Update on growth of Bank Deposits in India after demonetization, 30-11-2016

This is a sequel to my blog post http://obvioustruths.blogspot.in/2016/11/will-ban-on-high-denomination-currency.html

Here is an update on how bank deposits are swelling after the ban on Rs. 500 and 1000 notes. The question is whether a high proportion of the banned notes would be deposited or exchanged. What is not deposited or exchanged will become trash, yielding a bonanza to the Government. You can see from the graph, however, that there is an almost steady increase in deposits/exchanges. A good proportion what can be expected to come in has already done that. 

What is the Govt. going to do about the millions of people who have deposited other peoples' money into their accounts to white wash the moola? Deal with millions of court cases?

I have a suggestion. Allow 50,000 staff members of loss making public sector companies to transfer to the Income Tax Dept! There is work to do there! 

Here is the updated listing of sources of this information: 

Demonetization of Notes – the alternative

You may wonder if the suffering of millions could have been avoided, while at the same hitting at black money. Consider the following alternative. Whether it would have had a major impact can be argued about, and there would be differing views. Make up your own mind.

Suppose fifty or so corrupt politicians and an equal number of corrupt officials are identified and raided during one week end. Further assume that those found with unaccounted wealth are arrested and prosecuted without fear or favour, in a special court to ensure speedy justice. Assume that such raids continue every month. We cannot fix a target for the number to be raided or arrested, but surely there are over a thousand at least who deserve to be investigated thoroughly. Otherwise, we might as well declare that India is as pure as Ganga jal and forget talking about black money!
   

Action of this kind would require very good intelligence. It would also require that India does not continue behaving like a soft state and is willing to take harsh measures when it is in the national interest. What is soft and what is hard? Would a soft state have made millions suffer by making them “cashless” and having their jobs threatened? Surprisingly, yes. A soft state tolerates a lot of suffering by the poor! The softness is all reserved for the rich and powerful!

I know a crackdown on the corrupt would make a few thousand families suffer. Does your heart bleed to think of that?

It is not too late to discuss this now. The soft alternative has been taken. The corrupt have temporarily escaped, while the whole population has paid a price for no fault their own, but you can still crack down on the corrupt. They might have converted their ill-gotten wealth into gold or new currency. If you make an example of a few hundred of them, the people who have suffered will feel that their sacrifice was not in vain. You cannot make Ganga jal pure in a day, a year, or even a decade. It will require that we shut down every single sewage drain that sullies that water. We will need similar sustained effort to make India corruption free.  

How to use any bonanza the RBI/Govt. gets from demonetization?

I was shocked by the article by Swaminathan Aiyar (SA) in the Times of India today.  

http://blogs.timesofindia.indiatimes.com/Swaminomics/now-modi-can-turn-kala-dhan-to-jan-dhan/

I read his column every Sunday and respect him as a serious commentator on economic policies.

Two numbers he quotes are worth repeating here. Rs. Fifteen trillion (also known as Fifteen lakh crores of Rupees) is the value of Rs. 500 and 1000 notes banned by the Prime Minister’s (PM’s) announcement on Nov 8 2016. The second number is Rs. 640 billion rupees (aka Rs. 64,000 lakh crores) is the value to which “Jan Dhan[1] accounts have suddenly swollen”.  SA speculates on what the Govt. could do with any part of the 15 trillion worth of notes that are not deposited in bank accounts. He “suspects” that as much as 3 trillion worth would not be deposited. This is gain for the RBI/Govt. because what is not deposited would become trash, and the banks would not have to issue new currency to replace it.

Now, he comes with this amazing statement that the PM could emerge triumphant by combining “imaginative accounting, populism and good economic sense”. How? – by depositing Rs 10,000 in each Jan Dhan account; as a gift from the Govt? Some regional parties all over India would be turning green with envy! They could never buy vote banks by using Govt. munificence on this scale! There are over 250 million Jan Dhan accounts!

Either SA is kidding, or he suspects that the political temptation to do this would be very high. I am sure that he would have surely read at least summaries of the Economic Survey 2015-16: 

http://www.business-standard.com/article/pti-stories/india-needs-to-push-up-tax-gdp-ratio-spend-on-health-edu-116022600374_1.html 

which says that India should increase the tax/GDP ratio. If there is Rs. 3 trillion bonanza, a fraction of that would clearly be income tax that should have been collected but was not. Another fraction would be loot extorted by corrupt officials and politicians. So, SA, you want this to be used for buying votes?

What happened to your enthusiasm for building infrastructure? Can’t we use the bonanza to fund mass transportation systems? Can’t use it to improve the quality of our education and health services? Or, promote the switch to alternative sources of energy and cut the annual oil import bill? How all this should be done without introducing inefficiency and corruption endemic in every major Govt. effort is worth discussion, but obviously, there are ways of doing that.
  

I am also concerned about the crores of people who stood in the queues in front of banks. Many of them were honest citizens who had come to deposit their own money. However, there were also millions in those queues who were earning 5% or something like that for depositing someone else’s money into their own bank accounts. The goondas who had hired them have probably made 15 to 20% by acting as wholesalers for the operation. Those who stood in the queues were getting training in making easy money through whitewashing other’s ill-gotten wealth. They are not going to forget this training as well as the “working relationships” they developed with the goondas they worked for. They will look for new “opportunities” to make easy money. Many will go far, as far as doing some foreign travel on behalf of hawala operators!

Let me ask my concluding question – to what extent will the bonanza be reduced because of the great big white washing machine that the currency ban has created?

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[1] Bank accounts promoted by the Govt. for purposes of financial inclusion. Many of them were zero balance accounts before the ban on Rs. 500 and 1000 currency notes. 

Will the ban on high denomination currency notes work?

This is a complex question; different political parties will have different answers. Results will be judged by various criteria.

I will focus in this post on how the banned notes are being surrendered through bank deposits. There is no ban on such deposits till Dec 30, 2016; the ban is only in using them for payments outside the banking system. The deposits can be withdrawn in the form of new currency notes. A problem will be faced by those who have unaccounted money; that is wealth, the sources of which cannot be explained to the tax authorities. Of course, any tax due on the money now surfacing will have to be paid. The Income Tax officer can ask those who did not pay tax on similar income in the past to explain how they suddenly earned so much this year!  Such presumed evasion of tax could be penalized heavily. 

This leads to the belief that some of the 14.73 Trillion Rupees that was in circulation in the high denomination notes will not be returned through the banking system. The holders of such cash would be unwilling to face investigation. It is argued by some people that this will reduce the liability of the Reserve Bank of India, and result in a gain for the people of India as a whole. 

If this is true, we should watch with bated breadth deposit flow into the banks as it progresses. Like an election result, the suspense will be great till Dec 30 when these deposits will stop. We will then know whether all the pain and suffering millions underwent while standing in bank queues was worth it. I provide bank deposit information up to Nov 20. The tables are given below, and a graph is near the top of this page. I will add new posts to cover growth of deposits in the coming weeks. Keep watching this blog!

Date	Source of information summarized against that date
08-11-16	http://www.business-standard.com/article/economy-policy/86-of-currency-by-value-in-india-are-of-rs-500-rs-1-000-denominations-116110801416_1.html
12-11-16	http://www.ibtimes.co.in/banks-get-30-billion-deposit-boost-after-ban-higher-currency-notes-703760
14-11-16	http://www.hindustantimes.com/business-news/over-4-lakh-crore-cash-deposited-in-banks-in-five-days/story-CaAvhf0ivEAQkNiKYxYu0L.html
20-11-16	http://www.hindustantimes.com/india-news/live-pm-modi-in-agra-launches-housing-scheme-for-rural-poor-in-up/story-r1S0MqgSXIoGDRwVj2OIbN.html

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Tipayment = Tip + Payment

A major problem in India is the hassle of small payments. Auto rickshaw fares in Bangalore start at Rs 25, but many auto drivers do not seem to have ever seen a five rupee note or coin! You pay Rs 30. I would be happy to give the five rupees as a tip, but now it has become an entitlement. The government seems to find it difficult to print and distribute adequate numbers of low value currency notes. Coins are equally rare. A bank branch near my residence set up a coin vending machine, but it soon broke down for good due to heavy work load!

The problem is there with larger payments as well. You return from the airport and find that the taxi driver has no change, and has no means of accepting a card payment.
 

In principle, there are digital wallets that you can use to make payments. There are few takers, however, among vehicle operators and shop keepers. Uber and Ola accept app based payments, but when are shops, traditional cabs and auto-rickshaws going to accept payments from a Universal Payment Interface? 

I believe this will not happen unless we provide an incentive for the accepters. Mere technology will not work. There is a barrier to adopting new systems, and accepters of payments will always ask what is in it for them. Why should they make the extra effort to go to a bank or an ATM? Besides many of them live hand to mouth. An auto driver usually buys 2 litres of petrol at a time. Many of them start the day with no money in their pockets.

I suggest what can be called Tipayments – payments with an assured 10% tip. I would like to see companies offering digital wallets to give customers a special interface that they can use optionally. You would enter the actual payment to be made and it would add a 10% tip and send it to the account of the acceptor. The acceptor should display his acceptor-ID prominently on his vehicle or shop. Who pays for the tip? Of course, the customer does. Now there is a visible motivation for the acceptor of the payment. He has always had an incentive. Electronic payments save him valuable time that would have been wasted in handling small change, but this time saving is intangible. On the other hand, 10% is never intangible! I propose that the accepter displays a sign saying TIPAYMENTS ACCEPTED, giving his accepter-ID. This will clearly show that a 10% tip (or service charge) will have to be paid.

Many of us would be happy to pay the 10% tip in return for getting rid of the hassle of carrying small value notes. This system will also promote financial inclusion by bringing in millions more to use the banking system regularly. 

There are several providers of wallets in India – Paytm, Airtel, MobiKwik, Citrus Pay, Oxigen, mRupee, Freecharge. They should lead the way. Banks are very cautious by nature and will think of three reasons for not doing anything till it is shown to work by others, but some day their apps will also provide for a tip! At least one wallet provider has given attention to this problem. Visit http://timesofindia.indiatimes.com/city/noida/Now-use-mobile-wallet-to-pay-for-an-auto-ride/articleshow/51174174.cms

There is a problem in this context that is worth discussion. If I am a small shop keeper or auto driver, I might agree to accept payments in digital cash and have an ID acceptable to a digital wallet provider. But, which provider should that be? Not one, but ideally a common ID that all of them recognize. Some require the customer to let his cellphone camera read a QR code, a form of a 2D-barcode. I have to say that this system does not seem to be wildly popular! A simple accepter ID could be a mobile number registered with each of the major wallet operators, and verified by sending a one-time password to that mobile number. The customer making a payment will enter the 10-digit mobile number he reads off a poster into the interface. The app will do everything else to ensure that acceptor gets a notification that the payment has been received.

Prof D. V. R. Vithal passed away on Nov 8, 2016

Prof D. V. R. Vithal passed away on Nov 8, 2016. He had retired after decades of service as an academic at the Osmania University.

Photograph: Published by the Osmania Alumni Association

I had met him in 1964 or 1965 at the Tata Institute of Fundamental Research (TIFR). He had taken leave from Osmania to start work on a PhD thesis. These were early days of computing in India and the Computer Society of India (CSI) was in a nascent stage. Both Vithal and I, along with many other colleagues, were drawn towards the CSI. Prof R Narasimhan was the founding President of CSI. Dr Mathai Joseph was Editor of the CSI Journal and Vithal worked closely with him. Later, Dr F. C. Kohli became the President and he invited me to Chair the Publications Committee of the CSI. Networking with pioneers of the technology and industry, like Prof R. Narasimhan, Dr F. C. Kohli, Mr Hemant Sonawala, (then) Brig. Balasubramanian and Dr P. P. Gupta was possible for anyone who was contributing to CSI activities. In addition, it was the only place at that time to present and listen to technical papers. Many of us also worked to offer courses and run certifying examinations under CSI. Then there were very well attended technical conferences. Vithal encouraged, supported and contributed to most of these activities.

It was a loss to many of us at TIFR when Vithal moved back to Hyderabad though he continued to visit TIFR frequently while his PhD effort was in progress.  However, his work at the University and his deep involvement with the CSI did not give him time to complete his PhD work. We should also note that Vithal did whatever he did for CSI without ever occupying any position – by nomination or election, except one – National Student Coordinator of CSI. His own career interests came far below his own interest in team work and serving society. I do mean this in a broader sense – it is not the computer society alone that he served. His father had been a freedom fighter, and Vithal had obviously imbibed a lot of the values of a freedom fighter. His invariable politeness in conversation and seeing the positive attributes of everyone he met were some indications of his social nature. He worked with his wife Smt. D. S. R. Krishna, a well-known lawyer, to carry out many service-oriented activities, some under the Andra Mahila Sabha. He was a true teacher to his students – not one of those instructional technicians that many are! His warm, encouraging attitude towards students and younger colleagues has impacted thousands of lives. I have never seen him wearing anything other than Khadi – not merely the shirt, but the trouser as well! He never valued material wealth and lived a simple life.

The last time I met him was in 1914 at the Annual Convention of the CSI, which honoured him with a Lifetime Achievement Award. Visit https://www.youtube.com/watch?v=Y6MrHgcuuLs

The last few years were hard on Vithal. Krishna had passed away in 2013. Vithal was suffering from a bad back. His eating habits were as Spartan as ever. His daughter, Janaki, visited him frequently and took care of him.

He will be long remembered as a teacher, a gentleman, a selfless colleague and a caring friend. 

Surgical Strike on Corruption

The Prime Minister and Finance Minister have taken a bold step to strike against corruption; they have demonetized existing versions of Rs. 500 and Rs. 1000 currency notes. The only way to use them now is to deposit them in your bank and subject the amount to scrutiny by the Income Tax Dept. This is the first major step against wide-spread corruption that I have seen in the last couple of decades. Some of those who deal in real estate, precious metals and jewellery, along with corrupt officials and politicians are going to be among the losers.

Photograph by Sarvagnya from Wikimedia Commons,  published

under  GNU Free Documentation License, Version 1.2

It has been pointed out that banks will face a lot of additional work. There will be some chaos and even, perhaps, some slowdown of our economic growth. I believe this is all worth suffering through. Those below the poverty line are, hopefully, not going to suffer much; surely, they have no hoard of five hundred rupee notes! Those above the poverty line should be willing to pay some price for the nation carrying out a surgical strike against corruption!

This action should, ideally, increase peoples’ willingness to use banks and credit/debit cards for an increasing number of transactions, but the Government must encourage this tendency.  A strike has been made on existing black money, but there is no point in allowing future accumulation of black money in two-thousand rupee notes!

One step the Government could take is to withdraw tax on services provided by banks to retail customers. Credit and debit card transactions should also be free of service tax. All business transaction above a certain limit should be only through banking channels. These long-term measures are essential.

Demonetization is like the Delhi Govt. spraying water on the streets! It controls dust for an hour; do they have enough water to bring down all the pollution of Delhi day after day? 

The BSNL Saga Continued

This is sequel to my earlier blog post http://obvioustruths.blogspot.in/2016/10/ease-of-doing-business.html

I must add a note on what happened after I got my replacement SIM. I asked if I could get Internet data access. I was told to write a letter. I had spent a lot of time in the run-around to get the SIM; so, I said "Thanks, I will come back later for that" and rushed out. I was going out of town the next day and I left the phone with the BSNL SIM at home and went on my trip; it was not going to be of much use during that trip without data access! 

I did not try to use that phone for about ten days after my return, partly out of disgust. Then one morning this week, I switched the phone on and discovered that the SIM was not operational. The phone said that that the "SIM was not provisioned".

So, back to BSNL. The staff member at the postpaid desk looked up the records and found that the customer care people who had acted on my “SIM-lost” call (before the new SIM was issued) had disabled the phone number concerned. The staff member who issued the replacement SIM had informed them that a new SIM had been issued. But her communication did not have the desired effect. She said that she would send an email to them and that the SIM would be operational again within two hours. It is now working.

I don't worry too much about the run-around I was given. What else do you expect when three people are employed to do the work of one? One to tell the customer when to write letters, fill forms, and get Xerox copies made, one to handle the phone at the call centre, and one in the back office! It is naturally difficult for them to coordinate reliably!

What bothers me is that this is how millions of customers are treated by companies like this. The result is there for all to see. The losses of BSNL are described by the Hindu dated November 17, 2015 as follows ( http://www.thehindu.com/business/Industry/bsnl-reports-operating-profit-of-rs-672-cr-for-fy15/article7888002.ece).

QUOTE  

The net loss of BSNL though increased to Rs 8,234 crore for the reported fiscal compared with Rs 7,020 crore last year, mainly on account of asset depreciation calculated as per the Companies Act.   

UNQUOTE

Why blame the Companies Act? Depreciation is a fact of life; you cannot wish it away! Every company accounts for depreciation.

What is the value of assets that are depreciating? Wikipedia says that the assets of BSNL were ₹893 billion in 2014. https://en.wikipedia.org/wiki/Bharat_Sanchar_Nigam_Limited

That is close to 90,000 Crores of rupees, making BSNL the tenth largest company in India in terms of assets!

Meanwhile yet another telecom service provider has entered the field and is investing Rs. 150,000 Crores of rupees.
Reliance Jio initial investment at Rs150,000 crore: Mukesh Ambani

Rs 100,000 Crores seems to be chicken feed for India. It lets one company with roughly that much of assets bleed 8% of its net worth every year, while another company pours one and a half times that amount into creating a similar infrastructure. Would it not have made more sense to improve the management of the company with the tenth largest assets? Are we waiting for ₹893 billion to slowly wither away because of increasing competition?

Let me return to the starting point of this series of my blog posts. Ease of doing business is deplorable in most places in India. This does not merely affect the confidence of the foreign investor. It plays havoc with the productivity of the average Indian; and, a nation’s GDP is directly proportional to the productivity of its people.

We must also worry about productivity of the country’s wealth invested in public sector companies. What is the point in attracting the foreign investor when the companies in which our money is invested are loss makers? You can be sure that the foreign investor is not going to set up and run loss making companies in India. He will ensure that he gets a healthy return on his capital. Why can’t we ensure the same for our investments?

Compare the revenue per employee in two telecom companies of India

Company	Revenue (Rs. Crores)	Employees
BSNL	28645	> 200,000
Airtel	96,600	24868

Livemint reported the following in 2013:

QUOTE
In 2009, a panel consisting of technocrat Sam Pitroda and banker Deepak Parekh had recommended that the government sell a 30% stake in the company to the public and also cut its staff by 100,000.

The government had failed to act on these proposals despite the BSNL board approving the same, stalling its revival plan.

UNQUOTE

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