7 ILLOGICAL REASONS to oppose DEMONETIZATION

100-demonetization
The current demonetization move by the Narendra Modi government has seen a lot of accusations and counter-accusations being levelled by both the supporters and opponents of the move.

While the government has tried to deal head on with the official accusations levelled by opposition political parties, a much more subtle misinformation campaign is going on on social media platforms like WhatsApp and Facebook against the campaign.

Such campaigns are started and fanned by people who stand to lose from the current crack down on illicit funds — such as corrupt officials, tax-evading businessmen and politicians.

Many ordinary people who get such WhatsApp and Facebook messages do not know whether it is correct or wrong. We evaluate some of the criticisms of the move circulating on the social media and subject them to a fact check.

Reason 1: There was a massive increase in bank deposits before demonetization due to BJP insiders and their friends depositing black money before demonetization.

This is not an argument that has only been found on social media, but has also been echoed by Congress politicians and the mainstream media. The argument goes like this: Just before demonetization was announced, the BJP told its friends about the impending move, and they rushed to the banks to deposit their black money into bank accounts, leading to the spike in bank inflows.

While it may sound logical at first, on deeper analysis, it sounds less so.

For example, what benefit does a person stand to gain by depositing the money before the Nov 8 as opposed to after Nov 8? Either way, he or she has to tell the bank authorities where the money came from, why it was not declared for so long etc.. It is not as if, if you put 10 cr into your bank account on Nov 1, it would not be caught by tax department’s algorithms. A more logical step for someone with early information would be to convert their black money into gold or other assets, instead of depositing it into their bank accounts.

Reason 2: Govt should have recalibrated ATMs before Nov 8.

This is another widespread accusation used to substantiate the allegation that this was done in a hurry and the government did not think it through. We checked with banking sources, who confirmed that banking officials knew that a new 2000-rupee note was soon being launched. They were not overly worried about whether these new notes would fit in their ATMs or not. The reason? Given the expected availability of the 500 and 1000 rupee notes, they did not see any reason to hurry and fix their ATMs for dispensing 2000-rupee notes.

Demand for the new Rs 2000 notes was not expected to be high among ATM customers as such notes are difficult to change. Naturally, they saw no hurry to prepare their ATMs in advance for the new note.

So, unless the government gave some good enough reason — such as the fact that the 500- and 1000-rupee notes would soon be withdrawn — banks would not have recalibrated their ATMs before getting huge amounts of 2000 rupee notes. If, despite this, the government had forced banks to recalibrate their machines for 2000 rupee notes, banking officials would have been able to guess what was going on.

Reason 3: The Rs 2000 note was made in a hurry and bleeds colors.

According to our sources, the Rs 2000 note was not, and is not, meant to be a long-term currency. It was conceived of as a way to infuse quick liquidity into the economy in the immediate wake of demonetization. Once its purpose was served, it would be slowly demonetized as well. This second demonetization would have acted as a second blow to those who had converted their old 500 and 1000 rupee notes into the new 2000 rupee notes.

Further strengthening this argument is the fact that the government was not planning to issue new 500-rupee notes in the beginning. It wanted all big cash withdrawals to happen in 2000 rupee notes, so that anyone who continued to hold black money in cash would be forced to do so in 2000-rupee denomination.

Even today, banks are still not giving 500-rupee notes to those who withdraw huge amounts of money via cheque and cash. 500-rupee notes are being distributed only through ATMs, and you can take out only five of these per day. That said, the intense media pressure and outcry seems to have forced the government to deviate from its original plan of introducing the 500-rupee note at a later stage to ensure that any left-over black money would be converted to 2000-rupee notes.

Reason 4: India is a cash economy and can never change to a cashless one.

This is yet another argument used by the detractors of demonetization. They argue that since 90% of transactions in India happen in cash, we will always remain so. The fact is that two months ago, Indian banks created a payment platform called UPI or Unified Payments Interface, which makes it possible to transfer cash without any card or plastic, simply by using a smartphone. Since only one-in-three Indians today possess smartphones, this still leaves two thirds out of its range.

For them, the banks have brought out money transfer using USSD (something like SMS). Under this, you need to dial *99*XX# to instantly transfer money to any other person, such as a shopkeeper. (XX is a two-digit code for your bank.) You can instantly transfer money from your account to another person by simply dialling the phone number of the recipient (such as the shopkeeper).

In fact, as and when more and more shopkeepers install Aadhaar payment machines, it would be possible to pay at shops and establishments with nothing other than your thumb. Enter the amount in the machine and press your thumb against it and the payment is done.

These are not facilities that were there in India even a year ago. To say Indians will never use such facilities and will always be happy to carry cash is a bit like saying Indians will never talk on phone, they will always prefer to talk in person.

Reason 5: Cash is only a small part of total black money and the inconvenience is not worth it.

According to RBI, about 14.2 lakh cr rupees is held in 500 and 1000 rupee notes. Even if only 30% of this is black money, that comes to about 4.25 lakh cr. Divide that by the total number of adults in India — around 60 cr, and you get around Rs 7,100 per head, or about Rs 21,000 for a family of three adults.

When this much money is destroyed, the government can simply print an extra Rs 4.25 lakh cr and give it equally to all citizens without causing any big disruption.

Besides, the ‘knock on’ effects of the crack-down on the total worth of black money will be far higher. To understand this, imagine that there is a speculative market — say a the stock market — in which all the assets (shares) traded are worth Rs 1 lakh cr. Now, if one person withdraws 1000 cr from it — or 1% of the total value of the assets — the market will come down by 10-20% because that is how such markets work. As a result, the net impact on the value of the assets will be 10,000-20,000 cr, even though only 1,000 cr was withdrawn. This is the nature of speculative markets. You don’t need 1000 cr of cash to ‘create’ or ‘vaporize’ 1000 cr in value.

We can already see this effect in the real estate market, where prices are seen coming down by 20-30% over the next one year due to demonetization.

Now, imagine the savings that such a price decline in just the real estate sector will bring to Indians as a whole: It would be far higher than the Rs 2 lakh cr or Rs 4 lakh cr that gets destroyed directly in the form of black money held in cash.

Secondly, the move sends a clear signal to tax evaders that things are not going to be as easy in the future as they have been so long. They will think twice before flouting more rules. More people will be willing to observe laws than before. India will take one more step towards becoming a more law-abiding place where rules are observed and not always violated.

The move sends a signal that it’s not okay to keep flouting the rules and that rules are rules, not just in the US and Europe, but also in India. Or, as Dhirendra Kumar, CEO of valueresearchonline.com, puts it in his ET column:

“The real success of demonetisation, and the majority of its economic impact, will come not from ‘unearthing’ of stocked black money, but from a change in future behaviour. People work in cash, earn profits in cash and accumulate wealth in black. So far, this has been effectively a riskless option. This is no longer true – and that’s the real change. ”

Reason 5: The move hits the poor people more than the rich.

This is probably an argument that doesn’t need to be rebutted. As most ‘poor’ and ‘honest’ people know, their inconvenience of standing in front of the ATM for a couple of hours is nothing compared to the desperation of some of the people they know who have undeclared income. They are approached by these people asking them if will deposit half a lakh or so in their bank account. This is one of the key reasons why many poor people don’t mind standing in queues right now, because they can see how people who have been flouting the laws are paying for it now.

Reason 6: Demonetization was a cheap political trick and not an economic decision.

This argument misses the point that demonetization will start bearing fruits only 2-3 years from now, while the pain will be felt in the first 3-5 months. If anything, the move runs counter to the typical mentality of Indian politicians who keeps their immediate re-election on a higher priority compared to what is good for the country in the long term.

Reason 7: BJP was buying land just before demonetization.

This is a bit like the ‘deposits were rising’ argument. A pan-India party like the BJP will always be buying a plot for a party office in some town or the other at all points in time. These plots are not speculative investments that will give the BJP big returns after demonetization. In fact, for any advantage that the party may have had in buying these plots in Bihar before the demonetization, it probably also missed out on the lower price that it would have had to pay if it had bought the same plot after the demonetization.

VALID CRITICISM

There is, however, no doubt that the implementation of the program could have been better. Bank employees, for example, say that there should have been a central database of everyone who was exchanging cash over the counter, instead of resorting to application of indelible ink. Such a database could have been prepared in less than a week, and would have prevented — to some degree — seepage of black money back into the system through the use of mules. There were also other points that could have been improved as well. But, as they say in America, hindsight is always 20:20. We can never have a perfectly designed, perfectly implemented scheme of this magnitude.



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