Why We Forget…

One of the things which any writer worth his salt will tell you is that figuring out what to write is more difficult than writing that out.

And the trouble with ideas is that they can come at absolutely any time. Like the idea to write this piece came just as I was getting ready for my afternoon siesta. The first thing I did was make a note of it in a diary I maintain for smy ideas.

If I hadn’t noted down the idea, by the time I would have woken up, it would have slipped out of my mind. Of course, one has learned this through experience. In the past, when an idea has come at an inconvenient moment, I have felt confident enough to be able to remember it later, haven’t noted it down and forgotten about it totally.

In fact, why just ideas, this happens to all of us on a regular basis. There is some simple everyday chore that needs to be done. We suddenly remember about it. We don’t note it down but place it somewhere in a checklist that exists in the back of our minds. But by the end of the day we have totally forgotten about it. We only remember when we are reminded about it by our spouse, parents, siblings, colleagues etc.

In fact, sometimes it is something as simple as going from one room to another to do some chore and forgetting what one intended to do. As Robert Cialdini writes in Pre-Suasion—A Revolutionary Way to Influence and Persuade: “Before cursing your faulty powers of recollection, consider the possibility of a different (and scientifically documented) reason for the lapse: walking through doorways causes you to forget because the abrupt change in your physical surroundings redirects your attention to the new setting—and consequently from your purpose, which disrupts your memory of it.”

What is the scientifically documented reason that Cialdini talks about? We all know about the Russian scientist Ivan Pavlov. Pavlov could get dogs to salivate to the presence of something like the sound of a bell. As Cialdini writes: “To accomplish the trick, [Pavlov] just rang the bell immediately prior to introducing food to them on repeated occasions. Before long, the dogs were drooling at the sound of the bell, even in the absence of any food.”

The trouble is that this is the part of the story that gets recounted repeatedly. But there is more to this story. After many tests Pavlov wanted to share his finding with others. The trouble was whenever Pavlov invited others for a demonstration it would fail. The test would also fail when one of his assistants set up the experiment and then asked Pavlov to view the results.

Often, the dogs wouldn’t respond. This left Pavlov mystified. Nevertheless, he finally figured out what was happening. As Cialdini writes: “It finally dawned on Pavlov that he could account for both breakdowns in the same way: upon entering a new space, both he and the visitors became novel(new) stimuli that hijacked the dog’s attention, diverting it from the bell and food while directing it to the changed circumstances in the lab.” This is further linked to the fact that to survive, every animal needs to be aware of the changing surroundings around him.

Hence, “the potent effect of a rapid change in environmental circumstances on human concentration can be seen in” everyday mundane occurrences. Given this, we tend to forget the simplest of things in everyday life.

The solution to this problem is very simple. It is to maintain a checklist of things to do. But that requires some amount of discipline. Now only if being disciplined was so easy.

The column originally appeared in Bangalore Mirror on November 30, 2016

If Nation is Expected to Go Cashless, Stop Political Parties from Taking Cash Donations


In the November 27, 2016, mann ki baat address to the nation, prime minister Narendra Modi talked about India moving towards a cashless society. As he said: “The great task that the country wants to accomplish today is the realisation of our dream of a ‘Cashless Society’. It is true that a hundred percent cashless society is not possible. But why should India not make a beginning in creating a ‘less-cash society’? Once we embark on our journey to create a ‘less-cash society’, the goal of ‘cashless society’ will not remain very far.”

A very noble thought indeed, the practical part of implementing it, notwithstanding. The interesting thing is that the mention of this dream of India moving towards a cashless society wasn’t made in Modi’s November 8, 2016, address to the nation. In this address Modi announced the decision to demonetise the high denomination notes of Rs 500 and Rs 1,000.

Neither was it a part of the ministry of finance press release that accompanied the decision. The primary goal of demonetisation was to tackle fake currency notes and black money. As the press release pointed out: “With a view to curb financing of terrorism through the proceeds of Fake Indian Currency Notes
(FICN) and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India, and for eliminating Black Money which casts a long shadow of parallel economy on our real economy, it has been decided to cancel the legal tender character of the High Denomination bank notes of Rs.500 and Rs.1000 denominations issued by RBI till now

Of course, it can be said that the dream towards a cashless society goes hand in hand with the dream of eliminating black money. So, to that extent they are connected. Nevertheless, with the way the entire issue of demonetisation has been handled up until now, it is safe to say that this was not something that the government had thought about originally. They are making it up as they go along.

It is worth asking how feasible this dream is. A PwC report titled Disrupting cash: Accelerating electronic payments in India points out that 98 per cent of volume of consumer transactions in India are still in cash. The number is 96 per cent in case of Mexico, 94 per cent in case of South Africa, 90 per cent in case of China and 86 per cent in case of Japan. While this figure can be brought down, there is no way India is moving towards becoming a cashless society any time soon.

Then there are other issues. Smart phones are not a universal phenomenon. The moment one goes beyond the big cities, internet speeds both on mobile and broadband, tend to crash. There is a large portion of the population which is barely literate. So, yes there are many issues. Some structural and some cultural.

But given that the prime minister wants India to move towards a cashless society, there is one thing that he should do to tell the nation how serious he is about the cashless dream. If the nation is expected to go cashless, why are political parties still allowed to take cash donations? This is something that the prime minister and the Bhartiya Janata Party (BJP) can work towards eliminating .

Let’s look at this issue in a little more detail. As Sandip Sukhtankar and Milan Vaishnav write in a research paper titled Corruption in India: Bridging Research Evidence and Policy Options: “On the expenditure side, candidates face strict limits on spending once elections have been announced, but election authorities struggle to properly verify their reported expenditure since a substantial portion typically occurs “in the black.”” Hence, black money which mostly finances political parties and in the process elections in India.

The laws are also structured to help this. As Sukhtankar and Vaishnav point out: “For instance, corporations and parties are only legally required to publicly disclose political contributions in excess of Rs. 20,000. This rule allows contributors to package unlimited political contributions just below this threshold value completely free of disclosure.

And this is where things get really interesting. As the National Election Watch-Association for Democratic Reforms point out in a report titled Analysis of Income & Expenditure of National Political Parties for FY- 2014-2015: “A comparison of total donations declared by the parties in their IT returns (both above and below Rs 20,000) and that declared in the donations report shows that only 45% of the total donations of the parties came from voluntary contributions above Rs 20,000.”

It needs to be pointed out upfront that this analysis does not take the Congress Party into account because the Party had not submitted its accounts for 2014-2015 to the Election Commission at the time of writing the report.

The report makes multiple points.

1) Only 45 per cent of the total donations of the parties came from voluntary contributions above Rs 20,000. This means that 55 per cent of the donations came from those making donations of Rs 20,000 or lower. Hence, the donors are unknown. A total of Rs 582.72 crores (55% of total donations) of the total donations to National Parties was collected during FY 2014-15 from donors whose details are not available in the public domain. There are six national political parties: BJP, Congress, BSP, NCP, CPI(M) and CPI.

2) NCP is only party which has not received donation below Rs 20,000 during FY 2014-15. Thus all voluntary contributions are available in the public domain. It is to be noted that BSP claims not having received any donation above Rs 20,000 hence no donations details of the party are in public domain.

3) How do things look for the BJP? BJP, which declared the highest total income and highest income from donations above Rs 20,000 amongst the National Parties, had collected Rs 434.67 crores (50% of total donations) from donors whose details are unavailable.

4) The “unknown sources include ‘sale of coupons’, ‘relief fund’, ‘miscellaneous income’, ‘voluntary contributions’, ‘contribution from meetings/ morchas’ etc. The details of donors of such voluntary contributions are not available in the public domain.”

If Narendra Modi is serious about his fight against black money and moving India towards a cashless society, this needs to stop. If you, I and everybody else, are being encouraged to go cashless, why are political parties still allowed to take donations in cash and not declare the source of funds.

Since the entire demonetisation issue is more about making a political point, the BJP can take a step forward on this front and promote the usage of Unified Payment Interface for cash donations that are made to a political party. In fact, the BJP should make all donations of less than Rs 20,000 compulsorily to be made through the Unified Payment Interface.

This will work at multiple levels. The BJP will score political points over its rivals and allow Modi to take a moral high ground again. The economy will become more cashless. Further, there will be less infiltration of black money in political parties, given that those making a donation of Rs 20,000 or lesser can be identified as well.

The column originally appeared on November 30, 2016, in Vivek Kaul’s Diary.


Why the New Rs 500 Note is Missing from Your Pocket


Yesterday, the Reserve Bank of India, put out an interesting set of numbers. Between November 10, 2016 and November 27, 2016, the banks reported deposits of Rs 8,11,033 crore. Over and above this, Rs 33,948 crore of exchange of notes was carried out.

The deposits and exchange became necessary in the aftermath of the Narendra Modi government deciding to demonetise notes of Rs 500 and Rs 1,000, respectively. People have time till December 30, 2016, to deposit these demonetised notes into their bank accounts or their post office accounts. Earlier a certain amount of money could also be exchanged for new notes or notes which continue to be legal tender, but that has since been stopped.

Data from the Reserve Bank of India(RBI) shows that in 2015-2016 the total amount of paper notes in circulation amounted to Rs 16.4 lakh crore. Of this, the high denomination notes of Rs 500 and Rs 1,000 amounted to Rs 14.2 lakh crore. The Rs 500 notes amounted to Rs 7.9 lakh crore whereas Rs 1,000 notes amounted to Rs 6.3 lakh crore.

Between March 2016 and November 2016, the number of Rs 500 and Rs 1,000 notes would have gone up. Using “econometric model factoring in inter alia, real GDP growth prospects, rate of inflation and denomination-wise disposal rate of soiled notes,” the RBI places orders for new notes every year. But given that we don’t have exact numbers for the number of Rs 500 and Rs 1,000 notes printed between April 2016 and November 8, 2016, when these notes were demonetised, it is best to stick to the March end numbers.

Hence, Rs 500 and Rs 1,000 notes, forming 86 per cent of the total currency by value have been demonetised. Against the Rs 14.2 lakh crore worth notes that were demonetised, Rs 2,16,617 crore has made it back into the financial system between November 10, 2016 and November 27, 2016. People have withdrawn this money from their bank accounts as well as ATMs.

What this means that withdrawals of Rs 2,16,617 crore from banks and ATMs have replaced the Rs 14.2 lakh crore of currency that has been rendered useless due to demonetisation. Of course, some portion of the currency that has been demonetised may have been hoarded in the form of black money.

The estimates of this black money in the form of cash that I have seen, vary anywhere from 6-20 per cent. Hence, even at the upper end of 20 per cent, more than Rs 11 lakh crore of currency (Rs 11.36 lakh crore to be very precise. Rs 14.2 lakh crore minus 20 per cent of Rs 14.2 lakh crore) was out there in the economy, helping people carry out transactions.

Hence, around 19.1 per cent, or a little under one fifth, of the demonetised currency which was in circulation, has been replaced. This best explains why transactions across markets in the country have collapsed. People just don’t have enough currency going around.

It is easy to ask that why are they not moving towards wallets and netbanking. The point is that more than 80 per cent of the transactions in India by value are still carried in cash and that number cannot disappear overnight. This is an economic reality and needs to be taken into account in the political decision making process.

Assurances have been made about banks having enough new notes, both by politicians as well as the RBI. But that as we all know by now is really not true. The reason for that is straightforward. There aren’t enough new Rs 500 notes going around simply because they haven’t been printed. Some basic maths tells us that it will take at least another five to six months to print enough new Rs 500 notes and get them out there.

I had first discussed this issue in the November 25, 2016, edition of The Vivek Kaul Letter. But given the importance of this issue, the whole point is worth repeating here.

The question is why is the rate of currency replacement been so slow? The simple explanation for this lies in the fact that the government hasn’t printed enough new notes to replace the old ones. There is only so much printing capacity going around at the printing presses of the government.

In total, around 1571 crore 500 rupee notes have become useless due to the demonetisation. Media reports suggest that the capacity of the government is to churn out around 300 crore notes per month. It is interesting to see how they have arrived at this number. In the last three years, the printing presses have supplied around 2200 crore notes a year, on an average. This number can be arrived at by looking at data in the RBI annual report.

A Mint newsreport points out that the total capacity of the printing presses is around 2400 crore notes per year. This is achieved by running two shifts. Adding a third shift can increase production by 50 per cent to 3600 crore notes per year. This essentially means a production of 300 crore notes per month.

What if we work with the supply number of 2200 notes per year? A third shift would lead to a jump of 50 per cent to 3300 crore notes per year. This would mean a production of 275 crore notes per month.

To get back to the point, around 1571 crore 500 rupee notes need to be exchanged. At 300 crore notes per month, this will take around 5.2 months to print, the new Rs 500 notes to replace the old ones. At 275 crore per month, it will take around 5.7 months.

So, just to replace Rs 500 notes can take a period of up to five months. Over and above this, there is the Rs 1,000 note that also needs to be replaced. In total, around 633 crore, 1000 rupee notes have become useless due to the demonetisation.

Assuming the new Rs 2,000 notes directly replace the Rs 1,000 note, then that would mean printing 316.5 crore new notes of Rs 2,000 (633 crore divided by 2). At the rate of 275 crore or 300 crore notes a month, this would mean a little over a month. If all the currency is printed, it will take a little over six months to print it.

Also, we can clearly see that the problem is with the Rs 500 note and not the Rs 2,000 note. Further, media reports suggest that most of Rs 2,000 notes that need to be printed have already been printed. There are a reasonable number of Rs 2,000 notes going around but they are of no use because nobody has enough change to return. They become useful only if a purchase of more than Rs 1,500 is to be made. Only then is it possible to get change from the merchants.

Of course, all this currency may not have to be printed given that all of it may not make it the banks, given that some of it is black money held in the form of cash. And some people may prefer letting their money become useless pieces of paper than generate an audit trail for the bank. That part of the detail will come clear only after December 30, 2016, the last date for depositing old notes to banks.

Current assumptions on black money held in the form of notes are in the range of 6-20 per cent. If, the total amount of black money held in the form notes is 20 per cent, then at least one-fifth of the demonetised notes will not make it to the banks. This would mean around a month less of printing new notes.

This one month less of printing new notes is nullified by the fact that we are considering Rs 500 notes in existence only until March 31, 2016. In 2016-2017, the RBI had asked the printing presses to print 572.5 crore of old Rs 500 notes to be printed, during the course of the year.

Assuming that half of the lot has already been printed, it would mean that close to 300 crore old Rs 500 notes would have been printed during the course of this financial year. These notes are over and above the 1,571 crore Rs 500 notes in existence as on March 31, 2016. They will also have to be replaced by the new Rs 500 notes and this would mean an extra one month of work, given the printing capacity of 300 crore notes per month. This would in effect neutralise the impact of around 20 per cent of the old Rs 500 notes not making it back to banks or post offices.

Taking these factors into account, it is likely to take at least five months for the situation to get back to normal, when there will be enough new notes going around in the financial system. And this with the assumption that all Rs 1,000 notes are replaced by Rs 2,000 notes.

If that is not the case, and Rs 500 notes also replace Rs 1,000 notes, then it will take even longer. Of course, all this comes with the assumption that during this period the low denomination notes of Rs 10, Rs 50 and Rs 100 are not printed at all. I don’t know how feasible that is.

Also, we are assuming here that the government printing presses are working full steam here. Now that as well know is an unrealistic assumption. A report in the Quint points out that only 1 crore Rs 500 notes have been printed up until now. That is less than 0.1 per cent of the total number of Rs 500 notes that need to be printed. Further, I don’t know whether the government printing presses are in a positon to run a third shift.

Other than printing the new notes, they should also reach the different parts of the country, quickly enough.

To cut a long story short, this mess will take some time to sort out.

(The column originally appeared on November 29,2016, on Vivek Kaul’s Diary)

The Confirmation Bias of Demonetisation


It is interesting to see the kind of responses that Narendra Modi government’s decision to demonetise notes of Rs 500 and Rs 1,000 is getting on the social media.

Those who are in favour of the decision seem to always find examples of how the decision is a good one. Like some people keep running into chaiwallahs who take payments through Paytm. There is no denying that there are chaiwallahs out-there who do take payments through Paytm, but what proportion of the total chaiwallahs do they form, is a question no one is answering.

Those against the decision seem to always find examples of the decision being a bad one. For them, the ATMs are still not dispensing cash or banks are crowded or senior citizens are being made to wait and so on. Most of these examples are correct as well.

This Sunday I stepped out to withdraw cash from an ATM. None of three-four ATMs that I usually withdraw cash from, had notes. Hence, I had to come back home disappointed.

This gave me an idea for a small experiment in which I made posts on Twitter as well as Facebook. The post basically went like this: “No lines in any of the ATMs around where I live. Yay. No cash either… 12 days later. This looks like UPA’s 5-year plan.”

Of course, the post in social media terminology was anti Narendra Modi. This got an interesting series of responses both on Twitter as well as Facebook. One of the first responses I got was that the anti-establishment rant felt like that I had decided not to see merit in the actions of the government.

Then there were the usual responses around I being a chamcha of Rahul Gandhi. There were others who said how ATMs were just fine in their cities. One respondent talked about ATMs dispensing cash in Bhopal. I asked him to send me air-tickets. A cousin talked about ATMs working well in Jammu.

The point I am trying to make here is that everybody seems to have already worked out whether demonetisation is a good thing or a bad thing, even before any data has come out. And having worked that out we are all looking for examples which suit our point of view.

Economists call this confirmation bias. As Richard Thaler writes in Mishbehaving—The Making of Behavioural Economics: “People have a tendency to search for confirming rather disconfirming evidence… This tendency is called the confirmation bias.”

This tendency has been at full play in the aftermath of the demonetisation decision. The trouble is that there is no data either ways.

One of the goals of demonetisation is to destroy the current stock of black money held in the form of cash. The total amount of currency demonetised by value stands at Rs 14.2 lakh crore. The lower the amount that makes it to banks to be exchanged, the higher will be the stock of black money destroyed. This shall only become clear once the last date of submitting the demonetised notes of Rs 500 and Rs 1,000 is over. The last date currently stands at December 30, 2016.

Hence, this shall become clear only in January 2017. At the same time, whether the government has been able to clean up counterfeit notes, will also become clear then (assuming it chooses to release the information).

On the flip side, with the new Rs 500 note not hitting the market quickly enough, there is a shortage of currency going around. This has led to the transactions in various markets coming down dramatically. The real situation will become clear at the beginning of next month when the car sales, two-wheeler sales and tractor-sales data come out.

With the transactions in different markets collapsing, overall consumption is likely to take a beating. This will lead to lower indirect taxes (primarily customs duty and excise) for the government. Again, this shall become clear at the beginning of next month, when the ministry of finance publishes this data.

Also, it will take a few months to figure out the real impact of the demonetisation decision. But who has time to wait for a few months on the social media. We have all made up our minds already.

The column originally appeared in the Bangalore Mirror on November 23, 2016

Did a Few People Know About Demonetisation in Advance?


Conspiracy theories normally accompany all big-game changing events. The decision of the Modi government to demonetise Rs 500 and Rs 1,000 notes, from the midnight of November 8, 2016, is one such event.

It is now being said that a section of the population knew in advance that demonetisation was coming and high value notes of Rs 500 and Rs 1,000, would no longer have any value. Anecdotal evidence in the form of WhatsApp forwards showing massive deposits made into banks before the demonetisation move was carried out, has been offered on this front.

This suspicion becomes even more pronounced when one looks at the jump in deposits held by banks as of end September 2016, in contrast to earlier periods. Look at Figure 1, which plots out the quarterly increase in bank deposits, over nearly 15 years.

Figure 1

Quarterly increase in bank deposits (in Rs. Crore)

This Figure 1 clearly shows that the increase in bank deposits between end of June 2016 and end of September 2016, was the maximum, in absolute terms, since March 2002. Rs 1,83,035 crore of bank deposits were added during the three-month period between end June and end September 2016.

How do things look when it comes to growth in percentage terms? Look at Figure 2.

Figure 2:

Quarterly Growth in Bank Deposits (in %)

Between end June 2016 and end September 2016, deposits with banks grew by 18.2 per cent. This is clearly not the highest since March 2002. But all other peaks came at significantly lower deposit bases, many years back. The highest growth in quarterly bank deposits in the dataset considered, came in 21.8 per cent between end December 2009 and end March 2010.

Since then nothing has come even close to this. Hence, for the three-month period ending September 2016, the quarterly growth in bank deposits was the highest in six and a half years.

How do things look when we look at them on a monthly basis? Look at Figure 3.

Figure 3:

Monthly Increase in Bank Deposits (in Rs Cr.)
As can be seen from Figure 3, deposits of banks increased by Rs 1,66,437 crore between end August 2016 and end September 2016. This is clearly the highest nearly in five years. In percentage terms, this amounts to a month on month increase of 16.3 per cent, the highest since December 2011.

This growth in deposits of Rs 1,66,437 crore was just a little less than the total monthly growth in deposits over the previous twenty months between end of October 2014 and end of August 2016. The total growth in deposits between October 2014 and August 2016 had stood at Rs 1,71,108 crore just a little more than Rs 1,66,437 crore.

The question is why was there such a huge jump in bank deposits in the month of September 2016? Was it because a small section of people came to know of demonetisation in advance and started depositing money in banks to ensure that their money continues to be of value?
In a report written in April 2016, Soumya Kanti Ghosh, the group chief economic adviser of the State Bank of India (SBI), the largest bank in the country, had said: “There are suggestions in public domain and even analysis that are suggesting that higher denomination notes may be replaced.”

This is something that both the Reserve Bank of India as well as the government need to explain. What was the real reason behind this deposit surge? One explanation offered has been the Seventh Pay Commission. Nevertheless, higher salaries of current government employees and higher pensions of ex-government employees, cannot explain this massive deposit surge of Rs 1,66,437 crore during a period of just one month. Unlike the previous Pay Commission, this time the Pay Commission awarded higher salaries and pensions almost on time, and hence, arrears, if any, weren’t huge.

This jump needs to explained as well as investigated. Given that the IT department is sending in notices to people who have been depositing a large amount of cash since high-denomination notes were demonetised, the deposits that were made in September 2016, also need to be investigated.

Equally intriguing is the fact that between end September 2016 and end October 2016, the deposits with banks dropped by 10 per cent or Rs 1,19,193 crore, which is the highest drop in the last five years. Something clearly doesn’t add up here.

The column originally appeared in Vivek Kaul’s  Diary on November 21, 2016