The Demonetization Phenomenon

By Prabhat Pankaj and Sheenu Jain

Confused about Demonetization? Not really sure what it was about? Do you have a vague idea but are not sure about certain aspects?
Then this is the book for you.
Discover the answers to all your queries here, as we explore:
-Job prospects after demonetization
-What demonetization means for you as a layman
-Whether demonetization spells well for all economic classes
-India's infrastructural support f or a digital economy
-The reforms needed to support demonetization
-Its impact on sectors as different as retail, real estate, telecom and banking
The storm that swept away all your old currency may have settled down but the landscape it has left behind is a changed one. Inspiring not just a backlash and intense debates but new start-up opportunities, demonetization is still not ready to be relegated to the trash can of history.

• Language: English
• Publisher: Bloomsbury Publishing
• Release date: Nov 18, 2018
• ISBN: 9789386643100

Prabhat Pankaj

Dr Prabhat Pankaj is a postgraduate in economics and a Ph.D in applied economics. He is an international researcher on happiness and well-being. He teaches course on happiness to B-School students. Dr Prabhat is a Harvard trained leader in higher education and currently working as the Director of Jaipuria Institute of Management, Jaipur. In his 30 years plus teaching career, he spent 7 years in Bhutan and worked closely with Center of Bhutan Studies on the subject of happiness. He was also invitee to the World Government Summit 2019 in Dubai by the Ministry of Happiness, UAE. Dr Prabhat received the title of 'National Unicorn of Happiness' by the All India Council of Technical Education (AICTE). Recently, he delivered keynote address on teaching happiness in B-school to 300 plus attendees in AACSB's Asia Pacific Conference in Bangkok. Dr Prabhat has engaged happiness sessions for a large number of institutions and organizations cutting across sections such as students, faculty, corporate managers and top leaders. He has created a 'Happiness Laboratory' where Individual's Energy Field Analysis is carried out using Electro-Photonic Imagining technology. Participants get a full report, which is a non-medical analysis of the energy levels of body organs, stress level analysis and 7-chakras balance. Individual prescriptions have helped many in restoring health and reducing stress in life. Dr Prabhat is an avid trainer and a resource person on effective teaching, teaching leadership, student centric teaching-learning, effective student engagement and outcome-based education (OBE). Indian Institute of Management–Ahmedabad has written a Case Study on 'Jaipuria Institute of Management, Jaipur' focusing on student engagement which Dr Prabhat has initiated at Jaipuria, blending of formal and non-formal learning. Dr Prabhat runs a blogpost titled The Learning Corridor (http://student-learning.in) dedicated to research and experiments based writing on student learning, life and happiness.

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Jain

Section I

Demonetization and Digital Economy: An Overview

Public debate on demonetization has raised three sets of issues. First, broader aspects of management, as reflected in the design and implementation of the initiative. Second, it’s economic impact in the short and medium run. Third, its implication for the broader vision underlying the future conduct of economic and digitalization policy. What are the background facts? What are the analytics? What are the long-term benefits and short-term costs? And what policy responses going forward would maximize benefits and minimize costs? This section attempts to answer these questions. This section also focuses on digitization and how broadly it can impact three sections of society the poor, who are largely outside the digital economy, the less affluent, who are becoming part of digital economy, and the affluent who are fully digitally integrated.

CHAPTER 1

Demonetization: The Road Ahead for Indian Economy

Prabhat Pankaj

Demonetization represents India’s policy activism as against the era of ‘policy paralysis’.There have been short-term pains resulting in inconvenience for the people, businesses as well as some cost to the economy, including the remonetization cost. However, it looks like that the inconvenience factor has not really clouded people’s acceptance of the demonetization move. The post-demonetization period truly heralded an era of new economic-awakening. This has resulted a fundamental shift in the manner of doing business, medium term prospects of high growth, rural transformation and more so the biggest ever onslaught on mitigating black money, corruption, and terror funding.

Good news is that India has come out of the slumberness of ’policy paralysis’ and has started acting and progressing. This has not only made the economy look up but it has also changed the perception of the world towards India. India suffered for more than a decade with stagnating policy moves and a long list of reforms kept in abeyance for want of political will. Policy activism may have its own pitfall as some of the changes may not work miraculously as expected, but the benefits have the next possibility of doing good. Policy paralysis is like piling up of dry wood which can catch fire at any instance and destroy things beyond expectations. It is a well-known fact that the cost of policy dormancy is quite high. The recent withdrawal of higher denomination currency of ₹500 and 1,000 from circulation, better known as demonetization, falls into the category of policy activism which created ripples at least for ashort period of time. It was conceptualized, promulgated, and executed with a pre-conceived intention of larger cleaning-up, so much so that it has also been referred to as a kind of second ‘surgical-strike’. Therefore, it is no surprise that the move has resulted in a series of reactions, commentaries, and comparisons right from the time of its announcement. The euphoria went bigger and bigger as the implementation proceeded further. There have been numerous questions on the very idea of demonetization and to its implementation plan. Questions have also been raised on its actual impact size as well as on the slowing down of the economy. It is in this backdrop, that this chapter looks at the prospects, challenges, and the medium- and long-term impact of recent demonetization on the Indian economy.

DEMONETIZATION: NARRATIVES AND OBJECTIVES

It all began with the Prime Minister’s (PMs) announcement on Tuesday, 8 November 2016 late in the evening that ₹500 and ₹1,000 denomination currencies will no longer be a legal tender from midnight, meaning early Wednesday, 9 November 2017. These notes will eventually be replaced by new ₹500 and ₹2,000 denomination currencies. In his maiden communication on demonetization, the PM put a commendable call against corruption and black money expecting the nation’s wealth to be used for the benefit of the poor while law-abiding citizens get their due share. It also pitched for the promotion of digital payments in the economy and moving towards cashless transactions. Since then, the common sight in the country was that of long queues in front of banks and automated teller machine (ATMs), with most of the ATMs running out of cash. Nevertheless, counter narratives started pouring in from all corners. Large part of counter narratives were related to on-ground reality and common man’s suffering, while many of it came as an expert opinion and ideological opposition. There has also been an attempt towards public mobilization and street protests. However, it does look like that the general public sentiment was largely in favour of the demonetization move. People at large expressed that they are fine with temporary hardships coming their way. In a public opinion survey conducted about 2 weeks after the implementation of currency withdrawal on Narendra Modi App, the move and its stated objectives were approved by more than 90 per cent people.

Those who argued against demonetization largely resorted to common man’s plight and inconvenience caused during the transition days. Demonetization critics came up with a strong sentiment that people would punish the government in upcoming state assembly elections, especially in the big and crucial states like Uttar Pradesh and Uttarakhand. However, the election results in these two states proved just the opposite and it also testified that the opinion poll conducted on Narendra Modi Application represented the true sentiments rather than a false justification. Arguments on the expected benefits from demonetization move include the following:

Reduction of unaccounted/black money,

Removal of fake currency in circulation and wiping out the stock of such currency,

Backlash on terror funding, and

Speeding up of digital transaction and progressing towards cashless economy.

There has been a significant development in all these stated fronts and demonetization decision came at an opportune time when Indian economy’s future growth depended more on internal cleaning up and good governance. Perhaps, corruption and lack of good governance blocked direct benefit transfer (DBT) to poor and India kept on reeling in the scourge of abject poverty.

BLACK AND FAKE MONEY MENACE

Higher denomination notes are sources of black money generation and unaccounted transactions as well as generation of fake money. Money supply data suggests that between 2011 and 2016 there has been 40 per cent rise in bank notes in circulation, while in the similar period, the circulation of ₹500 and ₹1,000 notes increased by 76 per cent and 109 per cent, respectively. The two high denomination notes accounted for as high as 86 per cent of total stock of currency in circulation. There was a clear indication that higher denomination notes would have unaccounted transactions. There are no reliable estimates available on black money size in India, while some estimates suggest that the volume would be about one-third of the total gross domestic product (GDP). Friedrich Schneider in his September 2006 paper ‘Shadow Economics and Corruption all over the World: What do We Really Know?’ (Institute of the Study of Labour, Bonn) estimated that the size of black money in India is between 23 and 26 per cent of official GDP. However, the proportion of black money in India is below the world average of about 38 per cent, with the highest being in Africa and Latin America touching above 40 per cent. The Indian estimation further suggests that demonetization has hit about ₹4 lakh crore of cash in black money, which is about 12 per cent of the total black money. Most of these currencies are said to have either been reported or deposited in banks or people have also resorted to destroying and throwing away of cash. There is an apparent misuse of Jan Dhan accounts by influential and big players operating with black money. This also suggests that not all black money is in the form of cash, a lot is stored in other forms and sources such as real estate, gold, overseas, etc. A parallel reform needs to be followed on Benami Transaction, Real Estate reforms, nailing big defaulters, and overseas deposits.

Cash is not the only form of black money; rather a larger attempt needs to be made to eradicate the menace in its totality. Some of the pre-demonetization measures such as Special Investigation Team (SIT) to find out the presence of black money overseas. The Double Taxation Avoidance Agreement (DTAA) between India and Mauritius and India and Cyprus was a significant measure taken in the recent past. There has also been an attempt to reach out an understanding with Switzerland on looking at Swiss accounts. Amending the Benami Transaction Act is yet another measure which can bring about changes in the landscape of black money. Income Declaration Scheme 2016 has also been incorporated as a measure to curb black money.

RISE IN BANK DEPOSIT AND TAX REVENUE

Bank deposits have increased several folds during post-demonetization. With the reduction of narrow money (M1), which is currency in circulation and demand deposit with banks, there has been an impetus to broad money. There are several inter-connected impacts flowing from the rise in bank deposit. The lending rate has taken a declining route and has affected inflation positively. Deposits seem to have outstripped loan growth by ₹10 lakh crore. The bank deposits have increased by about 12.5 per cent while credit growth is a paltry 2.3 per cent which is likely to keep the interest rate lower for a considerable amount of time. With Consumer Price Index (CPI) moving down to about 3 per cent range, it can be expected that liquidity enhancing measures will be able to boost expenditure without much trouble for inflation in the economy.

Tax revenue collection in almost 17 states out of 31has seen a rise and it has not seemingly been affected by demonetization. West Bengal, which earlier complained about fall in tax revenue, witnessed VAT to move up by about 11 per cent in November 2017. Top performers in VAT collection in December 2017 are Jammu and Kashmir (112 per cent), Assam (20 per cent), Maharashtra (17 per cent), Chhattisgarh (16 per cent), Madhya Pradesh (13 per cent, and Tamil Nadu (11 per cent). It is also expected that direct and indirect tax collection will exceed the budget target. This puts the economy on a sound footing to expand credit at a lower lending rate and also increase the pace of development.

It is high time that tax compliance and tax-base expansion is focused in a big way. As the present Finance Minister, Arun Jatley in his budget 2017 speech clearly pointed out that India is largely a non-tax compliant nation where direct tax collection does not seem to be correlated with the income and the consumption patterns of Indians. Out of 4.2 crore people in organized sector, only 1.74 crore (about 41 per cent) filed income tax returns. Out of 5.6 crore informal and individual enterprises, only 1.81 crore (about 32 per cent) filed tax returns. Out of 13.94 lakh registered companies, only 5.97 lakh (about 43 per cent) filed tax returns. Out of 3.7 crore individuals who filed tax returns in 2015-16, only 24 lakh declared their income as above 10 lakh, while number of individuals showing income above 50 lakh is only 1.72 lakh. Out of 76 lakh individuals who filed income tax returns in 2015-16, 56 lakh were salaried individuals. The figures turn out to be a big surprise for everyone when compared with expenditure patters in the similar period. In the last 5 years, 1.25 cars have been sold while over 2 crore people travelled abroad.

GROWTH SCENARIO

There has been a downward projection of GDP growth to the tune of about 0.5 per cent, from 7.2 per cent to 6.7 per cent. The International Monetary Fund (IMF) projection of India’s growth rate stands at 7.2 per cent for 2017 and 7.7 per cent for 2018 which looks healthy. This also indicates that IMF does not see the impact of demonetization on the overall growth of Indian economy. The World Bank has a better picture to present about the reality. It has projected a GDP growth rate of 7 per cent in 2016-17 while upbeat figures of 7.6 per cent and 7.8 per cent have been projected for 2017-18 and 2018-19, respectively. Interestingly, these projections have come about amidst three distinct global trends which have the potentiality to play down India’s growth prospects. First, there is a possibility of US Federal Reserve rate hike, second, there is a lot of uncertainty about international price rise of crude oil, and third, with the change in political climate in the United States, there is a possibility of the return of the protectionist policies. Nevertheless, there is also good news that world economy is likely to witness signs of revival, though marginally. The IMF estimate suggests that world GDP is likely to grow by 3.1 per cent in 2016 which will increase marginally to 3.4 per cent in 2017. This is likely to be accompanied by a slightly higher growth rate in emerging economies which is expected to be 4.1 per cent in 2016 and 4.5 per cent in 2017. Even the developed and high income economies of the world are likely to witness a marginal increase from 1.6 per cent in 2016 to 1.9 per cent in 2017.

The best part of the recent macro-economic performance of Indian economy is fiscal and revenue deficit management. The Fiscal Responsibility and Budget Management (FRBM) Review Committee has proposed debt to GDP ratio of 60 per cent by 2030, wherein 40 per cent will be for central government and 20 per cent for state governments. With this given framework in place, it is expected that the target for the fiscal deficit of 3 per cent of GDP for the next 3 years will be achieved. The fiscal deficit for the year 2017-18 has already been kept at 3.2 per cent of GDP. The situation on revenue deficit front is still more comfortable. For the year 2016-17, the revenue deficit stands at 2.3 per cent of GDP, while it is expected to go down to 1.9 per cent of GDP in 2017-18.

Nevertheless, the negative impact of demonetization on India’s growth cannot be ruled out. The clarity on whether this downward revision is all due to demonetization or some other structural factors still remains unclear. It is based on the presumption that the liquidity shock has reduced the number of consumers spending in a big way. Here again, the extent of fall in consumer spending is not fully known. It further presupposes that even after the Reserve Bank of India (RBI) replaced more than 60 per cent of withdrawn currencies, people are not bringing back this money for spending. In either case, it can be understood that this slowdown is temporary and it is just a matter of time when the growth rate will bounce back. The sector wise growth scenario is presented in Table 1.1.

Table 1.1: Gross Value Added at Basic Price by Economic Activities (at 2011-12 prices) Per cent Change over Previous Year

Source: Adapted from various sources.

It is evident from Table 1.1 that manufacturing has slowed down from 9.3 per cent to 7.4 per cent, while services which constitute more than 60 per cent of the GDP, and is likely to remain at 8.5 per cent in 2016-17 compared to 8.9 per cent in 2015-16. Agriculture, being a critical sector in many ways, has witnessed a higher projection and it is likely to show 4 per cent plus growth rate in 2016-17.

ACTUAL SCENARIO IN THE THIRD QUARTER OF 2016-17

The recently released data of third quarter growth of GDP suggests an optimistic and encouraging figure of 7 per cent as against earlier estimate on a bit lower side. This seems to have lent support to the argument that lower projection could not make it evident as to how much of it is due to demonetization. Interestingly, the estimation pertains to the worst hit demonetization period of October toDecember and it has been largely contributed by agriculture and manufacturing. As against second quarter when agriculture recorded a growth rate of 3.8 per cent, third quarter of 2016-17 witnessed a robust growth of 6 per cent in agriculture sector. Manufacturing presented a growth of 8.3 per cent in third quarter of 2016-17, while the second quarter witnessed 6.9 per cent. As evidenced from Table 1.2, other sectors which contributed to overall 7 per cent growth are mining, electricity and utilities, trade and hotels, and public administration. However, constructions and financial services seem to have performed lower in the third quarter in comparison to the second quarter.

Table 1.2: Gross Value Added at Basic Price by Economic Activities

Source: Adapted from various sources.

If we compare this scenario in the global context, we find that few years back India was facing a sluggish growth, but it developed the resilience of beating most of them, including China. All over the world, growth is structurally challenged due to several developments. For example, Brexit affecting the United Kingdom and European Union, and China falling into structural decline. India has emerged as an attractive market due to the smart combination of domestic markets, fastening the pace of reforms, and controlled debt and deficit situation. This ensures that India’s medium and long term growth prospect is not going to be marred by a short term decline in consumer expenditure. In fact, the macro-economic scenario in India has improved in comparison to the past and also to other emerging markets, including BRICS. India needs to hold on to its ground and carry on with big reforms which will enable the economy to move faster. It is all the more important in the face of political changes in the United States which can redefine globalization and send new signals.

DIGITAL PUSH

Digital in India got dramatically speeded up due to demonetization and emphasis on cashless economy was laid. Greater digitization is likely to transform and benefit directly many sectors. The one with the largest benefits are financial services, banking transactions, retail, telecom, payment gateway services, etc. The customer relationship management is undergoing a big change in post-demonetization time. It may further prove to be a game changer for digital economy. With more than 80 per cent cash transactions currently happening (Figure 1.1), India needs to move down to less than 50 per cent transactions in cash. The benefits in terms of transparency and accountability would be immeasurable. This will also have a remarkable impact on bridging the rural-urban gaps.

CONCLUDING REMARKS

The impact of demonetization looks disruptive but only for a short period while medium and long-term outlook is likely to be buoyant. The fact remains that downward revision in growth prospect is not due to structural factor but a temporary fall in consumer expenditure. As and when the cash is replaced, the demand will rise. The policy reforms should not stop and put to back seat. Panic about demonetization is not about the facts of the economy, but more about ideological disagreement fuelled by the slow growth projection. M.J. Akbar in ‘Modi’s Historic Move’ published in The Times of India on 28 December 2016 has rightly said: 90 per cent of India is honest, and this 90 per cent has been thirsting for someone to assault the pervasive monster of corruption with sustainable commitment. This India was willing to accept passing discomfort as the collateral price of the struggle against cancer.

When the results of state assembly elections are out there to testify a resounding acceptance of demonetization move by people and the policies of the government and when apprehension of slowing down of growth rate is put to rest with growth rate standing formidable at 7 per cent plus in third quarter of 2016-17. M. J. Akbar once again comes up with a brilliant piece, ‘The poor have embraced Modi, and the vote-merchants still don’t get it’, published in The Times of India on 12 March 2017. In this article M.J. Akbar writes: What surprised me most, however, was the huge misreading of demonetization, when the evidence to the contrary was so widespread.

CHAPTER 2

Diminishing the Digital Divide: Cash is Not Accepted!

Sheenu Jain

Taka mati, mati taka (Money is mud, mud is money).

– Ramakrishnna Paramhamsa

When we talk about distribution of wealth, it’s quite clear that we are living in an unequal world. While the entire talk about going digital and cashless sounds very hunky dory, the ground reality for people making the digital transactions is anything but satisfactory. Government’s move of going from ‘Cash to Cashless’ in a centrally planned way in a mission mode will have its own turbulence in the ride. It’s not so simple initiative which can be launched across the nation overnight in a country of 1.25 billion people, but it was sophisticatedly carried out to bring people on board. All that we need now is a mature system in place that will not make people recoil from electronic payments, but will rather become their personal choice.

THE CHANGE

The historical night of 8 November 2016 will remain in memoir for years to come. The demonetization move by the Government of India has crippled the system of cash. Propagators of cashless systems and fintech companies are relishing this sea wave of change. Going digital was the additional objective of the demonetization move or was it actually the prime objective is a question to ponder.

‘Scarcity is the mother of invention’ is an oft quoted timeless saying. This sounds significantly relevant in today’s context where cash crunch is pushing the country towards cashless and digital economy. Shortage of cash leads to rise in use of digital mode of payments, infrastructure development, and thrive of fintech start-ups. The actual shift will soon be visible in some time when there will be ease in the economy. There seems to be a consensus on the fact that a major chunk of people who adopted digital payments for the first time due to dire need of time will continue to transact digitally because of higher order of convenience that they experienced.

Digital India is one of the most beautiful dreams that this country has seen to lead itself in the twenty first century. What started as a notion of vision has become reality today and has also become an essential utility such as water, electricity, and gas. We begin and close our day by being online or by using some digital tools every day. Relevance of broadband highways have become equally important, vis-á-vis, national highways. Using digital infrastructure has become a way of life today and now it has become quite essential for the government to develop digital infrastructure at par with any other infrastructure development they are creating in the country.

Generation C (Connected Generation) by 2020 will predominantly be in a digitized world. Internet, mobile phones, laptops, tablets, computers, smartphones, texting and social media will become second landscape to this group. Their techno savvy attitude, mobile friendliness, and desire to stay connected with network will transform our consumption pattern. Digitization phenomenon is touching inflection point. India Inc. is rapidly moving towards digitization and its effects are becoming live all across the spectrum.

Three forces that are supporting each other to strengthen the same are as follows:

Consumer Pull

Generation C seems to be fully adaptive to digital environment and others seem to be following them. Generation C has a natural desire and tendency to be online every time and love talking, walking, shopping, sleeping all online.

Technology Push

BCG Research (2016), states that 1,000 million mobile phone users, 300 million internet users and 260 million smartphone users were in the country in 2015. This is expected to increase to 1,200 million mobile phone users, 650 million internet users and 520 million smartphone users by 2020 which clearly shows how India is moving towards becoming a digital country. Influence of digital technology is gradually increasing. Information highway in the country is building up and billions of consumers are availing today low cost internet bandwidth and using it for variety of reasons.

Economic Benefits

The real digitization benefits can be seized from economic benefits. Flood of capital has discharged into the digitization move and both private