»5 Minute Wrap Up by Equitymaster

On This Day - 21 DECEMBER 2016
Seedhe Mann Ki Baat...

In the Issue
» Political parties unaffected by demonetization
» Conflicting reports compound currency woes
» Market Roundup
» And More...
Rohan Pinto, Research analyst

Dear Mr Modi,

Let me first thank you for some of your simple yet effective initiatives.

Prime among them is the Swachh Bharat Abhiyan. It took a prime minister to remind us of the importance of cleanliness and sanitation.

You then realised our excess reliance on imports and encouraged foreign companies set up manufacturing bases in India. The aim was fourfold: provide blue collar jobs, increase technological know-how, support domestic markets and exports, and augment foreign exchange accretion.

On Employment and Reform...

Then, with more than half of India's population employed in agriculture and allied sectors, you realised the urgent need to provide today's youth with crucial soft skills including how to use digital technology.

It seems you realised that unemployment is a ticking time bomb that could turn the promise of a 'demographic dividend' into a demographic disaster.

Kudos to you and your team.

Furthermore, Sir, the real estate land bill and the Goods and Services Tax are both steps in the right direction.

And Now Demonetisation...

But on 8 November 2016, you shared your vision of a corruption-free India, a fight against black money through the demonetisation of high-value notes.

The honest, tax-paying citizen watching you that night couldn't help but feel proud. You had the entire country motivated to fight for you, ready to endure pain for the greater good.

Half a league, half a league,
Half a league onward,
All in the valley of Death
Rode the six hundred:
'Forward, the Light Brigade!
Charge for the guns' he said:
Into the valley of Death
Rode the six hundred.

Lord Alfred Tennyson pens the courage displayed by the light brigade of six hundred men in a battle. In a similar vein. You had the entire country motivated to fight for you.

Sir, surely you had better data than us to determine how much black money was being hoarded in cash.

My colleague Vivek Kaul estimated this figure at 5% of the total cash in the system. To disrupt more than 100 crores lives for 5% of the cash in the system...

I ask you: Is it worth it?

Further, the lack of new notes has resulted in chaos. The cash-based Indian economy is suffocating.

Some complained...but few stopped fighting.

Sir, if demonetisation was planned as you said it was, then why so many amendments from the central bank...why the paucity of cash...why all the chaos?

Unless, of course, the plan all along was to wean the people off cash and go digital...

The past year saw payment banks set up, encouragements in the form of discounts for digital payments, etc. If the plan is to go digital, then why not create the infrastructure for it?

A country being forced to go cashless still has a huge percentage of its population unbanked. It is a tough ask for your citizens indeed.

'Forward, the Light Brigade!'
Was there a man dismayed?
Not tho' the soldier knew
Someone had blundered:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do & die,
Into the valley of Death
Rode the six hundred.

Even if the intentions were right and just, the execution has gone horrendously wrong.

We as citizens of this country give full support to the idea of eradicating black money. And look forward to other methods of doing so apart from demonetisation.

However, we want to ask. Will our post demonetisation pain go in vain? Will the government stand up and take responsibility of its citizen's plight?

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02:30 Chart of The Day

Demonetisation has been a huge economic disruptor in 2016 impacting the common man. While the exercise is touted as a tirade against black money and terror funding, but it remains incapable to crack a whip on money laundering that happens in the name of political funding.

Donations received by political parties fell by a steep 84% in FY16. But these essentially are donations above Rs 20,000 that have to be declared by political parties in the form of an affidavit to the Election Commission. It excludes cash donations below the threshold limit of Rs 20,000. And political parties have been making hay by utilising this loophole. Reportedly, the cash contribution received by political parties increased from 0.14% in FY15 to 1.42% in FY16. This despite the notification made by the Election Commission in August 2014 that disallows tax benefits on cash donations made to political parties.

So while the government seems earnest in its efforts to put an end to the black economy, its efforts will not fructify it it leaves this hole for political parties to sneak away. My colleague Vivek Kaul has a very interesting insight on this anomaly that can undo the benefits of demonetisation. This is what he had to say

  • Also, it is extremely unfair that the citizens need to show an identity proof while depositing their old Rs 500 and Rs 1,000 notes into a bank account, whereas political parties can continue to receive donations of up to Rs 20,000 in cash and need not declare who gave those donations. This includes the leading political party of the country which in 2014-2015 got half of its donations from unknown sources.

    In fact, as I have been saying repeatedly, the issue of black money cannot be tackled seriously, without making political funding transparent. This needs simple majority in the Parliament. The BJP has a majority in the Lok Sabha and can take the first step towards this. It is likely to be supported by some parties in the Rajya Sabha as well. Even without a majority, the party did manage to get the Goods and Services Tax passed through the Rajya Sabha. So, what is holding it back on this front?

    In fact, the Election Commission has suggested that "anonymous contributions above or equal to the amount of Rs two thousand should be prohibited." But why even allow a window of Rs 2,000? Political parties should move towards a totally cashless way of taking donations.
Political Parties Get Lower Donations in FY16


One of the grouses of the public hit by demonetisation is the lack of proper information dissemination. Also data on new notes given out by the Reserve Bank of India and the government do not seem to be on the same page. This has further added to the confusion about when the liquidity shortage would ease.

As per a press release by RBI, the total amount of money withdrawn by the public from accounts or ATMs stood at Rs 2.16 trillion until 27th November 2016. The Minister of State for Finance put a figure of Rs 3.29 trillion as the amount of money supplied in the high denomination 2000 and 500 rupee notes by 29th November 2016. This leads to the inference that currency worth Rs 1.13 trillion was disbursed between 27th November and 29th November. However, this appears to be a tall order considering that RBI had released an amount of Rs 2.16 trillion over a period of 17 days starting 10th November when the exchange of notes started post demonetisation.

The fact of the matter is that the shortage of new notes is unlikely to go away in a hurry with the forced slowdown continuing for a few months more. Clearly the economy would have rebounded faster from the demonetisation shock had this humungous exercise been planned and prepared for adequately by the government.


In the meantime, the Indian share markets gained marginally in the post noon trading session. At the time of writing, BSE Sensex was trading higher by 44 points and NSE-Nifty was trading higher by 12 points. The mid cap and small cap indices are trading higher by 0.2% and 0.3%, respectively.

04:50 Investing Mantra

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