A Directionless Radar?
‘Much ado about Nothing’
On 8th Nov at 8 pm,
demonetisation of Rs 500 & Rs 1000 notes were announced and was called as Surgical Strike on Black Money. These notes, as per the announcement, would no longer be remained as a legal tender from 12 o'clock midnight of 8th November, 20l6.
It claimed to be a master stroke or a surgical strike which would eradicate black money from the economy as the Black money was said to be one of the major impediments to India's economic growth.
As per GOI Gazette notification the purposes were of three—a) to remove fake currency which had inundated the market; b) to cleanse the economy from unaccounted / tax evaded money which were stored in the form of Rs 500 & Rs 1000 currency notes; c) to stop the external funding to terrorist activities through fake currencies.
The total currency value in circulation is approx 16.4 lakh crores. Out of the total value, around 85% was in Rs 500 and Rs 1000 notes! So suddenly within three hours the currency notes held in Rs 500 & Rs 1000 were declared as invalid tender as it is assumed that all black money in the economy is stored in these two currency notes. The effects were—banks were not having adequate valid currency to give away to citizens for their day-today transactions in replacement of old notes, ATMs were dry, plastic money was not, an acceptable transaction medium to all, digital transaction is little far fetched. The earlier notes were collected in the bank in huge quantity with no commensurate exchange quantity or mechanism. It was also claimed that funding of terrorists through cross border supply of fake notes in the country will come down drastically.
Till 7th December, that is within a month approximately, the deposit of the outlawed tender crossed rs 11.7 L crores which is around 70 % of total currency and 83 % of the cancelled tender. But where is the equivalent new currencies? It became a total failure. Now to move away the focus from this crisis, Government is coming up with new idea of digital transaction in India which is the global capital of hunger, poverty, illiteracy, subhuman living condition and poor health system!
Paradoxically,the percentage of black money in the system is estimated not more than 11% out of total currency in circulation! Balance 90% is in white. So to catch these black money, if at all, the entire nation's monetary system was thrown to the winds with accentuated public inconvenience. It is reported that 100 people so far died standing in the long queue to withdraw paltry sum from their account.
It is a real chaos, trading came to a virtual standstill, transportation systems have been stalled, the commodity transactions are suffered from supply shortages leading to price rise, the poor people's savings in the form of cash suddenly are declared invalid currency etc etc. Rhetorics, histrionics, big queue in front of the banks and public stage sobbing by political leaders are shown in the news channels. Political leaders immediately appeared in media to sympathise with the public sufferings! The condition of public misery is beyond anybody's doubt to exchange these so-called invalid tender.
It is interesting to note how the claims of government are getting substantiated.
It is also stated that that India is lagging far behind the developing countries to utilise plastic money. So it is another surgical measure to introduce plastic money or cashless society to make the economy more efficient.
While on the subject, one should bear in mind that the gross NPA of the bank is written off to the tune of 1.12 L crores by the govt recently. The collection of Rs 11.7 L crores of old currency is estimated to surpass the NPA of the nationalised banks.The estimated NPA of the PSU banks is to the tune of rs 5.95 L crores as on 31/03/16. It is created by the corporates by non refunding of the debt. If with the influx of these cash govt can set off the NPAs by provision in banks’ balance sheets, the corporate houses do not need to pay back this money and can be written off without affecting bank financial statement. On the other hand the corporates will go scot free and can draw further money from the bank, with renegotiated interest rates, ought to be lower than the previous time! Banks will be resorting to new loans as the idle cash will not fetch any revenue for them.
It is perhaps an opportune time to explore a few basic questions which are also in the public mind.
Currency is basically a medium of exchange which brings equivalence between products/services and the beneficiary. It evolved in the society initially in the form of metal coins, thereafter in the form of paper currency because of easy availability and convenience. RBI is the mandated agency in India to monitor the flow of money in the society. RBI or the central bank releases the legal tender of higher denomination of currency for circulation in the economy, Currency has got two usages—for transaction and for liquid assets creation to meet any exigency in the future.
The first part i.e. transaction is designed to facilitate the exchange of the products/services with known or unknown beneficiaries. For example the rice growers exchange the excess rice after own consumption with another agency to buy dresses etc. The barter economy, the initial stage of commodity transaction, was evolved into monetary media because of distant transactions or delayed transaction. Typically it is denoted by C-M-C formula. It means commodity (C) is converted into money to buy further commodity. The Commodity (C) is sold to get cash (M) and the transaction continues to buy further commodity (C). The equivalence between two commodities is governed by money (M). The profit process similarly can be denoted by M-C-M' cycle. The M is deployed to buy C and it is sold to generate earlier M plus extra amount denoted by M'. Here M-'M is the surplus money generated through this transaction. The question is whether M'-M is within the purview of legal disclosure.
The second part of the usage of the currency is its asset usage. It has grown to keep the liquid asset in hand to meet urgent requirement/exchange. Especially from 2000 it has made a quantum jump because of distinct shift of the economy towards Service sector from earlier Industry or Agri focus. A big amount of transaction is now-a-days conducted in cash in the society depending upon the requirement.
Genesis of currency has made a dramatic turn after globalization of economy and with the onslaught of global finance capital specially for the developing nations. The share of high denomination currency out of total currency circulation was 16 percent in 1971. It went up to 26.7 percent in 2000-01. It made a quantum jump to 78.7 percent in 2010-11 and finally to 86 percent in 2015-16. The reason for this indiscriminate rise of currency circulation is certainly not for black money, counterfeit notes or terrorist funding. Counterfeit notes as per different agency estirnaton is not more than 1 percent.
The actual reason may be attributed to shifting of sectors contribution in the GDP composition The combined contribution of agriculture and industry together came down drastically in the total GDP. The phenomenal rise of service sector and trading market coupled with the rise of informal sectors activity actually resulted this current growth scenario. It entailed the higher cash transaction, hence the enhanced requirement of excess currency in the economy.
This creates unhealthy and unstable economic growth as primary sectors are punctuated to support the stability of the economy. In previous eras economy was damped from global crises because of the agriculture & industry dependence. With new shift of finance capital from primary to tertiary sectors the economy will be more prone to external shocks on the fragile base of agriculture and industry coupled with high inequality of wealth distribution and virtual absence of public expenditure on health, education, medicine, housing, mobility, dresses, irrigation and minimum food support. The base of Indian economy is fragile both from domestic demand and export demand.
As stated earlier currency has got two aspects. The first one is transactional part i.e. is based on commodity or service buying and selling. The second part is for liquid asset purpose. In order to face any contingency and time loss to withdraw money from banks or any securities, people keep certain amount of cash in hand and as well as in bank in the form of liquid asset. The first part that is a transaction is usually measured by the currency versus nominal GDP ratio which is called velocity of currency. It is seen that the income velocity has declined during the last 10 years. On the contrary, the money supply has been accentuated. It clearly shows the rising liquid assets.
Is demonetisation a new step in India? Certainly the answer is NO. It happened several times in this country. But every time it was confined within higher currency notes like 10000, 1000 etc which were not even 2% of the total currency in circulation. Most of the common people did not see even these notes during that time. But in 2016 demonetisation shook the economy as the 500 & 1000 rupee notes are of 85% of the total currency in circulation with population either in the form of exchange wallet or in the form of liquid asset.
In Jan 1946 the first demonetisation happened in the form of wiping out Rs 1000, Rs 5000 & Rs 10000 notes from the system. The proportion of these notes in the circulation was minimal. In 1954 these notes were again introduced. These notes were ironically again got demonetised in 1978 with promulgation of High Denomination Bank Notes Act 1978. The demonetisation in 2016 November is the third demonetisation activity. In 2016 demonetisation it spread across 86% of the currency circulation vis a vis miniscule percentage in the previous time. Moreover during earlier periods more than 50% of these high denomination notes in circulation were at Govt treasuries but this time as per RBI estimation around 95% of the circulation is with public. That is why 2016 demonetisation impacted the economy so badly and is creating such devastating situation in the economy, in conjunction with public misery. Every time in previous periods like the current promulgation, the objective was to curb black money as stipulated in their election manifesto with questionable result on arresting the formation of black money finally.
In truth no money can be termed as white or black as explained by Prof Prabhat Patnaik. It is commonly understood that the money which is hidden from tax ambit is called black money and stated to be hidden in sacks or underground like any folk lore.
Black money is basically a process by which the (M'-M) is generated without payment of any tax. Black money is not a stock of money but is the flow of money. Money can earn additional money by flow or circulation. The durability of stock of money can be long or short.A business cycle typically depends on various factors, primarily driven by the nature of business. In any working capital cycle money can be blocked as cash or in the form of work in progress, finished goods, raw materials, receivable, payable etc. It is the black activities which are required to be curbed to arrest the generation of so- called black money.
The so-called black money once generated is converted very fast in other forms such as Gold, Foreign Currency, Stock Market securities etc. A very negligible sum is stored as cash currency. These currencies are actually current liquid assets kept by the middle class, agriculturalists, poor class and traders. It is also kept by the housewives or poor families as they stay far away from the dream world of bank or plastic money etc.
There are various black processes in the economy today:
1. Under Invoicing—When the materials are passed through customs/ excise check posts the actual product can be of, say, 100 number but the invoice is for 90. It evades the notices of authority by mistake or by pact, the excess 10 number will be paid by the receivers in cash. By this the sender is getting the proceeds in black and the beneficiaries are getting the product at cheaper price (without duty).
2. Under stated production—The actual production is hidden from excise disclosure and the excess quantities are sold in the market without bill.
3. Over Pricing—The products are billed in Rs 110 against the negotiated price of Rs 100. The excess money of Rs 10 received by the sender is deposited to overseas account of the beneficiary.
4. Kickbacks—For any sale of property or assets a portion of money is transacted in cash without any knowledge of authorities. This money is again recirculated in the economy in cash purchase or cash loan.
5. Govt Contracts—It is now customary to deposit cash in foreign currencies in overseas account in order to get any governmental contract, be it aircraft or arms or in railways.
6. Foreign Banks deposit—It is now well known that sizable portion of black money is held at foreign banks which are not accounted in India.
7. Bureaucratic & Political Corruption—Scams are now-a-days so much publicised, such scams which are innumerable in number and value.
8. Money lending/parking—A large chunk of so-called black money, not only generated but also channelised in the white routes through these informal financial sectors such as religious trusts, Nidhis, Chit Fund, Hundis etc.
9. Construction/Professional fees—This is another area where the amount is transacted in cash in huge quantity.
With the passing of days the capitalism is changing its earlier colours based on the self-created crisis trap. The process of generating surplus has undergone sea change in the recent period.
The earlier barter system was graduated to capitalist system with the advent of currency. In order to further enlarge the scope of capital after fulfilling the domestic demand, the overseas markets were targeted. It was driven basically with the idea of cheap raw material sourcing, cheap labour resource and new market expansion. On the third stage, industrial capital thus formed suffered from inadequacy issue. There after idle finance collected from public with an assured low return and deployed in the industry to make a fusion between industrial capital and banking capital. This enlarged the scope of further investment on technology and capacity of commodity production. It was further facilitated due to the discovery of new market and invention of technology.
In present days the scenario further changed to M-M' formula from earlier M-C-M'. The idea is—without any involvement of commodity the money in service sector will bring further profit either by knowledge trading or security trading. The example is Capital or Portfolio market where the securities are traded. IT sector is multiplying their capital by deploying knowledge based service. Large chunk of money has been infused in the form of Foreign Portfolio Investment (FPI) in currency or in metal or in security markets from overseas.
In developed countries in order to control monetary dynamics, central bank some time purchases the Govt Securities—short and long term, and trade these securities at near zero coupon rate. Due to low yield the capital migrates to the countries which are politically stable, having higher return and has good cash circulation. It is of short term tenure contrary to earlier overseas industrial capital.
The capital thus employed in service sectors can be withdrawn also any time if the return and stability of any other country or in their home country becomes higher compared to the country where it is invested now. The stability of currency is also of paramount significance. This is called flight of capital. In the recent Neo-Globalisation era the flight or exit of capital has been made virtually seamless. This is why the Fed rates in the US is of utmost importance for the developing nations where these finance capital is deployed. Any upward movement of interest rate will result into withdrawal of this capital from India.
No doubt it is the middle class, trading community, labourers, farmers etc. are the most affected people. The major employment in India, to the tune of 80% is veering around these sectors. Most of these people are in abject poverty as well. Dreaming for a bank account or plastic card is a distant dream for them. The dependence on money lenders will go up.
The cashless society or cash needs society depends mainly on the nature of economy as stated by Pronab Sen, Director and former Chairman of National Statistical Commission. With high informal sectors activity in the economy the cash requirement in the country ought to be high. The developing countries' need for cash is limited. Whereas the informal sectors dominated countries or expansionist countries or developing countries, like India will require more cash. As per Sen it is silly to look at Cash to informal GDP ratio. It is important, he argues, to look at cash to informal GDP ratio separately. It ought to be very high and natural.
The requirement of fund is very high for example in village (agricuitural sectors where 70% of population is engaged) during sowing season. It is natural that during that time the high denomination notes will be in circulation depending on the price of inputs. So to dispense with high value notes does not bear any meaning.
The activity in the informal sectors are growing due to spike in Service sector. This will also enhance the growth of informal credit system which is carried out in cash. This process has got the potential to become black, yet unavoidable in the existing types of economy in the long run.
The black processes as mentioned above will not be controlled by demonetisation, in the long run, without any reference to curb the processes. It can just punctuate or defer the black process for the time being. So to expose black money without touching its overseas fund parking pockets, is just a political rhetoric.
Counterfeit notes in circulation are too small an amount to comment upon. Yet with technology and machine advancement it can start any time with new notes even.Funding the terrorists with these notes are equally of no significance. If these activities still grow by leaps and bounds it depicts the inefficiency of Government or Bureaucracy. The check and control mechanism of Government is to be addressed instead of going for such politically motivated methods.
The present surgical activity on so-called black money or counterfeit money is 'much ado about nothing'. It cannot solve any concerned issues. With more cash with banks the further lending rate reduction is imminent. It will only help the corporates to swindle more money to inflate their overseas bank account! The misery of common people will continue as most of them are residng far away from the dreamy ATM, Net Banking, Plastic Card world. The spread of Digital transaction can always be taken up by curbing the supply of currency rather than putting the common people in hardship. Moreover with the existing printing capacity of RBI it will take close to one year to print equivalent number of new notes. The only silver lining is for RBI as they will reduce the liability of currency lenders and treat it as windfall income.
1. Frontline—Interview with Pronab Sen, Dec 9. 2016 issue.
2. Demonetisation : Witless and Anti people—Prabhat Patnaik : Nov 9, 2016.
3. EPW—Lost due to Demonetisation.
4. EPW—Demonetisation : J Dennis Rajkmar & S L Shetty; 1978, the Present and the Aftermath, Nov 26, 2016.
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Vol. 49, No.26, Jan 1 - 7, 2017