Wednesday, November 30, 2016

Demonetization – ‘Time to Party or Not yet?’

The बकबक Never Stops Here!

Demonetization – ‘Time to Party or Not yet?’

This is not a post from an economist but a keen analyst of facts and factors. I have just tried to apply some logic and mathematics to certain economics figures to understand the larger perspective of Nov'16 demonetization in India.

Every second post on demonetization is accolades showered on the step taken ‘as something out of the World’. While actually demonetization is a primary method to tap money in the market when the administration has lost control over it. It’s among first few lessons of Economics, practised by Tuglak as early as in 14th century. What the PM did isn't anything innovative but something daring. Most of us are just going ga-ga over this 'daring-step' without realizing that it may prove foolhardy too. 

Coming to my main agenda which hasn’t been talked about much, is the mathematics of figures and why it is too early to party. I have used figures extensively to substantiate my submissions, but you may skip them if you wish because they are not must to understand the overall context and conclusion. 

Opposition’s Bandh flopped and 8.45 Lakh crore deposited in banks in three weeks already. Isn’t it a reason to party?
Yes, if you were a bank, desperate for cash like many of them, till a few months back. But if you are a common citizen, then hold-on, try to understand and analyse the situation before you uncork the champagne.

Have a look at this..

India ranks as the 14th richest country in the World with national wealth of Rs. 381 Trillion from all sources. (FACT 1)

The country’s total Population is 1.25 Billion (FACT 2 as the PM claims in his speech time and again).

When the Demonetization of Rs. 500 & Rs. 1000 was announced, the Govt in its affidavit mentioned that there are around 16 Lakh crore rupees in the market in form of these notes and its intention was to bring them to books (bank-accounts). (FACT 3)

500 & 1000 constituted 85% of our total cash so the total cash including all other denominations = 18.8 Lakh Crore (FACT 3A)

Moreover the Govt expects 12 lakh crores remittance (around 75% of the total cash in the market FACT 3) (let’s call this FACT 4)

Now from the population of 1.25 Billion we can work out number of families assuming average 4 members per family = 31 crore

Let’s assume another modest figure of Rs. 25000 per household which they keep for general expenses. This is average for four persons and most of us kept this amount in Rs. 500 notes which is the most convenient denomination given the fact that Rs. 100 doesn’t even stand a single transaction at any shop. 

So the cash in form of 1000/500 notes with Aam Janata = 7.81 Lakh crore (FACT 5)

So the 500/1000 notes cash left with so-called black-money hoarders = (FACT 3 – FACT 5)
= (16 LC – 7.81 LC)
= 8.19 Lakh Crore (FACT 6) Almost 50% of the money in market.

Cash deposited in banks from 9th Nov till 29th Nov in notes of banned denomination = 8.45 Lakh crore (FACT 7)

Here it is obvious that Aam Janata whose cash holdings are genuine will definitely go to the bank and deposit it. People who have unaccounted wealth will do their tricks to save their penalties and taxes as usual. So assuming the total money with Janata as in FACT 5 is deposited. 

Also as per the 75% achievement of its target, the total so called Black-Money received pegs at (FACT 4 – FACT 5)
= 12 LC – 7.81 LC = 4.19 Lakh Crore (FACT 8)

Black-Money recovered = (FACT 8/FACT 6) = 51% (FACT 9)

Black-Money returned to the hoarders after taxing 85% penalty* = (FACT 8) X 15% = 62800 Crores 

Tax and Penalty earned = 3.56 Lakh Crore (FACT 10)

India’s Budget Deficit (2016) = 5.32 Lakh Crore (FACT 11)

Reduction in Budget Deficit (2017) = FACT 11 – FACT 10

                           = 1.76 Lakh Crore = 67% (FACT 12)

Black-Money unrecovered and thus expunged from System 

           = FACT 6 – FACT 8 = 4 Lakh Crore (FACT 13)

So Govt’s currency liability decrease = currency appreciation = (FACT 3A)/(FACT 3A – FACT 13) = 27% (FACT 14)

Now Govt can either reduce the currency liability and increase the value of our money by 27% or print fresh currency equal to FACT 13 i.e. destroyed due to black-money unreported if the Govt wants to maintain the liquidity keeping currency liability same as on date.

In the latter case, extra money available at Govt’s disposal is equal to FACT 13 which can further reduce the budget deficit by (FACT 12 – FACT 13) = - 2.24 Lakh Crore (FACT 15)

Negative deficit means surplus. Viola! India will have Budget surplus of 2.24 Lakh crore..!

So it’s too early to party now. As a common man it doesn’t matter to me as how much money the banks have collected during this period. As a common man what matters to me as what change the whole process will bring to the system given all inconvenience it caused to the masses. 

The demonetization has been presented as a quick-fix remedy for most of our financial woes. But unless I see it translate into a budget surplus or currency appreciation or both (wishful thinking), all this exercise hardly matters to me.

Currency appreciation means Rupee should strengthen against dollar. And 27% means a good Rs.18-20. Simply put Rs. 50 = 1$.
This 27% appreciation should also translate in lower petrol price (Rs. 50 per liter) and of course gold falling to below 25k.
Can't we Party on account of the other side-achievements of this mission?
No, the news that the new currency notes can’t be counterfeited isn’t true, so one of the biggest benefit pitched initially has been already withdrawn. 

No, India going cashless, was neither the original goal, nor can it be a secondary goal. Is it the insecurity of the mission failure that we are banking on such by-products? We are not ready infra-structure wise for going cashless. We can’t switch into top gear when the car has yet to pick-up it’s speed. 


So guys, let’s hold back for a while rather than joining the party right away with our banker friends. 

Another twist in the story is from the very first clue FACT 1. Total National Wealth.

Did you notice our total currency FACT 3A is less than 5% of our total wealth? So all this we are doing for two months was to deal with 5% of the wealth out of which max 50% is black so just 2.5% of the disease we are targeting?

Out of the total 381 Trillion of rupees, 95% is held with 100 richest guys in the country. So how much is that?

= 362 Trillion which is 4400% of the wealth we are targeting with this demonetization. What about it?
Aren’t we doing ‘Penny-wise Pound Foolish?'

This wealth comprises of real estate, stocks, assets, bullion, forex, all and sundry. We are just trimming hair of this big teddy bear and calling it a success?

Now check out the other side of it. 

In the initial days of the demonetization we saw ultra rich guys panicking and checking everywhere the ways to save their ‘hard-earned’ money. A possible remedy that suddenly became hit was the dummy account route to convert black to white for some commission to the account holder. In the beginning the commission ranged from 30-40%. But these commissions rapidly dropped to 10% and now 5%. Why this must have happened? Because the supply of dummy accounts was much more than demand. So it went to the rock-bottom and suddenly the panic among the hoarders disappeared around mid of Nov. They found agents who could facilitate the conversions. This rampant opportunism is likely to send the whole demonetization gambit for toss.     
Let’s see how easy it is. For normal Saving Accounts, Bank deposits till 2.5 lakh per account aren’t to be questioned for I-T. For current account the cap is 12.5 Lakh if you have shown that much cash-in hand in your books.

Going by very conservative figure of 2 lakh deposit per saving-account, the number of accounts required to make the black-money white = (FACT 8)/2 Lakh = 2 crore

So if the black-money holders want; won’t there be 2 crore such people who will allow their account as parking space for some petty commission? Just under 2% of our population? Is it so difficult to find 3% opportunist account holders in our country?

This has sent the Govt in damage control mode when they found 65000 Crores deposited in the recently opened Jan-Dhan Saving Accounts and to try to control this suddenly several restrictions have been levied on Jan-Dhan account which again is causing harassment to genuine account holders. All these desperate measures reflect Govt.'s unpreparedness to deal with ensuing mess.  

If God forbid the benefits mentioned in FACT 14 or FACT 15 above don’t see the light of the day then this opportunism of 3% account holders shall have consumed the efforts of 1.25 billion people for 2 months to tap 2.5% of the Black-money the country targeted. There is also a possibility of the demonetization benefits again not reaching the masses as usual but let's keep that argument aside because this blog is assuming that the scheme is implemented in all its honesty and yet trying to prove that it is an impulsive or imprudent decision.  

We are putting all our energies, nerves, faculties to catch the tip of the ice-berg and even that is in danger of slipping away..


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