governance, political economy, institutional development and economic regulation

Archive for November, 2016

How to junk cash and when


Going cashless is a good idea. For the government, the biggest gain is an easy audit trail to assess individuals and businesses to tax and to ferret out illegal transactions like the financing of crime, terror, smuggling and drugs. For individuals, plastic (payment cards) and e-money provides far greater security, despite the risk from cybercrime. Businesses also gain. Studies of consumer behaviour show that paying by card or e-money encourages you to spend more than you would otherwise.

So it is no surprise that Prime Minister Narendra Modi, a man in a rush, is pushing the country to abandon cash. But how far are we from the point where a cashless economy can kick in? A US study in California noted in 2012, that even in the case of those who state a preference for paying by card, there is a 49 percent probablity that they will settle payments less than $20 by cash. The probability drops to 8 percent  for payments above $20. In India the inverse is true. At least, 95 per cent of personal consumption related transactions in numbers (not volume) are in cash.

Access to bank accounts is key for going cashless 


A 2015 World Bank survey established that increasing the number of banked adults in the economy is the most relevant intervention till one reaches the level of around 800 accounts per 1,000 adults. India stands at a ratio of 480 accounts per 1,000 adults. This is pretty far from the point after which increase in the number of bank accounts cease to matter. Nevertheless, the extension of banking services in India is impressive given the scale of poverty, illiteracy, gender discrimination and the sparse spread of bank branches, particularly in rural areas — just around 40,000 for six lakh villages and a population of 800 million or on average 1 bank branch per 20,000 people..

“Barefoot” banks


The high level of poverty in rural areas; low savings and consumption levels make rural branches uneconomic. So innovative mechanisms should be developed to provide “barefoot” banking to the poor. This is virtually impossible via our clunky and inefficient public sector banking system. The Reserve Bank of India revolutionised the licensing of payment banks earlier this year by bringing in a “year-around”, entrepreneur-driven approach of welcoming proposals for opening payment banks -which provide less than the full range of banking services- without inviting proposals for bank licensing through formal rounds, as previously. We need to pursue this approach and establish at least a “payment only” bank branch for every cluster of 5,000 adults. But inevitably this will take time.

e-money is a low cost, “quick win”, to digitise payments

A faster way of displacing cash payments is to scale up the use of e-money. Across economies which do not have universal financial access, over the period 2010 to 2015, the number of e-money accounts have grown at the rate of an astonishing 63 per cent per annum — more than triple the rate at which bank accounts have increased over. Mobile money accounts comprise 55 per cent of such e-money accounts. But, in India, e-money continues to languish at merely 10 per cent of transactions.

Getting merchants digitally ready for Point of Sale applications.    

A more serious missing link for ramping up cashless transactions is the relative scarcity of point of sale (POS) acceptability of cashless transactions. Easy access to POS ready merchants and vendors is key for building the credibility of plastic money as an alternative to cash.


Photo courtesy:

This is a chicken and egg situation. Merchants do not see the value of accepting e-money payments unless enoigh people want to use them. Also, mechants lose interest on the deferred payments into their accounts. On top of this card providers charge merchants upto 3 percent of the transaction value for the service. All this pushes up the prices of customer purchase price of products. Customers in turn, try and dodge the servive tax and additional charges which comes with buying digitally. No wonder then that a mere 1.5 million commercial entities accept cashless transactions in India. Compare this with the 44.7 million registered micro, small and medium enterprises (comprising industrial and service related businesses) with an investment ranging from Rs 1 to 50 million, estimated in India by the 2006 SMSE survey. Bringing all these service providers into the POS net expands the market by an order of magnitude. Why not start by first “Carpet bombing” commercial entities in the 50 largest cities in India, with assistance and persuasion to say no to cash? Lets start by making cities cashless first and let the smaller towns and rural areas follow in an orderly manner.

Make cash transactions more expensive than digital ones

One cannot develop an entire ecosystem for junking cash by fiat alone. The incentive structure, which today privileges cash settlement because of its lower transaction cost, must be reviewed and reversed. The government started the RuPay debit card in 2014 with the hope that it would compete with the international biggies in the business — MasterCard and Visa – and make them look more seriously at the potential fortune which lies at the bottom of the pyramid — the small transactions end of the market.

India has 26 million credit cards and 712 million debit cards. But their use is low at just 12 times per debit card every year at an ATM and barely two transactions per year per debit card at a POS. The corresponding numbers are less than 1 transaction for a credit card at an ATM and 38 at a POS. In comparison in high income economies cards or e-money options are used to conduct around 280 transactions a year per person. We are a long way off from the frontier of cashless transactions. The good news is that we are better off than low and middle-income countries, which averaged just 22 cashless transactions per year per person.


Plastic money becomes expensive to use if the individual transactions are small. Typically, micro-transactions of less than $5 (Rs 340) are not viable through plastic money and would need to be cross-subsidised. This is where e-money becomes the most appropriate vehicle to mop up the micro-transactions market which could account for as much as two-thirds of the total transactions. After all, cigarettes are still sold as singles in India; a paan (betel) costs just Rs 20 and a street meal is Rs 100.

Build the eco-system for expanding payments beyond traditional banks

If the government is serious about junking cash it must engage with commercial entities which have a large , diversified customer base to leverage for diversifying into the payments space. Phone carriers, progressive electricity utilities and the Railways are some options. They can quickly scale up the use of digital money by their customers in collaboration with e-pay platforms and provide some assurance to merchants against the risk of not realising the payments from the e-pay platform. Developing a “reward” based strategy to move 50 per cent of commercial transactions above Rs 500 to digital settlement by 2020 is a reasonable target.

There are some limitations which need to be overcome or gone around- the poor quality of electricity supply, dodgy net connectivity and the additional cost that needs to be borne to digitise small-value transactions via POS arrangements. Regional hackathons to find solutions to specific barriers can pay rich dividends. They can create an ecosystem of innovative thinkers focused on solving the problem. The future is digital. Engage millennials to figure out how to fast forward us there, out of turn.

Adapted from the authors article in the Asian Age November 28, 2016


Deep freezing India


Terminally ill people are opting to deep freeze their body hoping for a cure some day which would make them come miraculously alive and be well. But would you opt to temporarily freeze 85 per cent of your bodily functions merely because you cannot compete with the explosive, short burst speed of Usain Bolt but are running well ahead of Haile Gebresellaise  – the Ethiopian long distance champ? Not likely, given the huge risks and the meagre reward.

Shockingly, the Government of India chose to do just that on November 8, by de-legalising notes of Rs 500 and Rs 1,000, which comprise 85 per cent of the Indian currency in circulation. This deep froze the world’s third (or fourth?) largest economy which was ticking over happily at a growth rate of just under 7 percent. It also irreversibly, hit the sentiments and the pockets of its most ardent supporters – the 400 million citizens who comprise the middle class earning between Rs 2.5 to 50 lakhs (US$ 3,500 to 73,500) per year.

Exit “old”black money enter “new” black money

If the government’s actual objective was to destroy black money, estimated at 25% of the US$ 2 trillion economy, think again. A widely dispersed “new black money” machine has already mushroomed, exchanging the frozen Rs 500 and Rs 1,000 notes into new legal tender at a cost of between 20 to 40 per cent of their face value. Many people prefer this route rather than declare their hoarded stocks and lose 33 per cent to tax -if the amount is the current year’s income- or 100 per cent as tax and penalty if it is undeclared income from previous years.

But not all sellers are owners of undeclared wealth. Many are ordinary people who got caught short on cash and are desperate to buy things they need — medicines, food or pay for transport to get home. The banks are inaccessible for exchanging currency and ATMs are by and large not operative. This mess will take at least till the end of the year to be straightened out.

In the meantime, scores of small establishments and workers will accumulate debts to pay daily expenses while the economy loses potential value added over this period. The direct economic cost for a two month deep freeze is at least 1% of GDP foregone. The loss of individual credibility from contracts not honoured because of a cash shortage; loss of savings or atleast the interest on it; the permanent shut down of small businesses due to bankruptcy and the consequential loss of self-respect even for hard working people. is far more permanent and immpossible to tabulate.

No to Black Money – but focus on its sources. 


Who would oppose hunkering down systematically on black money? Surely not more than 15 percent of the “black” wealth  (undeclared to tax) is held as cash in Indin Rupees mostly to transact, not as store of wealth. Much of it is held abroad; invested in real estate bought partly in cash to save tax and invested in gold and diamonds. Going after the cash component, whilst neglecting the other “black” assets, is like impounding the fuel in the tank of a highly polluting car, in the hope it will reduce smog. So long as the car exists it will  find the fuel; smog will result and new black money will be generated.

Prime Minister Narendra Modi has targeted election financing and corruption as the root of the black economy. But we are a long way from doing anything substantive. Even the accounts of political parties are not yet open to public scrutiny under the Right to Information Act. As for bureaucratic corruption it is a long haul with patient , deep surgery needed to unclog the pipes of good governance. There are no quick wins here.

High minded objective but low tech implementation

The declared objective is noble. But did we choose the optimum implementation mechanism? What have we achieved by the secrecy; the haste and the resulting action without adequate preparation – all of which are reminiscent of the anti hoarding drives against food grain traders of yore. Why not, instead, have given adequate notice of the government’s intention to crack down, specifying a future date? The efficacy of the step would not have been diluted. If anything, it would have been enhanced. Brandishing a big stick is better than using it.


A notice period would have allowed better logistics to be in place — sufficient new notes; working ATMs and mobile exchange units for the unbanked. Ordinary people could have been educated and prepared for accessing the new currency. There was nothing to stop the tax authorities and the police from clamping down, during the notice period, on the activities of potential black money aggregators to dissuade leakages — just as they are doing today. After all social media and electronic surveillance has vastly increased the powers of government to monitor the activities of citizens.

Leakages are inevitable in any currency exchange programme. Around 53 per cent of our 400 million bank accounts are dormant. Many may be multiple or “benami” accounts of the same person. These accounts are viable vehicles to launder black money by paying the nominal holder of the account a small fee.

The government says it will not scrutinise deposits up to Rs 2.5 lakhs in each account. But even an average deposit of Rs 40,000 in each of the 200 million dormant accounts can convert Rs 8 trillion of black money in old notes into temporarily white money, in new notes. Other avenues are for small businesses to deposit their old notes as an advance in the accounts of their suppliers. Employers can similarly deposit advance salaries in the accounts of their employees.

The math of who holds how much currency

Thirty per cent of the Rs 14.5 trillion currency in the high denomination notes is held legitimately in banks and other government agencies as working capital. Another 30 per cent could be the legitimate savings in cash of around 170 million households, after excluding the poor households, and the cash working capital of the 10 million registered businesses in India.

This leaves 40 per cent, or Rs 6 trillion, as the potentially unaccounted wealth held as cash. The expectation is that the “black money” component, held in cash, will not be deposited for exchange because the depositors would then become liable to tax.  But don’t hold your breath — it would be very surprising if the amount extinguished is more than just 15 per cent or Rs 1 trillion. After all, the government’s tax amnesty scheme which closed in September 2016 required a sacrifice of 45 per cent of the amount as tax and penalty. It netted just Rs 0.65 trillion in undeclared money. In the late 1970s, when gold was smuggled into India because legal import was prohibited, a small proportion was regularly and ritually “caught” and confiscated by the customs authorities — a “nazarana” for retaining the “izzat” of the “sarkar”.

Much the same may happen now. Around Rs 1 trillion may fail to be deposited in the banks. This is the amount the RBI can write off from its liabilities, enabling the government to declare victory, while individual hoarders of black money take a haircut. With inflation at historic lows already, the two month economic deep freeze will push it down even further. The windfall in RBI resources could be useful in FY 2017-18 to boost the economy, which would still be reeling from the internal shock and disruption. But caution on stoking inflation is fiscally and politically advisable.

Fix whats broken  

Recapitalising public sector banks and waiving the debt burden of state governments can give decent economic returns if it kickstarts investment in projects or if it generates the necessary political capital to implement GST on schedule. Using some of this largesse to reduce the tax rate for low and middle income earners in FY 2017-18, particularly for senior citizens, may compensate them for the pain unnecessarily inflicted on them. Some significant salve is necessary to restore the credibility of the government as an efficient protector of the aam aadmi. There are two lesson from the mess. First, never fix what isn’t broken? Second, think before you deep freeze tomorrow’s lunch.

Adapted from the authors article in Asian Age, November 20, 2016


Book Review: Ram Guha’s latest soup


Ramchandra “Ram” Guha’s latest book- Democrats and Dissenters – a collection of sixteen essays – is a meandering but delightful read. Part one explains India. Part two is about the scholars who have helped Ram do so. The link between the two parts is a stretch unless part two is the marshalling of a scholastic framework used in part one. By this logic inverting the sequencing – reading part two before part one, helps.

Ram Guha’s thought leaders

In this pantheon of six scholars, Dharma Kumar (1928 to 2001) is the only woman. The Delhi School of Economics professor and economic historian is the archetypal “nurturer” – mentoring students; incubating research; being a role model for unselfconscious women’ s empowerment; a “liberal polemicist”; determined opponent to fundamentalism and to the politics designed to take advantage of such bigotry.


Professor Dharma Kumar, Ram Guha’s “fellow radical” and the “last Liberal”

Possibly Dharma Kumar was the engaged academic, the one Ram decided never to became. Eulogising Dharma is his way of atoning for the consequential social loss.

Eric Hobsbawm’s (1917-2012) life-long commitment to Marxism illustrates the perils of sacrificing scholastic distance to wed ideology.  Guha builds on this theme in the chapter on the eight barriers to freedom of expression in India -ideologically committed writers being one.

The rooted, intellectual energy of the revered Kannada novelist U.R. Ananthamurthy (1932-2014) is implicitly contrasted with Hobsbawm’s dogmatic obsessions. Ananthamurthy, a Lohiaite had scant regard for identity obsessed Lohia descendants. His advocacy for sustainable development strikes a chord with Ram’s green roots, as does his dismay with Narendra Modi’s style of combative politics. For Ananthamurthy – and one suspects for Ram – building a “supple” India is far more important than building a “strong” India.

Benedict Anderson (1936 to 2015), an Irish scholar earned his spurs by deepening the study of nationalism in Latin America and Asia. His is the framework, Ram prefers, for nation building – “modern, contingent, forged out of struggle and contest…. replacing faith in God with faith in the nation …. never rooted in ancient history or in ties of blood or soil”. This is Guha’s elliptical manner of pointing out where Indian nationalists are going wrong.

Guha poses a provocative question – why are there so few right wing, conservative Indian intellectuals, other than in economics? R. Jagannathan, writing in the Times of India, has riposted that bench strength is not a good measure of intellectual vigor. Independent scholastic thought depends crucially on the availability of a supportive environment, which is rarely a feature of developing countries.

Guha’s gold standard for right wing conservatives is C. Rajagopalachari 1878-1972. Out of sync in the post-independence, ersatz socialist, Congress party, Rajaji left to found the Swatantra party in 1959. Rajaji defies conventional pigeon holing – a devout Hindu and a liberal, he presciently advocated against “big government” and the “megalomania of …. big projects”. His advice to the Hindu right wing Jan Sangh in 1968 was to go beyond mere toleration of the minorities. Guha’s view is somewhat similar – “a credible conservative intellectual tradition can only emerge outside the…. (reactionary) …. ecosystem of the Sangh Parivar”.

Andre Beteille is to sociology what Amartya Sen is to economics. More high praise for the sociologist comes by way of Ram labeling him the C. Rajagopalachari of our times. Devoted to field work related research; committed to no ideology or utopia other than his vocation; far removed from the convivial seductions of Delhi (much like Ram), Beteille embodies the ultimate scholar. Consider this understated gem from him, which speaks to the divide between Bharat and India: “While educated Indians are inclined to think and speak well of the village, they do not show much inclination for the company of villagers”


Andre Beteille, sociologist extrodinaire and diligent practioner of evidence based analytics.

Roots and how to not abuse them

There is a long chapter on Ram’s book review of Sen’s, “The Argumentative Indian”. Ram objects to Sen imposing modern concepts like “constitutional secularism” or “judicially guaranteed multi-culturism” to the pre- modern practices of emperor Akbar’s court. Sen’s motives are progressive, in portraying medieval Muslim rule as not wholly anachronistic. But Ram apprehends unintended negative consequences from other revivalists, similarly departing from historical rigor, by sanctifying the past to further current political objectives.

A distant glorious past dictating the present is Guha’s worst nightmare as in Pakistan – a revivalist country so devoid of outstanding current accomplishments that it compulsively harkens back to medieval times for inspiration. Vignette one is Pakistani liberals being nostalgic over dinner for the “high noon of Muslim political power in the sub-continent”. Vignette two is the rewriting of Lahore’s history – casting over it “an Islamic glow” whilst ignoring past accretions to its culture by the Sikhs, the Hindus and the British.

“likes” and “unlikes”

Ram does not take kindly to the political philosophy of Hindutva. For him accepting majoritarianism means abandoning inclusion and secularism – fundamental principles that India, unlike Pakistan, was founded on. In a similar vein, he privileges democracy versus authoritarianism. This is the message Ram carries on his travels to China in 2008, to a conference on multi-culturism.  His host- a Professor Lin – whilst generally approving of Ram’s credentials as a proselytizing, liberal, gently remarks “If India were not so economically backward, it would persuade the world more easily about how it has nurtured democracy and diversity.


India: Free to be desperately poor

The Congress party – makers of modern India or merely savvy rentiers

Ram is an intellectual- one who has much to be immodest about. But often the polemicist prevails.  How does one square his more than fulsome praise of the Congress party for making India “less divided, less violent, less hierarchical, less patriarchal, less intolerant, less unequal and less unfree” with his assessment of its progressive decline and its eminent death due to its conversion into a family business by Nehru’s “abysmally incompetent and self-seeking” successors.  He may yet have to eat his words as political Phoneixs rise routinely in India. Add to this that he flags the ill-judged, abandonment of the party’s liberal, secular credentials for perceived political gains in 1975-77, 1984, 1986 and 1992? Three of these figure in Ram’s list of the eight worst years for India. Consider also his assertion that India lacks a culture of actively preserving the constitutionally mandated freedom of expression and the acknowledgement that subversion of this right occurred as far back as 1951 via an amendment to Article 19 (2) inserting “public order” as an additional exception for curtailing this freedom. Put all this evidence together and you would be hard pressed to align it with Ram’s assessment of the largely benign impact of the long years of Congress rule.

Make peace not war

On the use of violence as an instrument of self-determination Ram’s conclusions are pragmatic and surprisingly conservative. He notes that in the past half century only two nations have been born from armed struggle – Eritrea and Bangladesh. He could have also included the most recent case of South Sudan in 2010. His advice to armed secessionists in Kashmir is sound. Learn from the failed insurrection in Sri Lanka. Emulate the Dravida movement of Tamil Nadu and the Mizos. Both abandoned entrenched isolationist ideologies seeking independence – the former in 1963 and the latter in 1966. Both are better off for it.


The no-where people: Adivasis of Central India – caught between joining the rat race at the bottom or remaining at the top of a hunter-gatherer past.

The theme of alienation and marginalization continues into the essay on the Adivasi tribes of central India. Unlike tribal communities in the North East, the Adivasi do not dominate the region they inhabit. In no state are they in a numerical majority, despite the creation of Jharkhand and Chhattisgarh. Consequently, they remain politically disempowered.  Predictably the result has been the convenient “harvesting of souls”, earlier by Christian and Hindu missionaries and most recently by the Maoists – none of whom have the welfare of the Adivasi as their prime objective. Ram, ever the pragmatic peacenik, advocates that the government give Adivasi tribes the safeguards assured to them by the constitution and the Maoists learn from the evolution of the CPI, the CPI (M) and the Maoists in Nepal and reconcile themselves to electoral democracy – though he admits that this advice is likely to fall on deaf ears.

This book is mixed fare from the high priest of Indian liberal thought.


Ram Guha, historian and creator of word symphonies.

What is sorely missing in this book is recognition that this “unnatural nation” has moved on, along the lines suggested by Professor Lin, to Ram, a decade ago. Even as revivalist conservative scholars dredge up past glories- somewhat futilely; right wing, conservative politics is creating the space – economic and political, for strengthening this great but “unlikely democracy” that is India. Meanwhile vigilant, liberal, alarmism – as by Dharma Kumar earlier and now by Amartya Sen and Ram, to flag deviations from this path, can only help.

Adapted from the authors book review in Swarajyamag, November 2016


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