Over the last one month the whole country has been transfixed by this phenomenon of demonetization and it has been a riveting saga. As I had written before about this in the blog here and here. You may also want to read about my own experience as well as the effect on investments.
Now while the intent was great and the strategy definitely a bold one, the implementation has definitely left a lot to be desired. I am not talking about the inconvenience and hardship to the public at large, that will probably be justified if the blow against the black money is a debilitating one. However, from the current data available it does not really seem that the black money hoarders are scurrying for cover. Consider these facts :-
- Out of 14.8 lac crores banned currency value it is now expected that much of this will find their way into banks through deposits.
- Do note that this does not mean that the black money has been laundered into white as once the money is in the system, it will be subject to scrutiny by IT authorities.
- However, the windfall that RBI was widely believed to be getting will not happen now and this will be seen to be a serious dampener.
- The political mileage gained from talking about notes being trashed and possibility of putting some money into Jan Dhan accounts has very nearly come a cropper already.
- The estimated monetary cost of 1.28 lac crores to the Indian economy will now take some making up, probably not possible in the next 1 year or so.
So what really went wrong as far as the deposit expectations are concerned? While hindsight is always 20-20, I think there were several basic mistakes committed by the planners and this shows their fundamental lack of understanding of how things can work on the ground in India. This is what really happened in the last month, starting 8/11 night:
- A humongous amount of gold was bought at astronomical prices. The idea was that it was better to buy gold with black money, even at much higher prices instead of paying taxes. It would have been logical to stop all gold transactions for a week or so, surprised that government did not anticipate this.
- Much of the black money was obviously with people who had access to manpower, whether politically or otherwise. Given the number of people in India who are unemployed or semi-employed it was also possible to hire them cheaply. This was used to both exchange and deposit money in big way. The whole idea of limiting exchanges through inking people was too little and definitely too late.
- Creative corruption was at the peak during this time. Schools were willing to take money for the next 10 years, businesses were willing to accept old notes and touts had a field day promising to pay in new currency after taking a hefty cut.
- The much flaunted Jan Dhan accounts actually became a huge negative here and caused a lot of money laundering. The moral fiber of most Indians, especially those surviving in abject poverty is unsurprisingly suspect and this was used relentlessly by a lot of wheeler dealers to channelize money from their clients.
- The situation was tailor made for compromising some of the bank officials through offering inducements and also threats of exposing past misdemeanors. So while in general the banking community did a great job, there were elements who colluded with the black moneyed brigade to help launder their ill gotten wealth.
Interestingly though, all this has meant that much of the money in circulation is now with the banks. This gives the government an enormous handle, as long as it has the intent and boldness to follow though with things in a logical manner.
How will this get done? Wait for my next post to read about it.