100 Days of #Demonetization. Citizens’ Protest on 19th February 2017.

demonetization-poster

The highs of demonetization when the Government can’t be LYING low.

Countering the Economic Emergency imposed ON the people. 
The Government has redefined Democracy, A form of Government BY the people, FOR the people, OF the people and crucially, ON the people. Rather than democracy, Demonetization has shown what DEMONcracy is all about. Please join in huge numbers on the 19th February 2017 for a Citizens’ Protest and shout out to the Government that Enough is Enough. 

#Demonetization #100DaysofDemonetization #CitizensProtest #JantarMantar

 नोटबंदी के 100 दिन 

धरना और रैली

19 फरवरी, 2017, रविवार , 12 बजे से 

मंडी  हाउस  से जंतर मंतर तक 

जंतर मंतर पर जनसभा और सांस्कृतिक कार्यक्रम

इसमें कोई गुंजाईश नहीं कि पिछले 100 दिनों में भारतीय जनता आर्थिक आपदा से जूझ रही है. 8 नवंबर 2016 की रात को प्रधानमंत्री ने 500 और 1000 के नोटों का विमुद्रीकरण कर इनके चलन को अवैध घोषित कर दिया और दावा किया कि इससे कालाधन पर रोक लगेगा, कर चोरी रुकेगी, आतंकवादी गतिविधियों के फंडिंग पर रोक लगेगी और जाली नोटों पर लगाम लगेगा. जिनके पास ये नोट थे, उन्हें जमा करने के लिए करीब 2 महीनों की मुहलत दी गयी और निकासी के लिए  भारतीय रिजर्व बैंक ने कई स्तर की सीमाबद्धता निर्धारित कर दी. भारतीय अर्थव्यवस्था जो मुख्य रूप से नकदी पर आधारित है और इसमें भी एक बड़ी तादाद ऐसे लोगों का है जिसे इस पूरे आर्थिक तंत्र से बाहर कर दिया गया है, वह केवल और केवल नकदी मुद्रा पर निर्भर है. यह गुहार किया गया कि “फौरी तौर पर थोड़ी तकलीफ सह लें” क्योंकि यह देश की सेहत के लिए बहुत जरूरी है. प्रधान मंत्री का यह आह्वान था कि इस “तात्कालिक मुसीबत” को झेल लेने से भारतीय अर्थ व्यवस्था की सारी बीमारियाँ ठीक हो जायेंगी.

लेकिन हुआ क्या? पूरे देश की जनता अपने बचत को जमा करने और नोट बदलवाने के लिए बदहवास बैंकों की कतारों में लगने को मज़बूर हुई. नए नोटों के लिए लम्बी और अंतहीन कतारों में लोग लगे रहे. इन कतारों में कई लोगों की जानें चली गयीं, बीमारों का समय पर इलाज़ नहीं हो पाया, सामाजिक कार्यक्रम जैसे शादी और मैयत के लिए लोगों को दर-दर की ठोकरें खानी पड़ी और ताने ये दिया जा रहा था यह कि देश की सरहद पर हमारे सैनिक अपना खून देकर आपकी रक्षा कर रहे हैं, और आप थोड़ी तकलीफ नहीं झेल सकते? पर उनका क्या जिनका किसी बैंक में खाता तक नहीं है. या उनका क्या जो बैंक या एटीएम से काफी दूरी पर हैं,वो अपना  नोट कैसे बदलवायें? उन लोगों का क्या जो अपनी छोटी-छोटी बचत को जमा करने के लिए अपनी दिहाड़ी छोड़ कर दिन भर कतारों में लगे रहे? उन महिलाओं का क्या जो बड़ी मेहनत और जतन से किसी विपदा के लिए वर्षों से कुछ बचा कर रखीं थीं? उन करोड़ों रुपयों का क्या जो कोआपरेटिव बैंकिंग सिस्टम में बचत कर के रखा गया था, जो अभी भी मुख्यधारा के बैंकिंग तंत्र से कोसों दूर हैं, लेकिन ये कई राज्यों में  करोड़ों लोगों के पैसे को हिफाज़त से रखते हैं? जो लोग इस मुसीबत को झेल रहे थे, मालूम हैं उनके लिए पी.एम. मोदी का समाधान क्या था? 9 नवंबर को लगभग तमाम अखबारों में विज्ञापन दिखा “अभी एटीएम नहीं पेटीएमकरो”

ऐसी क्या मज़बूरी थी कि सरकार यह नहीं बताना चाह रही थी कि अस्थाई मुसीबतें कैसे हमारे जीवन को, आजीविका को और अनौपचारिक क्षेत्र की अर्थव्यवस्था को स्थाई रूप से तबाह कर देगी . सरकार को पता होना चाहिए था  थ कि इस कदम के लिए न तो आरबीआई और ना ही बैंक पूरी तरह से तैयार थे, और यह कदम उल्टा पड़ सकता था. प्रधानमंत्री को यह निश्चित तौर पर मालूम था कि इससे कालाधन पर रोक नहीं लगेगा. अमेरिका-मेरिल लिंच बैंक के एक अध्ययन के मुताबिक अनुमान है कि सकल घरेलू उत्पाद में 25 % धन काली अर्थव्यस्था का है और इसमें महज 10 प्रतिशत हिस्सा ही नकद रूप में है. यानी कि 90 फ़ीसदी कालेधन का कभी भी नकदी के रूप में प्रयोग  नहीं रहा.  यह सच्चाई श्रीमान मोदी, श्रीमान जेटली और श्रीमान शाह अच्छी तरह जानते थे. आखिर क्या वजह है कि सरकार उसी जनता से लगातार झूठ बोल रही है, जिसके वोट से ये सत्ता में आये हुए हैं. आखिर किसके हितों को इस नोटबंदी के जरिये साधा गया.

जहाँ तक जाली नोटों का सवाल है, RBI का आंकड़ा दिखाता  है कि करीब 90.26 अरब भारतीय मुद्रा के नोट 2015-16 में चलन में थे, इसमें से मात्र 0.0007% ही जाली नोट थे. 2015-16 में इन नोटों का कुल मूल्य मात्र 29.64 करोड़ रुपये था जो कुल चलन में 16.41 लाख करोड़ रुपये का महज .000018 फ़ीसदी ही है. नोटबंदी का वास्तविक असर जैसा कि ढिंढोरा पीटा जा रहा था, बहुत ही आंशिक रहा . पुरानी कहावत  है कि “एक चूहे को पकड़ने के लिए पूरे घर को जला दिया गया”. इस नोटबंदी के पीछे यह भी तर्क दिया गया कि इससे देशद्रोही गतिविधियों के लिए फंडिंग रुकेगी. लेकिन क्या आज तक एक भी उदहारण देखने को  मिला जिससे कि आतंकवादी गतिविधियों में कोई रुकावट आयी हो? यदि कुछ प्रभाव पड़ा भी तो महज क्षणिक ही प्रभाव रहा जबतक कि नए नोट बदल नहीं लिए गए. नए  2000 और 500 के नोट पुराने 1000 और 500 के  नोट से कहीं ज्यादा देशद्रोही गतिविधियों के लिए माकूल हैं. तमाम गतिविधियों में नकदी का चलन बहुत छोटा हिस्सा है, यह ना तो आतंक का प्रेरणा स्रोत है और ना ही आतंकवादी गतिविधियों का मूल कारण. केवल एक ही दहशतगर्दी दिखी, वह थी सरकार द्वारा देश की जनता पर चलाई गई आर्थिक दहशतगर्दी.

आखिर यह पूरी कवायद क्या थी. हम भारत के लोग, पूरी शिद्दत के साथ अपनी आवाज बुलंद करते हैं कि हमें किसी अतिमानव (सुपर हीरो) की जरूरत नहीं जो अलोकतांत्रिक ढंग से काम करता हो और हमें सपने दिखाता  हो, और सपने बेच कर हमें उल्लू बनाता हो. हमें जनपक्षीय सरकार की जरूरत है ना कि कॉर्पोरेटपरस्त आर्थिक आपदा की. हम इस प्रकार के किसी भी आर्थिक और राजनीतिक  विमुद्रिकरण को अस्वीकार करते हैं, और पूरी शिद्दत के साथ मांग करते हैं कि हमें पारदर्शी और जवाबदेह सरकार चाहिए जो वर्त्तमान सरकार के कुतर्क तर्क और झूठे दावे “हमें मालूम है लोगों को क्या चाहिए” को पलट दे. हम आधार स्कीम के तहत सरकार के तानाशाही और दमघोंटू मुहिम का पुरजोर विरोध करते हैं और मांग करते हैं कि इस मुहिम पर तत्काल प्रभाव से राजनीतिक और न्यायिक दखल कर रोक लगाई जाय. हम मांग करते हैं कि सरकार नोटबंदी पर श्वेतपत्र जारी करे कि लोगों की जिंदगी और उनके आजीविका पर कितना प्रभाव पड़ा है और इसका तुरंत हर्जाना दे. हम मांग करते हैं कि कॉर्पोरेट द्वारा “कैशलेस” मुहिम को तत्काल वापस लिया जाय.

Indian people have undergone nothing less than an Economic Emergency for the last 100 days. On the midnight of 8/11/16, in a single pronouncement, the Prime Minister of India made higher denominations of Rs. 500 and Rs. 1000 illegal tender under the pretense of curbing black money, arresting tax evasion, stopping funding of terrorist activities and counterfeiting of currency. Those who had these notes were given a time frame of less than 2 months to deposit them and withdraw new denominations in different slabs of limits set by the RBI. The Indian economy, which is predominantly cash based and the Indian people, a great section of who are financially excluded, existing solely on hard currency, would somehow have to manage through this ‘temporary crisis’ for the greater good of the nation. This was the call of the Prime Minister to undergo ‘temporary hardships’ to root out the ills of the Indian Economy.

And so what happened? The country panicked and people rushed to banks to deposit their cash savings, exchange high denominations and lines formed. Long lines, winding unending lines full of people waiting to deposit and get new notes. People died in those lines, many patients could not get timely medical help, many social functions – marriages and burials got drowned in questions of “why cant you suffer a little for the country, when soldiers are giving their blood in the borders to protect you”. But what about people who never had a bank account? Or those too far away from a branch or ATM to withdraw or exchange? Or those whose earnings were so marginal that they could not spare losing a day’s work waiting in lines? Or women who had painstakingly collected money for emergency over many years? What about those crores of rupees that was saved through co-operative banking system, still far away from the mainstream banking operations – but was safeguarding the money of crores of people in many states? Modi’s solution for those suffering was clearly evident on the morning of the 9th, plastered on almost every major newspaper “abhi ATM nahin, Paytm Karo.”

What the government did not tell us was that these temporary hardships would leave a permanent damage on lives, livelihoods and disturb a major chunk of the informal economy. The Government should have known that with underprepared RBI and unprepared banks, the move was bound to backfire. In retrospect, the Prime minister surely knew that demonetization wasn’t about black money; it wasn’t about funding the terrorists; and it certainly wasn’t about counterfeit currency.  A study done by Bank of America-Merill Lynch estimates black economy at 25% of GDP and quantifies the cash component at 10% of the above. Hence, 90% of black wealth was never in cash. A fact that was well known to Mr. Modi, Mr. Jaitley and Mr. Shah. Why did the Government then lie to the citizens of India who voted them to power? Whose interest are being pushed through demonetization?

As for counterfeiting, RBI data shows that, of the 90.26 billion Indian currency notes in circulation in 2015-16, only 0.0007%, were detected as fake. The value of these fake notes in 2015-16 was Rs 29.64 crore, which is 0.0018 per cent of the Rs 16.41 lakh crore currency in circulation. The actual impact of demonetization is then so marginal that the ideology behind its application can best be captured by the old saying, “burning down the house to catch a mouse.” Seditious funding was also given as a reason for demonetization, but did we ever hear of any examples of how terrorism was halted by this move? Even if there was any impact, it can only have been temporary, until new cash replaced the old! The new Rs.2000 and Rs.500 note is as seditious as the old Rs.1000 and Rs.500 note then! Cash is merely one of many conduits; it is neither the source, the motivation nor the act of terrorism. The only act of terrorism seems to be by the government in economically terrorizing the entire population of the country.

So, what exactly was the drive for? We, the people of India, affirm that we do not need a superhero, who does not act democratically and instead is all about weaving and selling dreams. We need people oriented governance and not corporate driven economic emergency. We reject the economic and political premises of demonetization and affirm that a transparent and accountable government is required to replace the current logic of ‘we know what is good for the people’. We reject in totality the authoritarian drive to push the UID/Aadhar scheme down people’s throats and demand political and judicial intervention to stop the drive immediately. We demand that the government produce a white paper on the impacts of demonetization on people’s lives and livelihoods and compensate for the lives and livelihoods. We demand that the corporate driven ‘cashless’ economy plan be immediately withdrawn.

India’s Cashlessness Drive or A Rudderless Cacophony

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Is there a plus out of going less-cash dependent rather than  going cashless? Yes, on the negative interest rates issue, these appear to be better than Quantitative Easing to turbocharge an economy from a recession, BUT only in cases of advanced economies and definitely not in the case of an economy that is purportedly to be the fasting growing emerging one according to the whims, fancies and vagaries of WB/IMF statistics. Why is the case?

Presently, the interest rates are zero bound (though India is largely outside the bracket meaning all the more vociferously that this sudden sweep has been misplaced at the very top trickling down to the bottom in treacherous wringing. but imagine for a moment that India too faces this movement of rates towards the ignominious ‘0’), i.e. cannot fall below zero. And then there’s the sacred rule of

Real term interest rate = Nominal Interest Rate – Rate of Inflation

In 2008, with advanced economies like US having less rate of inflation the room to cut interest rates was pretty much restricted considering the US Fed had set a target rate of inflation as 2%. With a less-cash society the Central Bankers can set interest rates to negative which basically means that you need to pay the bank to hold your deposit. Now keep in mind that the debate is still out over whether the three tranches of QE actually did good.

The author (KR) acknowledges that negative interest rates might give rise to strange situations like for example in case of a bond holder – the borrower needs to pay the lender. Legal and administrative issues can arise but they can be handled as the payments due can be deducted from the principal in this case.

There’s one interesting alternative to negative interest rates shared in the book from the academic economic circles – the two currency system.

It calls for identifying as paper currency and currency in electronic form in banking system as two different. And it calls for an exchange rate when a person goes to the bank to deposit his paper currency which will ultimately be recorded in the banking system as an electronic form. This will give rise to three monetary instruments which the Central Bankers can then play with –

  1. Interest rates on electronic currency
  2. Exchange rate b/w Electronic and Paper Currency
  3. Forward (future) exchange rate

As these days the chatter increases about digital or crypto-currencies, Rogoff is of the view that these innovations are admirable but these currencies are at a major disadvantage as the govt. has tremendous power at its disposal to impose its will over them. But eventually, the technology like public ledger will be adopted, and that would eventually be taking off from #Blockchain.

Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely. A central theme of the book is that whereas advanced country citizens still use cash extensively (amounting to about 10% of the value of all transactions in the United States), the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts. Moreover, most of this cash is held in the form of large denomination notes such as the US $100 that are increasingly unimportant in legal, tax-compliant transactions. Ninety-five percent of Americans never hold $100s, yet for every man, woman and child there are 34 of them. Paper currency is also a key driver of illegal immigration and corruption. The European Central Bank recently began phasing out the 500 euro mega-note over these concerns, partly because of the terrorist attacks in Paris.

BUT SETTING AND IMPLEMENTATION IS VASTLY DIFFERENT

On implementation, however, India’s approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges. For example this is how the European swapped out legacy national currencies (e.g the deutschmark and the French franc) during the introduction of the physical euro fifteen years ago. India has given people 50 days, and the notes are of very limited use in the meantime. The idea of taking big notes out of circulation at short notice is hardly new, it was done in Europe after World War II for example, but as a peacetime move it is extremely radical. Back in the 1970s, James Henry suggested an idea like this for the United States. Here is what I say there about doing a fast swap for the United States instead of the very gradual one I recommend:

 “(A very fast) swap plan absolutely merits serious discussion, but there might be significant problems even if the government only handed out small bills for the old big bills. First, there are formidable logistical problems to doing anything quickly, since at least 40% of U.S. currency is held overseas. Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime. Foreign dollar holders especially would feel this way. Finally, any exchange at short notice would be extremely unfair to people who acquired their big bills completely legally but might not keep tabs on the news.

In general, a slow gradual currency swap would be far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences. One idea, detailed in The Curse of Cash, is to allow people to exchange their expiring large bills relatively conveniently for the first few years (still subject to standard anti-money-laundering reporting requirements), then over time make it more inconvenient by accepting the big notes at ever fewer locations and with ever stronger reporting requirements.

Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes.

MY PLAN IS EXPLICITLY TAILORED TO ADVANCED ECONOMIES

The idea in The Curse of Cash of eliminating large notes and not replacing them is not aimed at developing countries, where the share of people without effective access to banking is just too large. In the book I explain how a major part of any plan to phase out large notes must include a significant component for financial inclusion. In the United States, the poor do not really rely heavily on $100 bills (virtually no one in the legal economy does) and as long as smaller bills are around, the phase out of large notes should not be too much of a problem, However, the phaseout of large notes is golden opportunity to advance financial inclusion, in the first instance by giving low income individuals access to free basic debt accounts. The government could use these accounts to make transfers, which would in turn be a major cost saving measure. But in the US, only 8% of the population is unbanked. In Colombia, the number is closer to 50% and, by some accounts, it is near 90% in India. Indeed, the 500 rupee note in India is like the $10 or $20 bill in the US and is widely used by all classes, so India’s maneuver is radically different than my plan. (That said, I appreciate that the challenges are both different and greater, and the long-run potential upside also much higher.)

Indeed, developing countries share some of the same problems and the corruption and counterfeiting problem is often worse. Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes. Anyone turning in large amounts of cash still becomes very vulnerable to legal and tax authorities. Indeed that is Modi’s idea. And criminals have to worry that if the government has done this once, it can do it again, making large notes less desirable and less liquid. And replacing notes is also a good way to fight counterfeiting—as The Curse of Cash explains, it is a constant struggle for governments to stay ahead of counterfeiters, as for example in the case of the infamous North Korean $100 supernote.

Will Modi’s plan work? Despite apparent huge holes in the planning (for example, the new notes India is printing are a different size and do not fit the ATM machines), many economists feel it could still have large positive effects in the long-run, shaking up the corruption, tax evasion, and crime that has long crippled the country. But the long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move.

THE GOAL IS A LESS-CASH SOCIETY NOT A CASHLESS ONE

In The Curse of Cash, I argue that it will likely be necessary to have a physical currency into the far distant future, but that society should try to better calibrate the use of cash. What is happening in India is an extremely ambitious step in that direction, of a staggering scale that is immediately affecting 1.2 billion people. The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

The long quote is by none other than Rogoff himself on the viability of the Indian drive.

Demonetisation, Cashless Economy and PayTM

Disclaimer: This was written with specifically activists, grassroots movements in mind and is all set to be translated into Hindi after undergoing editions.

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Almost everyone remembers Narendra Modi’s full-page cover ad in leading newspapers, where PayTM congratulated him on the boldest ever financial decision made in Independent India. And almost everyone was stunned by the fact that the Prime Minister could actually endorse a private entity. Rewinding back, the date was 9th of November, an evening after Modi took the decision to demonetise Rs. 500 and Rs. 1000, stripping these bills of their legal tender pushing millions of Indians in a state of chaos with serpentine lines almost in every nook and corner of the country outside of banks and post offices either to exchange old denominations with new ones or deposit currencies in old denominations. With numerous fatalities resulting from this move, the Government is bent on marketing the rhetoric of cashless economy and has even announced a spate of tax exemptions and rewards for those going on to digital transactions. Recently, Chandra Babu Naidu, CM of Andhra Pradesh, who is often credited with floating the idea of demonetisation way back in 2013 expressed his utter helplessness in trying to get the situation under control, and the story is afloat across the political spectrum, but for the ruling dispensation, who sees this move as glorious in order to curb black money, counterfeiting, terror funding and tax evasion. But, for the last, the first three are misplaced as eminent economists from left as well as right have called demonetisation as sickly implemented bringing vainglory to the plan and extreme hardships on the common citizenry, which continues unabated even today. The logics have changed from the four parameters that demonetisation was supposed to effectuate towards going cashless, or digital. PayTM is one such intermediary that seems to have captured the imagination of the country. But, would this be the future of cashless economy, or would Indians be able to sink going cashless is too early to state at the moment. Let us turn our attention to what exactly is the scheme all about.

To begin, let us try and understand what is digital money. Ely, B.  in his Electronic Money and Monetary Policy: Separating Fact from Fiction says, “Digital money or electronic money is the money balance recorded electronically on a “stored value” card, often called “smart cards” that have a microprocessor embedded which can be loaded with a monetary value.” But, that is one form of such money, while the other form is network money, where the software allows the transfer of value on computer networks, particularly the Internet. Just like a travellers’ cheque, a digital money balance is a floating claim on a private bank or other financial institution that isn’t linked with any particular account. this money is issued by both public and private institutions and is raising concerns about the futuristic ability of central banks to set monetary supply targets, to which we would turn later. So, how does one envisage cashless economy for India? And before that, what exactly is cashless economy? Cashless Economy is when the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, and payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) in India. Since, India has been a cash-rich economy, post demonetisation, the government has launched itself into the cashless drive. But, before venturing any further, we must have to deal with statistics. In India, cash-to-GDP ratio hovers around 12%, which is enormously high and is attributable to lack of banking access resulting in high cash transactions; almost zero costs incurred in cash transactions; and a large unorganised sector with overwhelming majority of retailers, suppliers and service providers banking on cash rather than going the digital way.

Pros and Cons of cashless economy for India:

The cashless economy has its own advantages. The transaction costs are coming down and will further go down. Once a substantial part of transactions are cashless, it would bring down the cost of printing, managing and moving money around. Further, the cashless economy automatically solves the problems of cash out on long holidays, risk of carrying currency notes etc. Further, the lesser use of cash strangulates the grey economy, prevents money laundering and increase tax compliance. Increased tax base would result in greater revenue for state and greater amount available to fund the welfare programmes. Lastly, Cash being material, can be prevented from circulation but electronic channels alleviate this friction and increase circulation of currency.

But, it also has its series of disadvantages, and for a country like India, these are gargantuan, for the basic prerequisite to going cashless is Internet literacy, and whatever may be ascribed to India being a IT giant, its large swathes of population are still bereft of the basic of network and communication technology. Even if India is touted as the largest growing smart phone market in the world, the permeability isn’t much to hope for as a significant population of the country resides in pockets where networks either are weak or do not have any presence. Apart from this, hacking and cracking pose a serious danger as digital wallets, how much ever secured they are touted to be are vulnerable to security breaches where encryption-decryption keys could be easily manipulated and therefore used for vested and malicious intent. The third important danger to be factored here is biometric usage in accessing cashless-driven economy, where rates of failure are high with concomitant hardships faced by the consumers. These cons counter the pros in making cashless economy a distant dream and there is indeed a long way to venture before the Governmental claims can make this happen and turn this into a reality through a magical wand.

Anyways, moving on, what are the prerequisites of bringing about a cashless economy? Enabling access to banking is a pre requisite to promote cashless economy. A robust payments mechanism to settle a digital transaction is also needed, though the National Electronic Funds Transfer and Real Time Gross Settlement services. The Reserve Bank of India will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development. This part is definitely undergoing a sea change as the role of RBI seems to have undergone precisely that under the Chairmanship of Urjit Patel. The expansion of telecom and smart phones would provide a digital shift to the economy in near future. The private sector the driver of this change. Government is also mulling to provide incentives for electronic payments for example waiver of tax when electronic settlements are used, which it has already initiated. But moving back the circle, the question remains whether India is ready for this cashless transition? Looking at the reports published by the Economic Times, while the jury is still out whether government’s move at demonetisation to arrest black money would backfire, one thing is certain that it has brought digital in the centre of payments debate, and as banks and vendors are trying to capitalise on the country’s severe cash crunch, the verdict of going cashless would all boil down to the people. As ET asked, will this shove finally make people conscious of the cost of cash?

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Consider this Trilogue,

At a fish vendor, an erudite lady buys fish and wants to transact the purchase with the vendor using her debit card. An esquire is in the queue eavesdropping on the conversation.

Lady: So, do you accept payment through cards?

Vendor: Not by cards, but you could PayTM me. 

Lady: Isn’t it true that while suing PayTM, you are being charged 1.5% as surcharge that goes to the Government? 

Man: No, it isn’t 1.5%, but hovers between 1.5% – 2.5% depending upon the volume of purchases. 

Lady: So, it goes to the Government, right?

Vendor: (exasperatedly) To the Government? No, it goes to the company. 

Lady: But, isn’t PayTM a Government undertaking? 

Vendor: (shockingly) From all that I am aware of, it is not Government-owned or Government-run,  but the money goes to the company. 

Man: PayTM has nothing whatsoever to do with the Government, as it is a purely private company/corporation/institution. 

Lady: (anguished) Then why is it that the Modi Government is advertising for a private corporation? 

The trilogue isn’t fictional, but happened a couple of days back in Delhi’s upmarket INA, and narrated by a colleague of mine, who incidentally happened to be the esquire in the conversation.

But, it needs to be noticed here that Paytm had scrapped the merchant transaction fees for offline transactions (i.e. while using Paytm for payments at physical shops) back in Feb 2016, which means the merchant also need not bear any extra cost while accepting payments through Patym.

Welcome to the world of PayTM.

PayTM, owned by One97 Communications, is a digital payments platform that allows you to transfer cash into the integrated wallet via online banking, debit cards, and credit cards, or even by depositing cash via select banks and partners. Using the money in the PayTM wallet, you can pay for a number of goods without using cash. PayTM Wallet, as mentioned above, is the digital payment instrument where you can transfer money from your bank account or credit card to use for transactions on the platform. You need to set up an account using your mobile phone number and email ID to setup a PayTM account and transfer cash to the wallet. You can add up to Rs. 10,000 in a month in the Wallet; if you want to increase the monthly limit, then you can get the KYC (Know Your Customer) processor done. With this, you can have up to Rs. 1 lakh in the PayTM Wallet at any point of time. No, the obvious question is: is this digital wallet safe and secure? PayTM – which is an RBI-approved wallet – says it keeps the money you put in the Wallet is “protected under Escrow account with a reputed bank.” PayTM uses Verisign-certified 128-bit encryption technology, which means that the secret key used in transactions is a sequence of 128 bits and does not reveal anything about the password length or contents. The platform is PCI DSS 2.0 certified, which means it does not store credit card data in unencrypted form. Technicals aside, PayTM could be used for online as well as offline payments. By online would mean, payment over the internet, and by offline would connote scanning the Quick Response (QR) code/barcode along with an OTP, One Time Password to realise the payments at a vendor’s.

PayTM is an e-commerce fin-tech web portal with services in online shopping based out of NOIDA in the National Capital Territory of Delhi. Owned by One97 Communications, Vijay Shekhar Sharma is the CEO of the firm. In March 2015, Indian industrialist Ratan Tata made personal investment in the firm. The same month, the company received a $575 million investment from Alibaba Group of China, after Ant Financial Services Group, an Alibaba Group affiliate, took 25% stake in One97 as part of a strategic agreement. Paytm borrowed 300cr from ICICI Bank in March 2016 as working capital. These three make up for the chief funding sources of the firm.

Let us focus on how PayTM works and how it earns its share of monies or profits? Once a user registers on PayTM, it creates a escrow account (virtual code) against which a ledger is made with an entry of Rs.10k (Rs. 20k till Dec. 31, 2016). Whenever a buyer adds some money to PayTM wallet, a debit entry is created in the ledger account with the amount entered by the user. Suppose, a buyer enters Rs. 1000 and keeping the maximum limit of wallet to Rs.10k then in the ledger a debit entry will be created with Rs.1000 and the balance will be shown as Rs.9000. Now suppose the user makes a transaction of Rs. 500 from the wallet, then a credit entry is created in the ledger with Rs. 500 and making the balance amount to Rs.9500 and wallet balance to Rs.500. Suppose the user receives a cashback of Rs.50 into his PayTM wallet. In this case again a debit entry of Rs.50 is created on the ledger leaving the balance in the escrow to Rs. 9450 and wallet balance to Rs. 550. PayTM is more about escrow economy. PayTM does recharges and bill payments. While Government entities may not entertain commissions to PayTM they surely hook the customer to PayTM’s wallet for payments because PayTM gives CashBack on all of these in the form of Wallet Cash which can only be redeemed against any payment made via its network and can be withdrawn into one’s bank account. It is important to note here that PayTM negotiates hard on the Settlement time to these vendors i.e. there is a time lag in which you pay PayTM and PayTM pays the Vendor. Assume Your Due date for payment of Light Bill is 1st of the Month – You pay it by that date, PayTM will release the same money to the vendor by say 8th of the Month (Your Electricity will not be disconnected because PayTM has given confirmation to the vendor that the payment has been settled) and thus PayTM in turn will make money out of the interest that it earns out of the lying deposits in the wallet.

How is PayTM any different from normal debit or credit cards? It is not feasible to physically carry point of sale (POS) machine to swipe the card at every location. Thus Payment Gateway comes to the rescue, The payment gateway, or PayTM in this case acts as a virtual POS on the webpage/portal to accept money. Lets assume a customer made a purchase of 1000 INR on the website of the merchant, the merchant did some 9 similar transactions in the week i.e. Total Value of Weekly sale is 10,000 INR, now at the time of settlement from the payment gateway (PG) to the seller the PG will get a discounted amount from the bank, since the PG has a higher bargaining power with the bank on account of its large transaction volume the bank agrees to cut down Transaction Discounting Rate (TDR) from 2% to 1.5% (assume). Thus the PG will receive (10,000 * (1-1.5%*(1+14.5%))) = 9828.25 INR and will further discount it by 1% (assume) to pass it on to the merchant i.e. the merchant will finally get about 9715 INR (9828.25 * (1-1% * (1+14.5%))). Thus in the whole process, the Card Issuer made the same amount of money, the bank made slightly lesser money on account of customer acquisition and the payment gateway made some money. It is not about promoting PayTM at all, it is as I said the escrow economy which economically/financially is better at cost-effectiveness that I (used metaphorically) would be most benefitted by. The larger picture is thus to be considered vis-a-vis debit/credit cards, where banks are charged higher by the issuers, even if these are bank-owned cards. For instance, a MasterCard issued by the SBI would have a charge that the SBI would be mandated to pay the MasterCard, which itself acts as a payment gateway.

To end this, I did mention about how the Central Bank, Reserve Bank of India in our case would be finding it challenging to decide on monetary supply with an economy that is increasingly going cashless. If electronic money is issued through the conversion of banknotes or sight deposits, it does not change the money supply and price stability is not endangered. However, if electronic money is issued as a consequence of credit, private issuers have incentives to supply additional amounts of electronic money as long as the difference between the interest charged on the credit and the one paid on electronic money covers the credit risk premium, the provision of the payment service, and possibly also the cost of refinancing. Given the low marginal cost of producing electronic money, its issuance could in principle proceed until the interest rate charged on the credit extended for the provision of electronic money is equal to the credit risk premium. This, by lowering the level of interest rates, could in turn endanger the maintenance of price stability. The risk of overissue would be limited by two factors which increase the costs of issuing elec- tronic money, thereby limiting its supply: first, in a competitive environment, electronic money balances could be remunerated; second, and more importantly, a redeemability requirement could oblige the issuer to possess central bank money. An even stronger measure, which could be con- sidered in the light of future developments in electronic money, would be to introduce a coverage requirement on electronic money, i.e. to request issuers of electronic money to cover part or all of their liabilities with base money. Another way to limit the risk of overissue would be to require rapid clearing of electronic money balances in central bank money. Thus, it appears that there are several reasons to assume that the risk of overissue of electronic money can be contained. However the issuance of electronic money may have an impact on the conduct of monetary policy, as I have been claiming for quite a time now. Or else, switch to bitcoins!!!

blockchain-ledger

Demonetising and Cashless Economy: a difficult alliance rooted in compromise

This is a brief intervention on the aspect of Demonetisation and India likely to go a cashless economy. Though, a lot of oral debates and narratives are being featured around the topic, what saddens is the fact that cashless economy is hardly understood and then used as a tool to pare this whole exercise. The disclaimer from me is to be once again stamped: Demonetisation undertaken is a huge implementation failure, whereas the mechanism itself has pros weighed in favour. Anyways, the pros have been discussed elsewhere and in plenty and thus I feel no need to get to it at the moment, while a post on it could be in the making in the near future. On to cashless economising then….

The thing with cashless economy is it is rarely understood in its complexity. And what really goes missing from discursive narratives about it are what governments do about the loss of seigniorage: the profit the government makes from making money. To a large extent it is thought through as letting gone of, which is what governments would rarely engage in due to fiat currencies. Minting coins and printing money is an expensive affair and is further aggravated with circulation costs. These things are to be carefully thought out:

1. Getting rid of fiat currencies and thereafter bringing on cashless economising means governments ridding themselves of fiscal policy responsibilities and rippling through central bank that would be ridden off setting of monetary policy frameworks. This is extricating the government of its sovereign rights and it is a bit hard to believe minimum government maximum governance would be a realisation of it. Thus going cashless is expensive and hence best avoided.

2. Going cashless is beneficial as a chimerical thought process from tech and now fin-tech companies. Well, chimerical is a strong word here and thus needs moderation. What such industries conceive of, and google wallet is a prime example of it is economising through taking paper (and mint) out of circulation by minimising it evolutionarily. They think success comes through transaction costs and network permeability, which is indeed a revolutionary thought in itself as both networking and permeability are the pillars of such companies. Moving aside from such mundane as-a-matter-of-fact propositions, cashless transactions are built upon security systems enacted through multi-layered secured biometrics (strangely, these are effective as escrow) enabling remote logins and logoffs when threatened securely. They have their logic and it works like a charm, and the best example I can cite here is Blockchain technology, the template behind bitcoins or even diversified into humanistic sciences. Such escrows are secure and breaching them is difficult or impossible precisely due to labour that goes into it and the prospects of technological archiving that is humanly impossible to achieve as it would disturb the entire foundation of going cashless and no one really has the resources to go behind it.

how-bitcoin-works

India is a cash-strapped economy and keeping it that way is an expensive affair. Going cashless would in fact mean reducing paper + mint in circulation, which is done or at least imagined to be brought in via demonetisation. Value of volume in circulation remains the same, while the carrying capacity or carriers in the form of paper + metal (mint) is reduced. This would retain the status of fiat currencies and still have governments + central banks decide fiscal + monetary policies respectively.

Would this be achieved through demonetisation in our case is debatable as what is seemingly the case at present is the process has stimulated calling upon orgs like Paytm circumventing a sudden cash shrinkage in the economy. But, with payment banks no more remaining a distant reality, a tie up between such could spell a further cash crunch to be effectuated. That’d be getting us closer still to the ultimate Platonic idea of cashless-ness, which still needs to have its Aristotelian content (Sorry guys, philosophy still is my dying language). Add to that the spice of Aadhar and we would inch closer to cashless-ness, but never into pure digital economy. This is my bold claim and I’d only defend it vehemently.