Archive for December, 2016

Cashless, Corruption-Less? Can Narendra Modi Arun Jaitley Answer Hoards of Cash In ₹2000 Notes?

13 December 2016

Modi’s DeReMo {De and Re Monetisation} narrative shifted rapidly when facts encountered the fiction he spun. On 8th November DeReMo was sold as an “Encounter” of Black Money-75% {actually Black Cash} and Fake Currency-25%. He made almost every Indian, except the rich & powerful, queue up before the Banks & ATMs that ran out of replacement new currency notes very fast {even by 7th December, exactly 1 month after the DeReMo announcement, the situation has not eased out}.


Rural and small town distress was particularly acute. To make the pain bearable the narrative shifted within 5 days to it is a Patriotic duty of every Indian to face the ordeal with a grin: If soldiers stand vigil in “dangerous conditions” to guard borders 24×7, why can’t ordinary Indians do their bit in safe environs of bank queues just for 50 days to end the menace of terrorism. Hyper-nationalism was deftly sold: Do not fake currency and black cash fund the deadly fedayeen attacks like the one at Uri on 18 September? or stone pelting on security forces? Defence Minister Manohar Parrikar crowed on 15th November, “…there hasn’t been stone-pelting on security forces,.. PM has brought terror funding to zero,” and thanked PM profusely for the daring move {it is another matter that the stone pelting protests had already diminished in September and October but for the sudden eruption in Anchar locality on 3rd November}. The “Anti-Terror narrative” lay in tatters when new ₹2000 notes were found on two terrorists killed in Bandipora. The hyper-nationalist storm generated by BJP over Modi’s “successful” across border surgical strikes in Pakistan to destroy and demoralise terrorists was swept away by daily “patriotic queue-pain” of DeReMo’, when terrorists struck again at Army base in Nagrota killing 2 officers and 5 soldiers and thus underlined the failure of Modi’s twin “Daring initiatives” to neutralise terror {Incidentally, the devastating wars on Afghanistan, Iraq, Libya and Syria that US Presidents have waged in the name of Terrorism have proliferated terrorists not eliminated them; and the terrorists have already seen the backs of two presidents, Bush & Obama}. By 25th November, Modi changed, like a true chameleon, his colours once again and DeReMo became principally the vehicle to deliver “Cashless or Lesscash” India. The “cashless” was front loaded  and corruption free economy back-ended because Cashless-ness had become stark and cruel existential reality for most Indians.

Does cashless economy necessarily mean corruption free economy? If the aim was cashless economy, why is Modi re-monetising economy that too with higher ₹2000 and new ₹500 denomination notes? Just yesterday income tax department seized ₹10 crores in new notes {and today another catch of ₹24 crores is reported} in Chennai that almost doubled it’s earlier seizure of 5.7 crores in Bengaluru.    There have been other seizures of lesser hoards elsewhere. When rest of the country is in turmoil due to severe cash shortage, how did these individuals manage to lay their hands on freshly minted notes in such large numbers? Such massive leaks could have occurred en route from RBI/Govt Security presses to RBI’s Currency Chests to Commercial Banks or from the two storage locations in between or finally at the branch level. Does Modi know the answer exactly where? UPA’s two “grand initiatives”, Aadhaar Card to provide unique biometric identity to every Indian and Direct Benefit Transfer (DBT) to seed targeted beneficiary accounts through cashless-cash, were appropriated by Modi almost immediately on ascending to power. The purported gameplay was that shift to banking channels to transmit money to Aadhaar Linked A/c would put an end to the legendary corruption in the government machinery, which plagued the physical delivery channels like PDS, Fertiliser or cooking gas subsidies and cash payment to MNREGA workers. However, the banking channels look increasingly compromised too with hoards of new currency seized so far and therefore untrustworthy to safe keep the money of crores of illiterate, semiliterate, poor Indians whom Modi wishes to turn cashless metaphorically {literally he has already made his mark}. Estimates of black cash vary from a low of ₹1.5lakh-crore to Team-Modi’s estimate of ₹5lakh-crore. Income Tax department made a “record” seizure of ₹254 crore in cash in the first 7 months of 2016 during searches and raids, which is barely 0.16% to 0.05% of the black cash estimates. That means the quantum of new notes, which have leaked into influential grasping hands, must be much larger than the capacity of taxman to seize. Even before crores of Indians are adequately seeded with cash, the generation of black cash in new currency notes has already started in right earnest.

Cashless, Corruption-Less.

Does Cashless necessarily translates to Corruption-Less? Is going Cashless necessary and sufficient condition for a corruption free society as Modi is claiming? One needs to be wary of indexes prepared by putatively independent and unbiased NGOs and think tanks because they often have strong ideological commitment and are funded by superrich to serve latter’s hidden agendas. Biases also creep into the research design and methodology, which can significantly affect outcomes and rankings. Yet, many of the global studies emanate from these very organisations and one has to rely on them for some kind of “objective criteria” in the absence of any other. Transparency International prepares the corruption “perception” index (CPI), which is widely publicised and accepted as authoritative. The estimation of cashless consumer transactions (CCT) was done by Master Card, which suffers from conflict of interest as it wants to promote 100% CCT along with others like Visa, Global Banks and Payment gateways, who all would be major beneficiaries of cashless society along with consumer marketing giants. Take a look at the following table that shows CCT%, CPI-Rank and Macro-Economic Prerequisites Score (MPSC) to go Cashless for 34 countries.


Cashless Vs Corruption-2.png

(0) The highest rank in cashless transactions in held by Singapore, but it still uses cash for 39% of consumer transactions.

(1) If one takes India’s readiness to go cashless, then among the countries with comparable CCT (1% or 2%) Saudi Arabia (MPSC=57Score,CPI=48Rank), Malaysia (56S,54R) and Thailand (48S,76R) are far better placed than India (29S,76R) for conversion to digital money. Brazil with 43 MPSC score is not only better placed to go cashless, but already does 15% CCT or 7 times more than India. But still is perceived to be equally corrupt.

(2) Sweden (CCT=59%,CPI=3R), Netherlands (60%,5R) & Canada (57%, 9R) have comparable CCT% to France (59%,23R) and their cultural affinity would be significant; yet France does poorly on CPI in comparison. Canada (MPSC=91) is best prepared to go cashless, but still has over 40% cash-transactions. UAE (8%, 23R) has just 1/7th of France’s CCT, but is still reckoned to be not more corrupt.

(3) Two oriental economies, second largest China (CCT=10%,CPI=83R) and third largest Japan (14%,18R), both use cash in more than 85% consumer transactions but have widely different outcomes on CPI.  Japan’s CCT% is 1/4th of France, yet it fares better on CPI than France (CPI=23). This (and Singapore CPI=8) blows the myth that Asians are corrupt unlike western Europeans.

This also blows holes in the theory that going cashless helps remove or minimise corruption. There are countries with more cashless transaction but still with higher corruption index. Conversely, there are countries with heavy reliance on cash-based transaction, but still have low level of perceived corruption. Therefore,  “cashless” transactions are neither Sufficient nor Necessary conditions to  remove or reduce corruption. Yet, Modi’s desperation is evident when he roped in Nandan Nilkeni, Congress’s Tsar of Aadhaar (UIDAI), to realise his “dream of cashless economy”. Nilkeni’s UIDAI project enriched Foreign and Indian Digital service providers through lucrative contracts and now he has a chance to encash “Cashless-project”: “Earlier in the week, Nilekani had also appreciated Prime Minister’s demonetisation move and said that it would see a massive activation of digitisation of financial services in the country. “… what would have taken another 3-6 years to get rolled out, I now believe because of the urgency of the matter, will happen in 3-6 months,” ”.  Modi & Nilkeni seem to be familiar with Naomi Klein’s seminal book: “The Shock Doctrine: The Rise of Disaster Capitalism”. Modi has administered the DeReMo shock that has left people thoroughly bewildered. The field is now open to Nilkeni to impose Cashless transition before people realise what is really going on. Would it work? What are the risks?

(a) India is woefully ill prepared for transition to cashless society. Access to necessary infrastructure, that is digital connectivity/necessary equipment, especially in rural areas and small towns, is woefully inadequate and unreliable. For example, Uttar Pradesh has only double the number of ATMs than Delhi that have to serve 20 times more population spread over an area that is 160+ times larger. {Read: 5 Hurdles To PM’s Push For Cashless Economy, 4 Indicators Of India’s Cashless Growth–And Hurdles To Future Expansion}

(b) When one shifts the physical world to cyber world, one gets matching cyber crimes too. Highly educated and technology savvy people too have fallen prey to cyber frauds. A Padma-awardee and retired director of IIT-Kanpur lost ₹19 lacs, his entire life savings, in 22 fraudulent transactions over 2 days three years ago from his ICICI bank account. The case has remained unsolved. The biggest cyber heist took place early this year that aimed to siphon off close to $1billion out of (Central) Bangladesh Bank’s Nostro a/c with New York Federal Reserve, but mercifully only $101million worth of 5 “orders” were executed before Fed blocked remainder 30 transfers; one order was not executed due to spelling errors in beneficiary’s name and therefore net loss was “modest’” $81 million.  Cyber crimes in 2015 rocketed to 11,592 cases in India than over a decade ago; some 3855 cases rose out of greed. The unholy haste to shift very large numbers of literacy, especially cyber-literacy challenged people to cashless gateway would provide an easy and lucrative prey base to cyber predators. 3 callcenters in Mumbai scammed US-residents of ₹500 crores posing as IRS personnel. It was discovered thanks only to a tipoff from disgruntled employee. Cashless push would result in scams getting larger and wider in India. Police are as it is ill-equipped and ill-trained for crime-investigation: such as thefts,  robberies or homicides. When the arena shifts to cyber world, they would have to deal with highly sophisticated criminals with little idea of how to do it.


(c) Payee of Debit/Credit card or merchant-sites that debit bank a/c of buyer with latter’s concurrence have to pay a “convenience” fee for every time, which is a % of the value transactions, to the card issuing bank and the gateway providers like Visa, Master, ₹Pay, Bill-Desk or Tech-Process. On the other hand payer bears the fees charged for NEFT/RTGS transfers. When making high value purchases on card, like for gold or jewellery or diamonds, or fuel, the payee would add the convenience fee she bears to the value of purchases. Thus there is a definite cost to cashless transactions, which would ultimately reflect in the price charged for goods or services. Government too charges Service-Tax on service charges levied. Such transaction charges are akin to a Cashless Transaction Tax (CTT) collected by intermediaries much like the Banking Transaction Tax (BTT) proposed by Arthakranti, which too is levied on receiving/ credit accounts. But BTT proposed by Arthakranti in it’s scheme of things was in lieu of all other direct and indirect taxes save except the custom duties imposed on India’s external Trade. CTT would be in addition to existing taxes thus increasing the tax-burden.

(d) Savings held in cash also act as an emergency buffer against unforeseen calamities. Natural disasters, manmade disasters such as war/ terrorist attacks, or financial gridlock like it happened at the height of 2008 Great Recession in USA, have the potential to bring the Cashless system to a grinding halt. When such calamity strikes, it is these cash savings that can save families to tide over the immediate difficulties. That is the reason families hold on to some cash in most countries around the world. Confiscating that emergency buffer would be a sadistic assault on life. Poor people suffer far more in such situations because they have tiny or nil emergency buffers: may be in cash or in daily provisions.

Though people are trying to cope with their resilience and innate intelligence, many sections of economy have been devastated by removal of 86% cash at one stroke. Money circulates through economy to keep commerce moving much like blood moves through body to provide oxygen. Economy is facing the same severe shock that a person would face if he had a massive blood loss. There are no precedents that can guide as to how all this is going to end. However, indications available do not portend well. Modi vouches by helping poor, but the informal sectors where they earn their livelihood are hit the hardest. RBI’s Development Research Group in 2013 had said that with every percent rise in GDP the cash demand goes up 1.38 percent. Would the relationship work in reverse? Would every 1.38% drop in cash shave off 1% of GDP? One doesn’t know what the positive impact of whatever shift to cashless would make. But such massive and sudden withdrawal of cash and such a slow fortnightly infusion of new notes roughly @ rate of 10.6% of total currency stock of ₹17.98 Lac crores prior to 8th December would definitely have large negative impact.

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