And Cash is Back to Being The King!

Well all that hullabaloo about Demonetization and Digitization seems to have faded and people seem to be going back to their cash friendly days. The famous words by Mark Knopfler of Dire Straits “Money for Nothing..!” can be rephrased as all that “Drama for Nothing...!” There’s been hardly any accountability for black money and hardly any improvement in internet services to facilitate digital India. But what did happen was UP elections were won, nay, swept up like never before by the ruling central government.

All that hue and cry about PayTm and Bhim App has kind of fizzled out a bit, the sparks for mobile wallets seem to have faded. A recent report by Hindustan Times, dated 9th of March, 2017 states that Digital payments are on the decline. Restaurant and sweet shop vendors that operate out of smaller outlets and whose businesses had been greatly affected by Demonetization, claim that their customers hardly opt for digital payments any more. Even flea market shop owners in places like JanPath and Lajpat Nagar in Delhi have reported a significant shift towards cash payments by their customers.

So much for the huge marketing strategy behind BHIM (Bharat Interface for Money) App, which was launched by National Payments Corp. of India, even though it still has a huge subscriber base of more than 125 lakh Indians.

The drop in value and volume of transactions

The digital Transactions in December’16 in India were valued at Rs. 105.04 lakh crores, i.e approximately 9,575 lakh transactions, and this has apparently come down to 7,630 lakh transactions in February’17. With remonetization it’s become quite apparent that cash is the king and the most preferred source of transaction even now. Post remonetization, now the Govt. has withdrawn all restrictions on cash withdrawals from bank accounts as well as ATMs.

While UPIs show a robust usage, the number of credit/debit card, wallet and mobile transactions are showing a declining trend. Not only is availability of cash a reason, but also the taxes levied on card transactions are proving to be party poopers.  As also majority of outlets not having digital payment avenues.

The story revolving around ATM too continues to be that of a flip flop, where some ATMs are still running dry, especially during long weekends. 60% of money has only been replenished in the Indian economy, and that too in a country where 85% of transactions take place in cash. And, combined with the fact that Digital transactions are down, we are at a paradoxical threshold in our economy.

The recent RBI study throwing light on these facts, force us to mull about the fact that the entire effort to digitize the economy shouldn’t come to naught and the economy shouldn’t fall back into the limbo as before with a flourishing parallel economy that was proving to be a huge burden to national exchequer.

By:
Monica Mor
Sr. Faculty, INLEAD

How some of our Currency become piece of paper overnight

The demonetization of INR 500 and INR 1000 Indian Currency Note has come as a surprise to everybody. Whatever change is going to happen, but, this is the first time in my life when I have sensed that a person who is living on his liabilities, honesty and morality is feeling safe in this country. “Honesty is the best policy”, the saying, in fact, is now making much sense for the Indians. But, this isn’t the only change, which made Narendra Modi’s mind to take such a huge step, there were a lot of factors that bound him to do this. So what was that? Why this decision came into effect so sudden? Is it for unaccounted money? If yes, then what kind of effect will be seen, if that black money will become white or get captured by the country’s central body institutions. So many questions are raised.

Despite possessing legal earnings, Indians (Mostly in rural areas) accumulate their makings either at their home or lend them to the nearby surroundings. Even in the 21st century, when the banking network has spread more or less in every small area, money lending, the oldest form of business, is still effective in many areas.

With these changes, people who have a lot of legally earned cash in their pocket or at home, will have to deposit it in the bank before the date proclaimed by the government (30-Dec-2016). As it is legally earned money, it will surely be deposited in the banks (with id proof) and this will let the banks house surplus amount.

Now, talking about black money basically found in large digits i.e. crore or more than it undoubtedly carry INR 500 and INR 1000 currency notes, acquired through unrecognized or illegal ways, has no option other than to be destroyed or to be deposited. But, for considering the second option, they have to disclose it as legal income and have to pay heavy tax on it. So, how they’ll make it possible with these legal boundaries.No matter, if they found a way to make their income legal or they just get frightened, they have to pull out all the money that is not under the account of Indian government. Later on, it will help to minimise the total currency circulation in the Indian economy. As the currency circulation will be reduced, the inflation rate will also become negative, it is known as deflation. Although, deflation leads to unemployment problem, it increases the internal value of money as well.

So, the bottom line is: The demonetization of INR 500 and INR 1000 currency notes is such a positive move for the Indian economy as well a good lesson to those who are playing with Indian taxation policy. 

By:

Priyanka Sinha

Student, INLEAD

Black is Out & White is In

“It don’t matter if you are black or white…” sang Michael Jackson in his eponymous song Black or White. India’s chant is diametrically opposite “It matters if its Black or White!”, and no it’s not a racist statement, it’s all about the money that many have realized has ceased to be legal tender since India’s 9/11 (9^th of November).

At the stroke of midnight, 8^th November 2016, the Prime Minister demonetised all Rs.500 and Rs.1000 currency notes, rendering them worthless paper. However to not irk the common man they have been provided with time to convert their currencies into Rs.100s or maybe the new Rs.500s or Rs.2000s.

The idea behind this Master stroke

Master stroke, that’s what it is! The idea behind all of this is to curb the black economy that has taken gargantuan proportions in India. A parallel black economy was the reason behind very few people filing tax returns in India. With a population of 121 odd crores, only about 3.9 crores file their IT returns. (Economic Times, dated 10.11.2016) Those are the ones the Government is targeting & those are the ones who will be adversely affected.

Money being deposited in different bank accounts will be monitored, and any large sum deposited would come under Income Tax net. There is no immunity scheme in place. There may be a spurt in foreign currency purchases, gold purchases; and the respective rates have risen due to speculative effect. People may turn religious and deposit their black money, of no use to them since they can’t declare it, in Dan Patras.

Drawbacks to this idea

There may be mushrooming of middlemen across India who for a 10% – 30% commission may offer to convert high denomination notes to smaller ones. The temples if benevolent enough, can convert the offered black money into smaller denominations. Money for temples is tax free, and they can go ahead and get their newly received cash donations converted in banks.

Micro Finance Institutions that deal largely in currencies while lending to or retrieving loans from farmers. They may have to hold off their work for a few days. The biggest setback was 1500 points fall in Sensex on the 9^th of November. By 10^th it had gone up by around 250 odd points.

Purchase of consumer goods & automobiles and fine dining will see a drop in the coming few days. Online shopping will see a decline, where Cash on Delivery is the most preferred mode of payment. But all of this will be short term, in the long run consumers and companies will get used to the new systems and mechanisms put in place by RBI.

What happens to the demonetized 500s & 1000s?

Well, if you have black money and cannot declare it or get it deposited in your bank account, you have to destroy them (don’t burn them, there’s enough pollution in the air already)! So what will RBI do with all the old notes?

They have to handle the truckloads of demonetized currency notes rather delicately. All money will be shredded minutely such that they cannot be reconstructed. They will then be passed through a humidifier to be converted into briquettes, which are then given to contractors who mostly use them for land filling. They may even use some briquettes for sale as souvenirs, or for artistic or commercial purposes, as is done by Federal Reserve in United States of America.

That’s the story of how Black has become White in India, and we will along with westerners be celebrating “Thanksgiving to our Govt”.

By: 

Monica Mor

Sr. Faculty, INLEAD