The former banker and AAP leader talks on the disservice done to India’s banking system and why we weren’t better prepared to become a cashless economy.
Could you talk to us a little bit about how black money circulates through the formal economy and the informal economy, and how this step (demonetisation) is going to affect that black money? Is it going to go after it? Your thoughts on that.
One of the things we really need to understand is that not all of the cash economy is black economy and clearly not all of the black economy is cash economy. And, so what really is black money? Black money is money on which tax is supposed to be paid but is not paid. And, of course, there are large parts of the economy, many many millions of Indians who don’t have to pay tax legally. For example, farmers don’t have to pay tax on agricultural income. Anyone who earns less than two and a half lakhs does not have to pay tax. And, so you have a large part of the cash economy which is legitimate and white. Of course, only 1% of Indians pay tax. Only 1.25 crore* Indians are actually tax payers and that’s a very small amount. All of us know there are many more people who should be paying tax and who have a lot of black money.
So to your question, how is black money generated? Let me give you a very simple example: suppose an industrialist or a businessman is selling goods worth a thousand rupees but he only declares three hundred rupees as his actual sales and he pays tax on only three hundred. Then the seven hundred which is generated is essentially black money. Now what does he do with that black money? Let’s say he keeps two hundred of that for himself. He buys himself a fancy car, he buys his wife some fancy jewellery, he spends a lot of money on his daughter’s wedding. What does he do with the rest? With the rest, that five hundred, let’s be very practical, he gives it to the system; he gives it to the politician or to the corrupt babu or official who he has to deal with. In fact, most small businesses in India have to pay this amount as a cost of doing business. We all know that.
But what do the big industrialists do? They give this to the big politicians and to the big political parties. What does the politician do with the money? So let’s say the politician has now got five hundred. He keeps two hundred for himself; similarly, for a nice fancy house, nice fancy car, nice lavish wedding for his daughter but three hundred goes toward elections. Of this three hundred, some of this is official because political parties have to show official expenditure as per the EC rules. But how do they show this because this is black money? So let’s say he takes two hundred out of this three hundred which is going for elections and he breaks it up into small chunks of twenty thousand rupees cash donations. That is why all political parties are showing such large amounts of cash donations. Over 80% of their funding comes ostensibly from cash donations, which are less than twenty thousand rupees. What does he do with the remaining hundred? That goes as unofficial election expenditure—the type of expense that the EC is trying to control – money given to voters, alcohol given to voters, clothes given to voters, etc. But note that in all of this, the money which was black, some of it has been converted into white money in the hands of the politician, in the hands of the political party.
But this is not the real scandal. The real scam is what happens next. After all, why should a big industrialist or a big businessman give away five hundred rupees of his own money? What does he do? What does he expect in return? And, here is the real scam. What happens is that the politician, when they come to power, gives them access to things they should not have access to. For example, resources of the country. You have mining contracts being given for iron ore, for coal, for aluminum, for oil and gas –resources which are worth thousands of crores to India; resources which are given away for a few hundred crores. Spectrum allocation, you have contracts for roads, for bridges, for highways, for airports, which cost a few hundred crores but which are shown as costing thousands of crores. You have bank loans where a balance sheet cannot support more than ten crores. They are given hundreds of crores of loans and in due course these loans are written off.
You know we talk about the enemies of the state. We have neighbouring countries but they have a name, they have a face, we know who they are, we know what the danger is. These politicians and industrialists who are looting the country, these are also enemies of the state. They are nameless and they are faceless and these are the people who must be caught.
You can do a quick search on Google. You can see the scams of India, thousands and thousands of crores. But I want to say one thing: that money leaves a trail. Comptroller Auditor General has investigated many of these scams. Many of these are lying before the courts. It is time that we prioritise these and find out who these people are and take action to punish them.
If the Modi government’s strike against black money is to be successful, in your view, what are the next top three decisions that need to be taken, to sort of follow up on this and really carry through and make it a success?
I think it is very simple. I think the first step that we need to do is to strike at the root cause, which is political funding. Let the ruling party say completely, immediately, that they will not accept any cash donations. All donations need to be by check or by electronic payment, and you don’t have to do complicated electoral reforms for this and you don’t have to do all party meets. Let the ruling party declare, their intention is honest, they will accept only by cheque and electronic means. I think every honest industrialist in this country will rejoice. It will make doing business in India easier, but remember that an official check donation to a political party is 100% tax exempt. So everyone will be happy with this step.
Second thing that I think we need to do, which is very important, we are basically facing a national emergency. This is a very big step. Millions and millions of Indians are taking a lot of short term pain, making big sacrifices; people are dying, people have lost their jobs, people are standing in queues for hours on end. This needs to count for something. The Prime Minister should tell the chief justice of India to prioritise the investigation of all the scams. Let us put these on a fast track. Let these scams, which have been pending for many years, let them be investigated swiftly. Let it be known before the next elections who are the dishonest politicians and industrialists. Let’s take action so the nation can be cleaned of this scourge.
And the third step of course is simply on implementation. A lot needs to be done on that.
Coming to implementation and inconvenience and the suffering by a lot of India’s residents…So we’re seeing, yesterday Narendra Modi, our prime minister, he announced the results of a survey that he had conducted and so of course the representativeness of it can be questioned. But the overwhelming 90% support this move. And we’re seeing a lot of people fall into sort of two camps. A certain section of people think that this is a bad move. This is flawed fundamentally and principally. But there’s also, perhaps a larger section of our country’s population that perhaps feel that it was a good move but the implementation has been very bad. Could you talk a little bit about this dichotomy and whether a policy can truly be good if its implementation was not taken into account, if preparation was not done, it was not executed?
I really think there are three steps in this. The first is, what is the intention? Secondly, what are the policy measures? And thirdly, what is the execution? I think there is no doubt that all of us are united; every single honest Indian wants black money and corruption to stop. Every single, honest, patriotic Indian does not want counterfeit money in the system, and all of us want to move to a digital and cashless economy. So the objectives, I think we’re all united, are good objectives.
The question is on the policy measures and you know you have some very eminent economists both within the country and abroad saying that demonetisation, and basically when we’re talking about demonetisation it is removal of liquidity of 86% of our currency from a system, from an economy which is basically a cash economy. I think the majority of economists and some very eminent people in this category are saying that you are risking bringing the entire economy to a crashing halt. It is a catastrophic move from an economic policy point of view. I have to say, I believe they are right.
Let us talk about counterfeit money. You do want to move counterfeit money out, absolutely right. Unfortunately, the speed and the shoddiness with which this has been done – you have notes which are running colour, you have very senior government officials saying that there are no new security features in this note. Now if you were a counterfeiter from across the border I think you would be having a good laugh and saying, ‘Alright, how long is it going to take us to get our act together and counterfeit these notes as well?’ So I think that’s regrettable. I think if the aim was to remove counterfeit notes you could have easily gone to technology which is available, which a lot of other countries are using. You have notes which have polymer substrate, which are very very secure. If that was the aim, it should have been done with a little bit more thought and we could have had better notes, which were not amenable to counterfeiting.
And, certainly in cashless, I have a lot of questions. I think that could have certainly been better done.
We had an article on The Wire the other day that said if we’re talking about surgical strikes, the Indian army might have been up to the task of going across the border and doing its job but India’s financial industry and banking industry has not risen to the battle cry. We’re seeing a lot of chaos; we’re not seeing a lot of assurance. Our central bank RBI governor Urjit Patel has not clearly addressed many of the concerns arising from demonetisation since November 8, the day since demonetisation was announced. Clearly we can’t place blame on any one bank or any one official but clearly the banking industry has not come up to the mark with regards to implementation here. Can you give us some insight?
In fairness, and of course I’m a banker and I speak in defense of my fellow bankers, I think the Indian banking industry and bankers across the board whether they are in private banks or in public sector banks have really risen to the occasion. They are working from early hours in the morning to late at night. From what we gather, none of the bank chairmen or chairpersons were consulted because the move was secret. And so banks have geared up to the best of their ability.
However, I do want to make a point. The real issue that the country is facing at the moment is not that we don’t have enough banks, the real issue is that we don’t have enough notes. We don’t have enough currency. So you have sucked out 86% of India’s currency and you haven’t replaced it with anything. And to me the really shocking thing is, what was the planning? So first of all, who did the planning? Was it the Ministry of Finance, was it the RBI, was it the Niti Ayog, or was this just done by one or two people who thought up this idea and then felt like they didn’t have to tell anyone?
However, that’s all in the past and there is no use crying over spilt milk. I think what we need at the moment is that the person who is the custodian of the monetary policy and of the currency in the country, which is the governor of the Reserve Bank, Mr. Urjit Patel. I think it is time for him to come in front of the nation and explain what the planning going forward is. Doesn’t matter what happened in the past. Let us know how many notes of which denominations have already been printed and are going to be released, and how many notes of which denominations are going to be printed in the coming timeframe. Because at the moment there is a sense of panic and confusion.
I, as a citizen, am being told that the money which I own legally, because 90% of the cash economy is legal, my legal money is no longer valuable, it is worthless. I have to go deposit it in the bank. Once I have deposited it in the bank I can withdraw in little bits and amounts. If I have an emergency I have to jump hoops to prove that my daughter is actually getting married or that I am actually doing something. And, it’s creating a sense of real unease. People are frightened. They don’t know what is happening, and everyday the rules change. So first it is one week, then it is fifty days, then some people are saying five months, some people are saying longer. The issue is that anyone speaking in the media and on TV channels—none of us are in the know. We don’t know what is happening so we can only give best case estimates.
But the person who does know is the governor of the Reserve Bank and if he were to come in front of us and say, ‘Look, don’t worry, everyday we can print so many two thousand rupee notes, we can print so many 500 rupee notes, we can print so many 100 rupee notes; by the first of December this much money will be in circulation. By the thirtieth of December this much money will be in circulation. By the first of January you can withdraw all the money you have placed in your bank. You can draw it out’. Then people will have a sense of comfort. And, I think that must be done immediately.
Without this sense of comfort, we are seeing a lot of panic mostly because, as you pointed out, many of the institutions and people responsible for this have not come out. Is there a fear or is there a real risk of the common man’s trust within the former financial system actually failing at this point? So rather than pushing us towards the cashless economy that this move may have supposed to, would they now fear going to a bank ever again, trusting cash and instead funnelling it towards other assets such as gold?
For a poor person, entering a bank is in any case a little bit of an intimidating atmosphere – you’re entering a very formal looking place where there’s a guard standing outside. Millions of Jan Dhan Yojna accounts have been opened, and that’s a very good thing that people should enter the banking system. But now what has happened is that almost your first experience of the bank is a very intimidating thing. You have to stand in a long queue for several hours, you get in and you’re dealing with a very very harassed bank official who is trying to push you away; you are putting your money in and you have no certainties as to when you can get it out.
If you finally figure out how to use your Rupay card or an ATM then the cash runs out. It’s a bit frightening. It’s a bit unnerving, and really it doesn’t build any confidence in the system. My personal view is that we have actually done the banking industry a great disservice by this shoddily planned execution. We really will have to make a lot of effort to bring people’s confidence back. I have spoken to a lot of people who are saying that they will take out their cash and buy gold because that will stay with them, and that’s not the objective of this move.
Even people within India’s financial system, especially this Fintech startup ecosystem, when demonetisation was announced they really cheered it. They said this is the “Whatsapp moment” for us to move towards a cashless economy. But now it’s increasingly becoming clear that to the extent that our economy depends on cash, depends on liquidity, we can’t just turn it on or off like a switch and say that now we are cashless. It is clear our move towards a digital economy is still far away and the process to transform will take multiple years. What are your views on this?
No, that’s true. Once again I come back to the objective. Is the objective of a cashless digital society a desirable objective? I, for one, believe it absolutely is. And, I do want to say that the RBI has taken many steps over many years to bring us to this point. For example, the INPS platform. That has been developed five or six years ago. It is a very robust platform and for the last four or five years you can make mobile payments on it very effectively. We have NEFT, we have RTGS. In fact, I’d go so far as to saying that India’s digital platform systems are amongst the best in the world and the most secure in the world.
Earlier this year, in April 2016, we launched the Unified Payment Interface (UPI). I tell you that this is a path breaking step. It is something, from a banking perspective, it is a space moment, it is a Eureka moment because you have now enabled every bank in the country, every public sector bank, every private bank, every cooperative bank to have an app which allows its customers to pay seamlessly, free of cost, instantaneously to anyone else. You can pay for a small transaction, you can pay for one kilo of tomatoes, you can pay your corner store, you can pay your doctor, you can pay anyone from one rupee to one lakh rupees free of cost. Now this is a wonderful move. To me, it is a really a surprise that the finance minister, that the chairman of every bank did not make this a popular move.
We opened the Jan Dhan Yojana accounts. We were talking about cashless benefits, transfers into those accounts. Those should have happened and every bank should have got people and said, ‘Look, this is very simple.’ Of course, let’s be very clear: you need a mobile phone. In fact, you need a smart phone for the UPI app and not everyone has that. But for those who do, and a lot of people do, this is very very simple. A child can use it, and it’s safe, and it’s secure, and it’s free.
To me, this is a big mystery as to if this move was planned, why did we not do it better? Still it’s not too late. Even today, only twenty-seven banks are using UPI. The question is why. If this is your objective, move on to that. Instead of that, and I must say this, I have nothing against the private sector, I think competition is good but the UPI is far superior and far cheaper than PayTM, JioMoney, all of these things. Why are we not popularising things that will take us to that digital cashless economy?
That’s very true, Meera. I think many people have pointed out that an ideal step would have been to first really familiarise, let our citizens understand UPI, understand this technology. One of the biggest banks in India only formally adopted UPI a couple of weeks after the demonetisation move was announced. So clearly, even when it comes to shifting towards a cashless economy our implementation is lacking. Maybe it could have come after a couple of months, for instance. That seems to be the sort of general consensus.
Yes, you know as I said, I come back to the basic thing: the objectives of this move were good; the policy measures are questionable, the execution has been fatally flawed on every step. And, I think we are now stuck between a rock and a hard place. I think what we really need to do is to figure out how do we go forward from here? And, if you were to ask me I would say that what is really critical – cashless can wait, you can tackle the counterfeit story, you can do different types of notes – but what can’t wait is the economy. I would like to say one thing; I think it’s a basic principle of business – no business goes bankrupt because they don’t have money or they don’t have profits. They go bankrupt when they go out of cash; when you can’t pay your employees, when you can’t pay your creditors. You may have cash somewhere sitting as an aero plane or as a house or whatever it might be. But if you can’t pay that month, you go bankrupt. And, the problem is that millions of small and medium businesses are being pushed towards bankruptcy.
We’re getting all kinds of messages that many start-ups are going belly up. Small farmers, small businesses, small mandi traders. This is pushing millions of Indians and millions of businesses into liquidation. We need to inject liquidity into the system urgently and it boils down to this: if you can’t give me my own money in usable cash, you have to give me more time to use the cash I have. This is now a matter of critical urgency.
*Note: In the video, Meera Sanyal mentions 1.25 lakh. The correct figure is 1.25 crore.