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| December 02, 2016 |
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Impact 
Saving is advocated as a good habit, but for many, it becomes a task. Come the 1st day of every month and most people end up spending almost half their salary on household expenses, utility bills to pay; we can't forget school fees of children; oh yes, credit card payments need a special mention–the claims are plenty.
This month might be an exception, not because household needs have reduced or our saving habits have improved overnight. Demonetisation has created a situation where our own hard-earned money can’t buy us things that we want. Why? Because we have less access to it. Ironically, our passbook shows how much we own but there are limits on actual withdrawals that change too frequently.
Many ATMs have run dry again. Payday claims (first since the demonetisation) on cash were too high, and money available in the system for disbursal was too little.
People have started losing patience as every day has become a payday for them. They are wasting productive time by queuing up helplessly outside banks.
An insider account of a banker who spoke to the Economic Times on the condition of anonymity would sum up the situation at the ground zero level. “We are only getting around 20% of the daily cash that is required by us in order to get the entire ATM network of the country up and running in a normal manner.”
A retired RBI official had a counter view though. Speaking to Economic Times, he said, “Payday worries are overdone. The scarcity of currency is also because people are hoarding cash that was earlier easily circulated.”
Large banks receive more cash, but unfortunately many poor people have bank accounts with small banks which are starve for money. The Government has set a limit on weekly withdrawals, and many banks don’t have enough cash to satisfy this outflow.
The misery doesn’t end there. Rich and middle-income families have atleast 2-3 bank accounts each, unlike them, many poor families have one account and many a times with regional co-operative banks that are burdened with additional restrictions.
The capacity of a wealthy or a middle-class family to withdraw cash is far higher than that of a poor family.
India’s Prime Minister has asked the citizens to cooperate for 50 days. Unfortunately, many families who have gone jobless because of the Government’s draconian decision can’t survive without food for so long.
The state of small and medium scale businesses reinforce the feeling that the Government has dealt with the situation ham-handedly.
Cash dependent industries such as textiles, transportation are on the brink of a collapse. Many business owners have no money to pay to their labourers. Even if they pay by cheque, banks have no cash to dispense. Unlike the ones drafting policies, for the poor, sitting in air-conditioned offices in New Delhi and assisted by half a dozen support staff, poor people don’t have surplus funds to bank on in times of uncertainty. If they don’t earn every day, they struggle to support their families and feed their children.
If you visit the tea gardens in Assam or in Kerala, you will witness a unique problem. Many tea estate owners there have cash to pay, but they only have Rs 2,000 notes. Now, the trouble is many daily wage labourers earn about Rs 200 to 300 daily, a few dexterous labourers manage to earn even upto Rs 400-500, but none of them make as high as Rs 2,000 a day. Tea estate owners can’t give advance salaries to so many of them nor can they hold back wages for a week’s time. As they are left with no other option, tea estate owners have been paying Rs 2,000 collectively to a group of 6-8 labourers. They are then spending one Rs 2,000 note co-jointly. Some markets in Indo-Nepal Border towns have resorted to Nepalese currency. Isn’t it an attack on India’s sovereignty?
Proponents of demonetisation had been drawing attention to the situation in Kashmir getting back to normalcy post demonetisation. However, the terrorist attack at Indian army base in Nagrota near Jammu diffused all such claims. A terrorist in Punjab managed to flee from the jail (without cash?), although he was nabbed later.
While the legitimate businesses are cooling off, seasonal businesses are mushrooming. Renting one’s account to black money holders, standing in bank queues to replace/deposit another’s money to name a few.
Instead of solving the common man’s problems, the Government is trying to promote digital payments (at the eleventh hour). The result is? Banks will now have an additional task of installing about 10 lakh card swiping machines at the Point of Sales (PoS). Such bizarrely high targets given to the already burdened banking spine only proves the lack of preparedness to the current Government. Interestingly, these machines are mostly imported from China and Malaysia. To satisfy this unexpected bump in demand, global manufacturers of these devices may take some time. Ramping up their production abruptly isn’t feasible.
Roping in experts such as Mr Nandan Nilekani and appointing crisis managers like Mr Chandrababu Naidu at the last minute wouldn’t palliate the pain of tormented citizens. They might be quite capable in handling their responsibilities adlib, but they are no messiahs nor do they have a magical wand to satisfy the Government’s whims and fancies.
Well, claims of digital payments and its promotion, both are vastly detached from ground realities. For instance, can passengers buy instant railway tickets using their digital wallets? Are all Government offices well-equipped to receive digital payments and more importantly is enough training provided to the Government employees on cashless payments?
As per the RBI data, Indian banks had issued a little over 71.23 crore debit cards until August 2016. By any standard, this number is far lower than the 1.25 billion population in India. Most urban families obviously have more than 2 debit cards at least; it means there would be many families who don’t have access to plastic money. The majority of people who have debit cards, use it primarily to withdraw money from ATMs. Outside metros and tier I cities, credit cards are a rare commodity, better not talk about them.
Cyber security is another issue. India doesn’t have adequate cyber laws to protect users against malpractices; implementation is another matter.
There’s no need to trivialise the issue by drawing the attention to cases of hacking individual social media accounts. But let’s recall that not very long ago the data security of 32 lakh debit cards in India were compromised at various levels.
The Government would have done a lot better had it assessed the situation well and learned something from the global experience. In the transition phase (from demonetisation to remonetisation), Greece preferred to stamp the old currency and allowed it to be used for the transaction. Later, it printed new drachmas and citizens were asked to exchange them for stamped money.
The Modi Government could have done something similar, but probably it wasn’t even confident of being able to protect the rubber stamps. Alternatively, the rot in the system is so deep that the Prime Minister thought the black money holders would have used their influence to get their notes stamped without depositing them in banks.
The everyday struggle of the ordinary man is the price that India has paid for what we call ‘a clean-up drive’.
On entirely different note… read this tiny story
A person went to a dentist as his rotten molar needed to be uprooted. The dentist just plucked it out without giving topical anaesthesia to the patient and didn’t prescribe any painkiller either. The patient kept wondering if the doctor’s brain was numb when he entered the clinic that day.
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Impact
The Government is trying to promote its agenda of financial inclusion, eyeing an unprecedented surge in the deposits in Jan Dhan accounts post demonetisation. As per the data sourced from the finance ministry, there are about 26 crores Jan Dhan accounts that collectively hold deposits worth Rs 73,000 crore. As against that, there are only 9.72 crore people opted for Suraksha Bima Yojana and 3.06 crore for Jeevan Jyoti Bima Yojana. On the other hand, Atal Pension Yojana remains even less popular. It has a base of just 37 lakh subscribers.
The good part is, the Government has already clarified that, “Banks will not push these products but just educate such accountholders when they come to withdraw or deposit.”
The only question remains, will the sales teams of banks consider the overall financial situation and risk profile of a person before selling these products?
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Impact
The United Opposition is observing ‘Jan Akrosh Diwas’ — to protest against the torture common man has gone through, post the demonetisation move of the Government.
Ordinary people who don’t ‘hoard’ black money, use plastic or digital money in a limited way are suffering. Cash dependent businesses are struggling, daily wage earners, agricultural labourers, and even small and medium enterprises have hit a rough patch. These are the evident side-effects of demonetisation or maybe the effects of bad planning, one could call.
Nevertheless, the positive is the ‘black money’ crackdown has been a body blow for some big hoarders And that’s probably why ‘Jan Akrosh Diwas’ may end without any significant participation from the common man.
A fact remains that many black money hoarders have smartly turned their cash to gold, while others have deployed it to pay ‘token money’ to purchase real estate. Some holding heaps of cash have deposited huge sums in another’s bank account hoping to evade the scrutiny of taxmen. Besides, you may have even seen and read about people burning old Rs 500 and Rs 1,000 bank notes.
To read more about this story and Personal FN's views over it, please click here.
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Impact
From liquidity deficit, the Indian banking system has moved to relatively comfortable position-- thanks to the deposits post demonetisation.
But in the absence of vibrant credit demand, the excess cash has now started to create a problem, disrupting the Indian bond market. Banks aggressively invested in sovereign bonds and even placed money into reverse repos — a window through which banks park their surplus liquidity with the Reserve Bank of India (RBI) and earn interest on it. Besides, they also invest in liquid funds to fetch a tad higher returns vis-à-vis reverse repo.
But the central bank recently asked banks to maintain an ‘incremental Cash Reserve Ratio’ (CRR) of 100% on increased Net Demand and Time Liabilities (NDTL) between September 16, 2016, and November 11, 2016. In other words, banks will be forced to hold a bulk of the fund flows they receive for the time being. The ‘incremental CRR’ is a short term arrangement which, RBI says, would be reversed soon after other options to absorb excess liquidity become exercisable. The normal CRR in the meanwhile remains unchanged at 4.00% of outstanding NDTL.
This has turned the tables for banks. Until recently, banks benefited immensely. Post demonetisation, people rushed to deposit scrapped notes, which helped banks grow their Current Account and Savings Account (CASA) deposits rapidly.
To read more about this story and Personal FN's views over it, please click here.
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Call it a farce or a revolutionary step, the fact is demonetisation is inconveniencing several Indians. The RBI has failed to supply adequate cash, and disproportionate disbursal has provided a few banks with an upper hand in rationing cash.
Banks with currency chests are better off. For example, the SBI holds more than half of total 4,000 currency chests across the country. This makes it possible for the nation's largest bank to circulate cash across its branches, both urban and rural. The contrast is that private sector banks, especially smaller banks, have a fewer or no currency chests -- another lacuna. The situation in urban areas might have improved, but the story in the rural India remains ugly.
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Stabilization policy: A stabilization policy is a macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. On-going stabilization policy includes monitoring the business cycle and adjusting benchmark interest rates to control aggregate demand in the economy. The goal is to avoid erratic changes in total output, as measured by gross domestic product (GDP) and large changes in inflation; stabilization of these factors generally leads to moderate changes in the employment rate as well.
(Source: Investopedia)
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Quote: "A market is the combined behavior of thousands of people responding to information, misinformation, and whim."- Kenneth Chang
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