intervention. Price of real estate and money:
• India has long mispriced land and money, and analysts suggest a huge impact on both. Analysts suggest that India’s low rental yields of two per cent reflected our black economy because globally rental yields and borrowing rates are similar.
• It is estimated that rental yields will double as the price of residential real estate halves.
• It is also estimated that the shift from black to white savings (banks have received ₹2 lakh crore in deposits on the last two days of last week) could reduce our interest rates by 350 basis points over the next four years. Ending the mispricing of real estate and money is wonderful for entrepreneurship, global competitiveness and job creation. Bad timing:
• Analysts suggest this could have been timed differently because of the rabi crop, Diwali, and Uttar Pradesh elections. A country of India’s diversity and size will always have some harvest, election or festival coming and a decision of this impact is probably best made in the middle of a government’s tenure rather than too close to the next national election.
• An important part of the fairness of this move was secrecy and surprise; announcing the decision as soon as it was logistically possible with new currency was crucial to its impact. SME destruction:
• Analysts suggest that many small businesses will not be viable in the white economy because their survival depends on tax or labour law arbitrage.
• A reduction in the number of enterprises is welcome. Of India’s 63 million enterprises, only 8.5 million have any tax registration and only 1.5 million pay Provident Fund.
• The US economy is eight times our size and only has 25 million enterprises. The destruction of low-productivity informal enterprises that don’t pay minimum wages or provide safe working conditions and leave is rather welcome.
• Demonetisation destroys past gains of informality; complementing this with infrastructure building and ease of doing business interventions that reduce regulatory cholesterol could raise formal employment from 10 per cent of our workers to 50 per cent in the next decade. Lower consumption:
• This is the trickiest to estimate. Analysts agree about short-term pain but are divided on impact. Some suggest pain will be concentrated in the north, rural areas and consumer durables while economist Surjit Bhalla suggests no problem because individual consumption is ₹13,910 per month at the 99th percentile.
• It can be deciphered that the pain will not be as prolonged and as widespread as expected except in jewellery and real estate that delightfully will have a long and overdue cold winter. Inconvenience:
• This is a real short-term pain but the amount of tears shed by rich people for the inconvenience of poor people and farmers would probably fill an ocean. Poor people don’t have black money and farmers are untaxable.
• This pain would have been greater before Jan-Dhan, Aadhaar, Direct Benefit Transfer, mobile banking, universal payment interface, Bharat Bill payment, new bank licences, mobile wallets, and other financial inclusion measures that are blunting the traditional defence of cash as access.
• A counterintuitive but effective measure to reduce this temporary pain is the ₹2000 note but the numbers of this high value note should be capped and this new accomplice of black money storage should be demonetised in a few years. Conclusion-
An important upside lost in the black money vaporisation debate is counterfeit money destruction. If you can see the happenings in Kashmir, it is obvious that much of valley terrorism is fuelled by money not printed by India. Getting rid of black money is not the solving of a sum but the painting of a picture; no single action moves the needle but a series of action can change the norms of acceptable, accepted, and expected behaviour.
The boldness of demonetisation suggests a bias for action, however imperfect, after decades of rhetoric. The estimates figuring non-exchange of 12 lakh crore of currency in circulation due to the fear of clamp down by the State authorities, are different by different analysts.
Whatever the final number, as Karl Marx said “Philosophers have only interpreted the world, in various ways; the point is to change it.” Source – Business Standard
Demonetisation of the Indian currency was a surgical strike against black economy, which was initiated with the Prime Minister Narendra Modi’s announcement that RBI was cancelling the legal tender of high denomination currency notes of Rs 500 and Rs 1,000. An expected hullaballoo followed the announcement with people getting restless about the second demonetization drive (the first demonetisation was done in 1978) by the Government. Let us observe the effects of this decision.
Demonetisation | The after effects
Legal cash with people will see the vault of the banks, which will increase the lending activity of banks. The banking sector which was scrambled by the issue of NPAs (Non-Performing Assets) might get a temporary relief.
Interest rates may come down due to surge in deposits which would make credit cheap for the businesses to expand and flourish.
Black money got a shot in the foot with the hidden cash becoming obsolete. Transparency might follow the game now.
People from the poor and middle income group would rejoice because of sinking of prices of real estate sector and higher education (the two harbingers of black economy).
Organisations operating in the field of cashless economy such as payment banks and the UPI (Unified Payment Interface) would get a boost from this pragmatic move.
Appreciation of rupee against the foreign currency basket can also be anticipated which would bring down inflation in long terms giving relief to the poor and middle income population.
Initial transition of black money into gold purchases have also paved the way for the success of Government’s ‘Gold Monetization Schemes’.
Due to lower value of currency available in the market, businesses would be forced to shift towards a cashless economy to prevent hassles of currency maintenance.
Internal security of the nation would get a boost with the funds cycling across the nation to propagate terror operations, smuggling, drug trafficking, human trafficking etc getting obsolete with the dawn of the day.
The issue of counterfeit currency causing huge loss to the exchequer would be resolved with this one big solution.
Government should ensure smooth transition towards the new currency with minimisation of volatility in the circulation of currency.
Income Tax Department needs to keep a close watch over the cash deposits above Rs 2.5 lakhs with adequate safeguards in place to track the unaccounted wealth.
The economy would transit swiftly to a cashless economy; therefore, an adequate IT Infrastructure should be in place to ensure security of transactions.
In both short and medium terms, the real estate sector would suffer from reduction in market prices and the gems and jewellery sector getting an increase in prices, due to the uncovering of the parallel economy and demand-supply mismatches respectively. SEBI and RBI should work in tandem to keep close watch on this phenomenon too.
RBI would need to bring frequent revisions to its monetary policy to get itself in sync with the currency fluctuations which may otherwise have inflationary repercussions.
The government’s move is tantamount to the fact that a strong political will and good intentions can unearth even the decade old secrets. While the intent is clear, the implementation and long term impact is yet to be seen. It is laudable that if the Government wants to keep a secret, it really can, with some people calling it ‘Pokhran-3’.