Happy New Year 2017

Wish you a very happy and prosperous New Year!

Jayalalithaa Passed Away

The Tamil Nadu Chief Minister J Jayalalithaa, popularly known as Amma, passed away on 5 December 2016 at 11:30 pm at the Apollo Hospital, Chennai. The death followed a cardiac arrest she suffered on Sunday night.

The 68-year-old leader was buried in the presence of tens of thousands of mourners, with full state honors at Marina beach, Chennai, next to the memorial of her mentor and former chief minister Dr M G Ramachandran.

Her mortal remains were brought to her residence in Poes Garden on at 6 am Tuesday. She was draped in the Tricolor, the Indian national flag, and encased in a glass casket and placed at the Rajaji Hall for the grieving people to pay their tributes.

The nation is mourning the death of Amma along with the people of Tamil Nadu. The Tamil Nadu government has declared state mourning for seven days. Holidays have been declared by various state governments across India.

Life in Chennai and the rest of Tamil Nadu came to a standstill when news of her death spread with shops, educational institutions and offices remaining closed. The national flag was lowered half mast across India.

Several prominent leaders from all walks of life visited Rajaji Hall to pay their tributes to the departed leader, including President Pranab Mukherjee and Prime Minister Narendra Modi.

Meanwhile, O Panneerselvam, who has been the acting Chief Minister since Jayalalithaa was admitted to Apollo Hospital on September 22, was sworn in as the Chief Minister of the state.

Demonetisation to Derail Electoral Fortunes

Five Indian states are going to polls to elect their respective state legislature members in early 2017. The Election Commission of India is expected to announce the poll dates as soon as publishing the revised electoral rolls expected latest by January 15, 2017. The states going to polls are Uttar Pradesh (UP), Punjab, Uttarakhand, Manipur and Goa.

Elections in India are notorious for what is known as ‘buying of votes’ or ‘cash for votes’ practiced by some candidates and/or their political parties. The maximum limits of election expenditure for parliamentary and assembly constituencies have been prescribed by the election commission.

And it varies from state to state and it may vary from one election to the next election. For instance, the current maximum limit for small states like Goa and Manipur is Rs 8 lakh, and for a large state like UP, it is Rs 16 lakh. But, based on what was reported by news agencies during the previous elections, several candidates were spending in crores.

Where does all this money come from? Of course, it is an open secret that overspending depends on black money, which is amassed through corruption and other illegal practices.

In the past elections, liquor and cash were distributed liberally and openly to voters. All kinds of freebies, including electronic gadgets, clothing items such as saris, etc. were also distributed. These practices are also illegal. It is common sense that legally earned money cannot be spent in such ways.

One of the fallouts of demonetisation of high value Indian currency could be a substantial reduction in illegal election funding and spending. It is not that all candidates are corrupt. It is also not to claim that black money has been wiped out.

As news reports show, several people might have found ingenious ways to convert black money into white. That means cash for vote may still be at play in the coming elections, though the recent demonetisation drive might have dried up a substantial portion of unaccounted money that is usually hoarded in high value currency notes.

The Five States Going to Polls

The most populated state Uttar Pradesh will go to polls to elect 403 lawmakers for the Vidhan Sabha. The incumbent CM Akhilesh Yadav is seeking reelection of his Samajwadi Party (SP). His main rivals are the former CM Mayawati’s Bahujan Samaj Party (BSP), Bharatiya Janata Party (BJP), and the Indian National Congress (INC).

Punjab will go to polls to elect 117 members of the state Legislative Assembly. The ruling Shiromani Akali Dal (SAD)-BJP alliance, led by CM Parkash Singh Badal, may face tough competition from the Aam Aadmi Party (AAP), INC and BSP. Aawaaz-e-Punjab, a new party formed by Navjot Singh Siddhu and others, is expected to be in the fray independently, or in alliance with other parties.

In Goa, election will be held to elect 40 members of the state Legislative Assembly. The current CM Laxmikant Parsekar of the BJP is seeking reelection. The main rivals are the Congress (INC), Maharashtrawadi Gomantak Party (MGP) and Aam Aadmi Party (AAP).

Election will be held for 70 seats of the Vidhan Sabha in Uttarakhand. CM Harish Rawat and his party, the Congress, mainly face a tough challenge from the BJP. The Congress and BJP have ruled the state alternatively.

Election will be held in Manipur to elect 60 members of the state Legislative Assembly. The incumbent CM Okram Ibobi Singh is facing the main contenders BJP and the Trinamool Congress led by the West Bengal CM Mamata Banerjee.

No Black Money in India?

Here is a shocking possibility that there may be no black money hoarded in India. At least, that is what two reports seek to show convincingly, quoting government’s own data.

The IANS Story

According to an IANS story published by the Indian Express, the government may have a rude shock to find that there is no or negligible amount of black money hoarded in India. At least, that may be the outcome the data as on 30 Dec 2016 can reveal. Here goes the story.

According to various estimates, black money was pegged at amounts ranging from Rs 3 lakh to Rs 5 lakh crore. On Nov 8, the value of Rs 500 and Rs 1000 notes in circulation was Rs 15.44 lakh crore. Out of this, as of Nov 28, the RBI said, Rs 8.45 lakh crore was deposited between Nov 10 and Nov 27 (banks were closed on Nov 9).

Commercial banks are required to keep a cash reserve ratio (CRR) @ 4% with the RBI. On Nov 8, CRR was about Rs 4.06 lakh crore, deposited mostly in high value notes. The cash-to-deposit ratio is 4.69%, which leaves 0.69% with the banks as cash in hand, which works out to approx Rs 70,000 crore.

The sum of CRR and cash deposited in 20 days is approx Rs 12.50 lakh crore. If you add Rs 50,000 crore from cash in hand, the total amount of high value notes not with the public works out to Rs 13 lakh crore.

At rate at which old notes are deposited or exchanged since Nov 8, Rs 2 lakh crore or more can come to the banks in till Dec 30, taking the total to above Rs 15 lakh crore, “thus throwing to the winds all calculation of the government to tackle black money”.

This report says, “Either the black money is not in high denomination notes or those who have such money may already have put it back into the banking system”.

The Wire Report, Quoting Economist Arun Kumar

Economist Arun Kumar estimates that over 95% of the old high value notes may come back to the banking system. The government had estimated that up to Rs 3 lakh crore of these notes may not come back into the system.

As of Dec 1 2016, nearly Rs 11 lakh crore of the old Rs 1000 and Rs 500 notes were back in the banking system, with about a month more left to deposit the old notes. According to the report, small and medium scale businesses, which hold 40% to 50% of the demonetised notes, have found ways to push back money into the system.

He further reasons that the sudden increase of deposits in Jan Dhan accounts, the entire amount of Rs 29,000 crore is from just 3 crore accounts out of the total 25 crore Jan Dhan accounts. That means, 3 crore Jan Dhan accounts were used to launder money. Had these been genuine deposits, they would have been spread evenly across 25 crore accounts, not just 3 crore accounts.

My Take

The sudden announcement of demonetisation was an rude shock to most people. They invented ingenious ways to exchange/deposit their money.

One of the ways people found was to buy gold from jewelers who reopened shops and continued selling their stocks till they lasted on the night of Nov 8/9, charging exorbitant prices.

There are reports of people using the bank accounts of others, apart from Jan Dhan accounts as mentioned above. There were millions of bank accounts which were either dormant or rarely operated accounts many of which could be used by hoarders. Also, there were such accounts offered on hire.

Then there were some bank officials who colluded with money hoarders to exchange notes illegally, and many such officials were caught red-handed.

Temple accounts and accounts in cooperative banks were misused. Post offices, railway, petrol pumps and many other agencies were authorized to exchange/receive banned notes. Taxes and bills of utilities such as electricity and some others could be legally deposited using banned notes.

Practically every department of the central and state governments was involved in exchange/deposit of invalidated currency. All these present several millions of legal and illegal opportunities to launder money for those who really had black money. And they used the available opportunities.

Those who suffered untold hardships were the poor people and those who were not black money hoarders.

Handling Payday Rush Post Demonetisation

Banks, private sector, governments and public sector enterprises are bracing up to face the challenges that will unfold during the first payday season since the sudden notes ban announcement. Banks across India are getting ready, though reluctantly, to face a massive rush for cash.

Though salaries get credited to the accounts of employees, they need to withdraw cash either from banks or ATMs. This will double or triple the queues that are still found before ATMs and bank branches. Additionally, a vast number of ATMs are still not recalibrated and hence unusable. Added to that, even before the expected payday rush, ATMs used to be emptied out no sooner than they were replenished with cash.

That means, longer queues, and a huge loss of working days on a national level. Besides, the restrictions on withdrawal of cash will be another impediment. This will put additional pressure on banks to fill up their ATMs and to permit higher withdrawals to reduce the queues.

The demonetisation of high value currency notes announced on November 8 took 86% of cash out of circulation all on a sudden. The result is a huge cash crunch affecting almost all people, especially the lower middle class, farmers and the poor.

So, whoever could manage to exchange old notes or withdraw from their accounts are hesitating to spend except for basic and urgent necessities. This resulted in an artificial cash shortage because money as usual did not go into circulation. That means, newly printed notes would not get back to the system as fast as expected.

Well before the payday season, the government and banks have been preparing to deal with the situation, but not, expectedly, enough. As per reports, banks are expected to see disbursal up to 30% more than usual due to withdrawals from accounts of salaries and pensions.

Ever since demonetisation was announced, the Reserve Bank of India (RBI) was planning to meet the challenges of the first payday rush. Accordingly, the RBI has promised ‘there will be improvement in cash supply’ to meet the rush, and there will be more new Rs. 500 notes.

However, several bank branches did not get the new Rs. 500 notes at all. Only adequate supply Rs 500 notes will ease the banking system. It is because this particular denomination has been the standard one for easy transactions. People are reluctant to receive Rs 2000 notes as they are difficult to use for daily transactions.

After cash crunch hit people, Rs 100 notes took the role of Rs 500 notes too. Banks too were dispensing this smaller denomination, making its circulation increase by 150% since demonetisation. And, people have started hoarding Rs 100 notes also, resulting in more crisis.

Though the weekly withdrawal maximum limit has been fixed at Rs 24,000, several banks have imposed their own limits, saying they cannot allow more than Rs 10,000 for shortage of notes. Even withdrawals from Jan Dhan accounts have been limited to Rs 10,000 a month, at least for now.

What can be understood from various reports is that, though government security presses are trying hard, they are unable to print enough currency to replace the banned notes to meet the demand. The problem is not with disbursing banks, but with the supply of notes. So, till the government can supply sufficient number of notes of the required denominations, the problems are likely to continue. And the withdrawal restrictions will also continue.

Let us see how the payday rush worsens or eases the current crisis.