The media – both electronic and print – is showing long queues in front of ATMs and is interviewing a few aggrieved to present the impact of demonetisation on the common person. The picture being painted is quite dismal. But is this the only version? Are there some missing pieces?
We are an excessive cash economy
Let’s start with a few facts. The Harvard Business Review in its article titled ‘India’s botched war on cash’ by Bhaskar Chakraborti says we are 90% cash economy of which 86% was in Rs 500 and Rs 1,000 denomination. Cash as a percentage of the GDP in India was 12.2%, which is three times higher than in Brazil.
Why do Indians prefer cash
Indians hoard cash and feel insecure without it. Due to excess cash, our velocity of money (frequency at which money is exchanged from one transaction to another in a given period) was only 1.5, which is far lower than the lowest velocity reported in the US of 6.6 in Q3 of 2013 (the five-year peak rate in the US was 11).
Indian’s affinity for cash is unreasonable. My 85-plus father-in-law, who never moves out of the house alone, was the first to stand in line to collect the new Rs 2,000 note only to realise later that no one wants to exchange it. The feeling of insecurity without significant amount of cash is very common among our middle-class.
This is the reason for growth of ATMs. The growth in value of ATM transactions has far outpaced the growth in the value of card payment transactions. Many who own debit cards prefer to stand in line, draw cash and pay the merchant. But at what cost?
Cost of cash in India is the highest
According to a Fletcher School report ‘Cost of cash in India’ in 2014, costs of cash to the Indian consumer in terms of time and travel cost spent to get cash and ATM fees are among the highest in the world. New Delhiʼs 11 million inhabitants collectively spend some six million hours and $1.5 million per month chasing cash. Hyderabad’s ATM consumer costs were about twice as high as that of Delhiites on a per capita basis. The RBI and banks spend around Rs 21,000 crore annually in currency operations, states the report. So, cash is not free and is expensive to handle.
Cheque system has failed
In the US cheque is as good as cash. You can give your cheque to a retailer and not only will he accept it but he will also give you cash against it. No retailer will accept a cheque in India. Cheque bouncing cases take years to resolve and even the courts prefer to go for settlement instead of sending the person to jail for breach of faith.
Why do merchants prefer cash
Cash is preferred despite the high cost only for one reason — merchants do not accept cards. Why? Because cash transactions are not traceable and are beyond government oversight and helps in evading not just VAT/service tax but also income tax.
So, many merchant establishments who accept cards and, therefore, are tax-compliant are at a disadvantage compared with those who receive cash. Black money is created in this manner and is used for bribe and fuels the parallel system.
The only way to improve tax compliance at the merchant end and to bring a level-playing field is to push for an electronic payment system. To do this, one has to withdraw cash from the system. In my view, this is the core argument for demonetisation and this has to be done some day.
The media has overplayed the cost of demonetisation and underplayed the benefits. The media prints what it believes and this is based on what it hears and sees. Herein lies the fallacy.
But is this one-sided version prevalent because the government did not discuss this with the media before announcing? If the editors were invited to a closed-room meeting and the plan shared, the reporting could have been different.
Absence of an alternative version from the government too is making the media debate one-sided. Formal press briefings at regular intervals are essential in this kind of a crisis.
The third issue is the competitive nature of the media business. ‘I told you first’ syndrome drives the media to speculate based on limited information. No one wants to be left out.
The Axis Bank story
Let’s take the case of a leading private sector bank – Axis Bank. A local paper floated a story of RBI mulling cancelling the banking licence on the ground that it is helping convert black money to white. The story circulated faster than money and the RBI had to intervene and deny it.
What do the facts say? Axis Bank is a leader in bullion trading accounts. Here, bullion traders buy and sell gold bars in large quantities and the daily trade is in hundreds of crores. Traders deposit money in the bank in crores – daily. So big cash deposits are normal in these accounts.
Next, the government wanted to bring all the cash into the banking system and hence was keen that all the banks accept genuine bank notes in full – without refusal. This was for the simple reason to ensure traceability — who deposited, where did the money go among others. These questions can be answered easily and hence should not raise suspicion.
Yes, there are questions whether the money was deposited in benami new accounts where the KYC (Know Your Customer) norms were flouted. This is being investigated.
Moreover, once you deposit the money you cannot draw large cash back immediately due to shortage of cash. You can only transfer to other bank accounts, which can be traced. Then how does this mean that the bank is involved? Leadership of Axis Bank or for that matter any bank would simply not do anything that risks its brand – especially when a bank brand is all about trust!
It is very critical that the media must be balanced in reporting a crisis scenario. On the other hand, there has to be more official communication – much more than usual – during crisis. This will help the media to look at both sides while reporting, go by facts and not get carried away.
(The author is Chairman -TMI Group and co- chair Ficci Telangana. These views expressed are personal)