Wednesday, March 8, 2017

The Opportunity of Demonetisation






A surgical strike is a military attack which results in, was intended to result in, or is claimed to have resulted in only damage to the intended legitimate military target, and no or minimal collateral damage to surrounding structures, vehicles, buildings, or the general public infrastructure and utilities.

On November 8, 2016, Mr. Modi Government announced that he is conducting a “surgical strike” in the government’s war against black money by demonetising Rs. 500 and Rs. 1000 notes worth Rs 15.4 lakh crore. (An allusion to the "surgical strikes" conducted by the Indian army against suspected militants in Pakistani-administered Kashmir on 29th September 2016, eleven days after the Uri attack.)

The deputy RBI governor, Mr. Gandhi, on December 13, said Rs 12.44 lakh crore of the old Rs 500 and Rs 1000 notes had been received by the RBI or in currency chests as of 10th December. Since then, the RBI has been silent on the issue and has put out no figures on the deposits of invalid notes made with banks or the value of such notes returned to the RBI. It could mean that the government’s aim of extinguishing black money has fallen flat.

According to reports, not confirmed by any official authority, 94% of the demonetised currency has returned to the banks, i.e. Rs 14.5 lakh crore out of 15.44 lakh crore. So, there is not going to be any quick Rs 2 lakh crore to Rs 3.5 lakh crore windfall for the government (as some experts estimated). The maximum the government can hope to gain from the mass suffering is a measly Rs 1 lakh – Rs 1.5 lakh crore.

The Centre for Monitoring Indian Economy (CMIE) has estimated Rs 1.28 lakh crore as the cost to the economy during the 50-day period from November 9th to December 30. This does not include many indirect costs, such as those from disturbing the supply chain. These 50 days are a little more than half of the 3rd quarter of the current financial year. Gross Domestic Product (GDP) was Rs 34.8 lakh crore in the same quarter of 2015-16.

Many people struggled to meet their needs with the Rs 2,000 - Rs 2,500 ATM withdrawal limit imposed by RBI. That’s if you managed to get your hands on the money in the first place! "Carpenters, maids, vegetable sellers are dependent on cash. Are you capable of reducing their trauma? Your aim is to wipe out black money but people are traumatised standing in queues for hours doing nothing," the bench comprising Chief Justice T S Thakur and Justice D Y Chandrachud said, pointing to the long queues at banks and ATMs.

A lot of people, esp. in rural areas spent days trying to exchange their hard-earned money instead of working, such that they lost their wages. Many farmers had no cash to pay the labourers and as a result those on daily wages lost their livelihood. The fact that co-operative banks were not allowed to exchange notes added to the trauma because most of the last mile banking in rural areas is done by co-operative banks as scheduled banks just don’t have the wherewithal to service far flung areas.

Post 8th November, around 100 people have been reported dead in incidents directly or indirectly linked to demonetisation. While it can be argued that a few of the deaths reported could have taken place even if demonetisation did not take place, the fact remains that most of the reported deaths could have been avoided in the absence of the currency ban.

What was really upsetting was the government's response to the Opposition on the issue of demonetisation-related deaths which was raised by prominent politicians during a six-hour debate in the Upper House of the Parliament. Nothing. Or next to nothing.

On 16th Nov 2016, Union ministers Piyush Goyal and Venkaiah Naidu responded to the Opposition on demonetisation but avoided talking about the deaths (At that time, the death toll was 33). Naidu compared the "difficulties" faced by people to, of all things, child birth. Goyal also acted as if no death had taken place and painted a rosy picture of the country.

Bankers themselves struggled to keep abreast of the government's announcements and amendments in connection with the note-ban since 8th November. There were about 60 RBI circulars from 8th November to 31st December. That’s more than one per day!

On the economic front, FMCG bellwether HUL cut its advertising expenditure on TV in December, estimated at Rs 300 crore, by half for the month of December 2016. Other corporates in various sectors have also reported lower revenues due to demonetisation. But demonetisation has hurt agriculture and informal sector workers the most.

Demonetisation has also hit the PR sector… by hitting the clients of PR companies. There has been a definite slowdown in the PR business especially among clients in the real estate, building-material suppliers, consumer goods, tourism, two-wheelers, jewellery and banks. Most of these clients will be having a credit crunch at this time and will affect payments to their PR and Ad agencies.



However, there is a flip side to everything! In the aftermath of Demonitisation, there will also be need for companies to manage reputation and create demand. Life and business go on! Most client managements will put in money if it helps their brand recover faster than competition. Agencies will have to make that extra effort to build and strengthen ‘trust’.

Currently, the government is in a great hurry to promote digital transactions and the digital ecosystem in general. Not only have mobile wallets like PayTM received a great fillip but the Bharat Interface for Money (BHIM) app launched on December 30, 2016, has witnessed 15 million+ downloads since. Hopefully, the government will do what it actually needs to do… stop the generation of black income.

While the effects of which are still unfolding, it is clear that a shift to digital money and hence digitisation has abruptly happened. As consumers start making the shift to digital money in ever growing numbers, all brands will need to communicate to be relevant to get a pie of the digital money pie. More so, in the rural areas that were ignored by marketers so far. With the allotment of funds in the current budget to rural infrastructure and development, there will be increase in purchasing power of the rural population. Brands will need to begin, build and strengthen customer engagement with this customer base.



(This is a modified version of an article that has appeared previously in the PRCI Journal, Chanakya)