IDBI Bank is the worst performing public sector bank when it comes to its gross non-performing advances or bad loans. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more.
As on September 30, 2017, the bad loans rate of the bank stood at 24.98 per cent. This basically means that the borrowers have defaulted on nearly one-fourth of the loans given by the bank. Now take a look at Figure 1. It plots the bad loans of IDBI Bank over the last three years.
The bad loans rate of IDBI Bank has jumped from around 5 per cent to around 25 per cent, over a period of just three years. What is happening here? What this tells us is that initially the bank did not recognise bad loans as bad loans. It probably did that by restructuring loans (i.e. giving the borrowers more time to repay or decreasing their interest rate or by simply postponing their repayment) or by issuing fresh loans to borrowers in a weak position, so that they could repay the loans that were maturing. In the process, the recognition of bad loans as bad loans was avoided.
Of course, any bank can’t perpetually keep kicking the can down the road, and after a point of time must do the right thing. IDBI Bank is now doing the right thing of recognising bad loans as bad loans and given this it has such a high bad loans rate. Given that, one-fourth of the loans advanced by the bank have been defaulted on, it is worth asking whether this bank should be in the business of banking at all.
Nevertheless, the more important issue here is how do depositors view this bank. The best way to find this out is to look at the total amount of deposits the bank still has. Take a look at Figure 2, which plots that.
What does Figure 2 tell us? The total deposits of the bank have fallen after peaking in December 2016. Nevertheless, the total deposits with IDBI Bank are still higher than they were three years back. Hence, the conclusion that we can draw here is that while bad loans of the bank have gone up from 5 per cent to 25 per cent over a period of three years, the total deposits with the bank are still at the level they were.
Why is this the case? Why would you continue banking with such a bank? First and foremost, this faith comes from the great faith in the government. The government will not allow any bank to go bust. Fair enough. But why wait for that to happen? Typically, when a bank lands up in major trouble, the government tends to merge it with a bigger bank and thus the depositors continue to be safe. Nevertheless, such a merger is never smooth and there might be a brief time period when the full money deposited in the bank cannot be withdrawn. Hence, liquidity can become an issue.
Also, it is worth remembering here that IDBI Bank is not a small bank. It is a relatively big bank and had total assets of close to Rs 3,61,768 crore, as on March 31, 2017. This means that if the government were to decide to merge it with another bank, the balance sheet and the profit and loss account of the combined entity, will be another big mess.
Secondly, many people are simply unaware of how badly the bank is placed. This lack of knowledge about their financial activities is a general trend among many people in this country. We spend more time gossiping and worrying about the state of the nation, than the state of our own finances.
Thirdly, many people locked in their fixed deposits at high interest rates, a few years back. In the aftermath of demonetisation, interest rates have crashed as banks have been flush with funds that were deposited and at the same time their lending has crashed. Given this, even if some individuals understand the riskiness of the situation, they really can’t do much about it. In case they were to break their fixed deposits and move it to other banks, they would earn a much lower rate of interest.
And at that lower rate of interest, they would simply not be in a situation to meet their monthly expenses. This is another negative impact of demonetisation at play, with people having to continue to bank with risky public sector banks, which includes IDBI Bank.
While, some people are simply stuck with IDBI Bank, there are others who can easily move their money to other public sector banks, like State Bank of India, Vijaya Bank, Indian Bank, Syndicate Bank etc., which are in a comparatively much better position.
But given that they have chosen not to, they are the real brave-hearts.
The ill-effects of demonetisation are still coming to the fore. In this issue of the Diary, I will talk about how demonetisation destroyed Indian jobs and “possibly” helped create jobs abroad.
Before I get into explaining why I am saying what I am saying, a recap of some basic economics is necessary here.
At its most basic level, the gross domestic product(GDP), a measure of the economic size of a country, is expressed as Y = C + I + G + NX, where:
Y = GDP
C = Private Consumption Expenditure
I = Investment
G = Government Expenditure
NX = Exports minus imports
The point to remember here is that imports are a negative entry in the GDP formula. The more a country imports, its GDP falls to that extent. Having said that imports also represent consumer demand at the end of the day, even though that demand does not add to the country’s GDP. For example, every time an Indian buys an electronic good manufactured in China, he is adding to the consumer demand but not to the GDP. Of course, he is adding to the Chinese GDP because exports are a positive entry into the GDP formula.
Hence, if we remove the imports of oil, gold and silver, from the total imports number (in dollars), what remains (i.e. non-oil non-gold non-silver imports) is a good indicator of consumer demand.
Now let’s take a look at Figure 1, which basically plots the year on year growth in the monthly non-oil non-gold non-silver imports. Hence, the non-oil non-gold non-silver imports in April 2017 went up by 42.5 per cent in comparison to the imports in April 2016. And that’s how it is for all other data points in Figure 1.
What does Figure 1 tell us? It tells that non-oil non-gold non-silver imports have grown at an extremely fast rate after October 2016. They are growing at rates at which they haven’t grown for a couple of years. What is happening here?
As Jahangir Aziz, head of emerging market economic research, told Bloomberg Quint recently: “What we had also feared was the demonetisation would disrupt the supply chains that run through both the formal and the informal economies. And if those supply chains get disrupted, then the revival in demand would not get fulfilled by domestic production.”
This basically means that demonetisation destroyed domestic supply chains. Without supply chains products can’t move. This has resulted in consumer demand being fulfilled through imports.
This is clearly visible in the huge growth of non-oil non-gold non-silver imports. What this also means is that as demonetisation destroyed supply chains in India, it also led to a huge job destruction. If goods weren’t moving, there was no point in producing them either. This meant shutdown of firms and massive job losses.
Further, by importing stuff that we used to produce in India earlier, we have helped the manufacturing business in foreign countries and in the process “possibly” helped create jobs there.
The irony is that one million youth are entering the workforce in India, every month. The economist Kaushik Basu had said in November 2016 that “[The] economics [of demonetisation] is complex & the collateral damage is likely to far outstrip the benefits.”The impact of this complex economics is still playing out and along with the botched up implementation of GST, has pulled down non-government GDP growth to around 4.3 per cent.
On August 30, 2017, the Reserve Bank of India (RBI), published its much-anticipated Annual Report. Up until last year, only journalists who covered the banking beat, economists and analysts, kept track of the RBI Annual Report.
But this year, many more people were interested. This was primarily because the Annual Report would finally reveal what portion of the demonetised Rs 500 and Rs 1,000 notes, made it back to the banks.
And why was this of interest? After demonetisation had been announced, many people including government ministers and several leading economists, had hoped that a large portion of the demonetised notes won’t come back to the banks. This was because those who had black money in the form of cash wouldn’t want to deposit it into banks, and reveal who they are to the government. In the process, a lot of black money held in the form of cash would be destroyed.
But nothing of that sort happened. The RBI Annual Report revealed that Rs 15.28 lakh crore of the Rs 15.44 lakh crore that was demonetised, made it back into the banks. This meant that nearly 99 per cent of demonetised notes made it back to the banks, and almost no black money was destroyed. Other than not achieving its major goal of destroying black money, demonetisation has also hurt India’s economic growth in general and manufacturing and industrial growth in particular, very badly.
After this, the government as expected has been offering multiple reasons in favour demonetisation. In a press release the ministry of finance offered this reason: “The fact that bulk of specified bank notes (SBNs) have come back to the Banking system shows that the banking system and the RBI were able to effectively respond to the challenge of collecting such a large number of SBNs in a limited time.”
What does this even mean? If paper money is made useless overnight, it is bound to come back to the banks. Where else will it go? Another reason offered to show demonetisation as a success is that Rs 3 lakh crore of the Rs 15.28 lakh crore that has come back is black money. No explanations have been offered on how the Rs 3 lakh crore number was arrived on. But even if we assume that it is black money, the holders of this black money aren’t exactly waiting to hand it over to the government. They have access to chartered accountants as well as lawyers and are ready for a long-drawn battle, if needed.
The weak government spin on demonetisation has continued. The question is why? The answer lies in the fact that a section of the population is still buying this spin on the social media. As Evan Davis writes in Post Truth: “In social media, our disposition to believe things is something a form of bonding. Not only do we tend to reside in echo chambers online, but we actively enjoy becoming closer to our friends by sharing views and agreeing with them. The act of consenting to someone else’s beliefs, and have them consent to ours, is satisfying; and because it is so, it stops us questioning the nonsense that others post.”
This is one explanation for the rather weak defence of demonetisation that is still being put out by the government. Then there is the problem of the narrative, or the prevailing interpretation of a pattern of events. There is a section of population which really wants to believe that demonetisation worked. It’s their narrative.
As Evans writes: “Like-minded groups of individuals share a narrative about many things… These narratives are sometimes true, sometimes not, but they are often like stereotypes… Once embedded in our minds though, they can easily gain excessive traction and trample over truth as willing believers put too much weight on propositions that conform to their narrative without looking for evidence in support of them.”
And that explains why the weak spin on demonetisation is still going strong.
The impact of demonetisation has played out in many ways. Here is one more way: The gold imports between April and July 2017 have been nearly 2.7 times the gold imports during the same period last year.
Let’s take a look at Figure 1 which plots gold imports (in Kgs) over the last few financial years.
It is clear from Figure 1 that the gold imports have jumped up big time between April to July 2017, in comparison to last year. In fact, they are the second highest in the last five years. Take a look at Figure 2. Figure 2 plots the money spent on importing gold over the last five years.
Even in value terms significantly more gold has been imported this year than last year. The price of gold during the period April to July 2017, averaged at $1257.9 per ounce (one troy ounce equals 31.1 grams). During the same period last year, the price of gold had averaged at $1291.3 per ounce, which was slightly higher.
How do things look if we look at the calendar year instead of the financial year? Between January and July 2017, the total amount of gold imported stands at 6, 61,836 kgs. Between January and July 2016, this had stood at 3,11,938kgs. There is a clear jump in this case as well. In fact, the interesting thing is that the import of gold has been concentrated during the first five months of the calendar year, immediately after demonetisation.
What does this tell us? When and why do people actually buy gold?
The history of economics tells us that people buy gold when the faith in official paper money (in this case the Indian rupee) is low. Take the case of the period between April to July 2013. A lot of gold was bought during this period. The rate of consumer price inflation was at 9-10 per cent. Given this, a section of the population had lost faith in the Indian rupee and was hedging against inflation and buying gold.
What is happening this time around? This time around Indians are buying gold because in the aftermath of demonetisation which was carried out in November 2016, there is a feeling that the government might do it again. Given this, a portion of the black money which was held in the form of cash earlier, is now simply being converted into gold. This seems like the most logical explanation for this surge. The lower price argument doesn’t really hold because prices this year have been more or less similar to prices last year.
Of course, gold is easy to store and has never gone out of fashion. Hence, it can easily be converted into cash at any point of time.
In 2013-2014, people had lost confidence in paper money because of extremely high inflation. This time around, people have lost faith in paper money because of demonetisation. Hence, they are buying gold.
As Indians bought gold in 2013-2014 and a lot of it (close to 4,20,000 kgs, during the first four months of that financial year, as Figure 1 suggests), the demand for dollars went up. India imports almost all of the gold that it consumes. Hence, it buys gold internationally in dollars. As the demand for dollars went up, importers sold rupees and bought dollars. In the process, the rupee lost value rapidly against the dollar.
In April 2013, one dollar was worth Rs 54.23. By August 2013, it was worth Rs 67.4. The rupee simply crashed during the period. It is worth asking here that why a similar situation does not prevail right now. Why hasn’t the rupee crashed like it did when people bought lots of gold between April and July 2013?
This is because while Indians are buying gold, a lot of dollars continue to come to India through the foreign institutional investors route. These investors continue to invest in the Indian stock market and the debt market. Between April and July 2017, the foreign institutional investors have invested a little over Rs 95,000 crore in the stock and the debt market. The foreign institutional investors sell dollars and buy rupees in order to invest in the stock and the debt market. This demand for the Indian rupee has ensured that the dollar has remained stable against the rupee at around Rs 64. Hence, the demand for rupees among these investors is negating the demand for dollars among gold importers. This has led to a stable value of the rupee against the dollar.
What had happened between April and July 2013? While, the demand for gold was very high, the foreign institutional investors were selling out of India. During the period, they encashed close to Rs 27,000 crore from the stock and the debt market. In fact, the foreign institutional investors sold stocks and debt worth over Rs 60,000 crore between June and July 2013.
In order to repatriate this money abroad, they had to sell these rupees and buy dollars. This along with heavy gold buying, which was accompanied by selling of rupees and buying of dollars, pushed up the demand for the dollar, and drove down the value of the rupee.
This essentially explains why the value of the rupee had crashed in 2013-2014, and has remained stable during this financial year. Nevertheless, people are buying gold because their faith in the Indian rupee has gone down and they clearly want to hedge against the risk of another round of demonetisation.
On August 30, 2017, the Reserve Bank of India(RBI) published its annual report. The annual report had data points looking at which we can finally say that demonetisation has not met any of the objectives that it set out to achieve.
On November 8, 2016, the prime minister Narendra Modi in an address to the nation said that the notes of denomination Rs 500 and Rs 1,000, would not be legal tender from November 9, 2016, onwards. People in possession of these notes could deposit them in banks until December 30, 2016. In value terms notes worth Rs 15.44 lakh crore were demonetised.
As per the press release accompanying the decision to demonetise, there were two aims of demonetisation: 1) Eliminating Black Money which casts a long shadow of parallel economy on our real economy. 2) Eliminating Fake Indian Currency Notes (FICN).
Let’s look at how successful demonetisation has been in achieving these two main goals. The idea was that people who had black money in the form of Rs 500 and Rs 1,000, would not deposit it in the banks for the fear of being identified by the government and in the process black money would be destroyed.
This was a point that was made over and over again by those in favour of demonetisation. As finance minister Arun Jaitley said in an interview: “Obviously people who have used cash for crime purposes are not foolhardy enough to try and risk and bring the cash back into the system because there will be questions asked.”
Niti Aayog Member Bibek Debroy was specific on the proportion of demonetised money that would not come back. As he said in an interview: “Even now, Rs 1.6 lakh crore is what will be missing at the end of it all. Those are the figures. If I take a base of roughly rounding off demonetised currency around Rs 16 lakh crore, 10 per cent of it is about Rs 1.6 lakh crore.” Hence, Debroy felt that currency worth Rs 1.6 lakh crore would not come back and this would lead to the destruction of black money.
The American-Indian economist Jagdish Bhagwati (along with two co-authors) was even more optimistic on this front, and in a column in the Mint newspaper on December 27, 2016, wrote: “Suppose we accept the estimate that one-third of the approximately Rs 15 trillion [Rs 15 lakh crore] in demonetised notes is black money.” These economists did not bother to explain, what logic did they base their assumption on.
The RBI Annual Report on Page 195 says that demonetised notes worth Rs 15.28 lakh crore were deposited into banks, up to June 30, 2017. This basically means that almost 99 per cent of the demonetised money was deposited into banks. Hence, almost all the black money held in the form of cash, also made it back into the banks and wasn’t really destroyed, as had been hoped.
Given this, instead of destroying black money held in the form of cash, demonetisation seems to have become a legal money laundering scheme, where people with black money have found ingenious ways to deposit it into the banking system. So, the first objective of demonetisation of eliminating black money has not been achieved.
Now we are being told that just because the money has been deposited into banks that does not mean it is not black money. And given this, the Income Tax department now has the data and will go after those people who have deposited their black money into banks. So far so good.
Let’s look at the past record of the Income Tax department when it comes to going after people having black money and achieving convictions. Take a look at Table 1.
Table 1: Year wise details of number of cases in which prosecutions were launched by the Income Tax Department.
No. of cases in which presecutions launched
No. of persons convicted
* Provisional figures upto 31st October, 2016
What does Table 1 tell us? It shows the extremely limited capacity of the Income Tax Department when it comes to bringing tax evaders to book. Even if the Income Tax department improves on these numbers, there isn’t much hope on the tax collection front. The prime minister Narendra Modi in his Independence Day speech said: “More than Rs 2 lakh crore black money has reached banks.” An impression is being created that this money is just waiting to find its way into government coffers. The people who have this black money aren’t exactly stupid. They aren’t waiting to hand it over to the government. They have access to good lawyers and chartered accountants and they know how the Indian system works.
Looking at this, it is safe to say the government is just trying to defend a bad decision and it is highly unlikely that it will earn a significant amount from all this black money.
In fact, the Pradhan Mantri Garib Kalyan Yojana, the income declaration scheme, launched by the government in the aftermath of demonetisation, failed miserably. The scheme which was launched on December 16, 2016, managed to collect all of Rs 2,300 crore as taxes. This tells us very clearly how much those who have black money fear the taxman in this country.
Now let’s jump to the second issue of eliminating fake currency notes. As far as detecting fake currency is concerned, nothing much seems to have happened on this front. Data from the RBI annual report tells us that the number of fake Rs 500 (old series) and Rs 1,000 notes detected between April 2016 to March 2017 was 5,73,891. The total number of demonetised notes stood at around 2,400 crore. This basically means that as a proportion the fake notes identified between April 2016 to March 2017 stands close to 0 per cent of the demonetised notes.
The total number of Rs 500 and Rs 1,000 fake notes detected between April 2015 and March 2016, stood at 4,04,794. And this happened without any demonetisation. Hence, demonetisation has failed on its two major objectives.
Now let’s look at the third objective of demonetisation. In the original scheme of things increasing cashless transactions wasn’t on the table at all. It came into the scheme of things once prime minister Modi talked about it in the Mann ki Baat programme on radio on November 27, 2016, where 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.”
How have we done on this front? Let’s take a look at Figure 1 and Figure 2. These figures plot the total number of cashless transactions through the years in terms of volume (i.e. number) and value of the transactions. I have ignored the Real Time Gross Settlement (RTGS) mode of transferring money because it can be used only for transactions of Rs 2 lakh and over. Hence, it clearly does not fall in the retail domain.
What does Figure 1 tell us? It tells us very clearly that the total number of cashless transactions rose in the aftermath of demonetisation. They have fallen since then and are now more or less back on the trend growth line (i.e. the red line in Figure 1). The trend growth line has been plotted in order to take care of the fact that cashless transactions had been growing anyway, irrespective of demonetisation.
In fact, between March 2017 when cashless transactions peaked and June 2017, the total number of cashless transactions have fallen by 10.1 per cent.
Now take a look at Figure 2.
Figure 2 clearly tells us that the total value of cashless transactions is now below the trend line. As former RBI governor said in a recent interview: “If you look at electronic transactions, you see that there was a blip-up when demonetisation happened but it has come back to broadly the trend growth line.”
One form of cashless payments which has seen good growth is the United Payment Interface. But it forms just 0.6 per cent of the overall cashless transactions and it will be a while before it forms a substantial portion.
Given this, the 2+1 original aims of demonetisation have flopped. The data clearly shows us that.
Of course, we are now being told of new benefits of demonetisation. Take the case of the number of returns being filed going up. Very true. But has it led to increased tax collections? A press release put out by the ministry of finance on August 9, 2017, states the following: “The Direct Tax collections up to July,2017[i.e. between April 2017 and July 2017] in the Current Financial Year 2017-18 continue to register steady growth. Direct Tax collection during the said period, net of refunds, stands at Rs. 1.90 lakh crore which is 19.1% higher than the net collections for the corresponding period of last year.”
Basically, direct tax collections have grown by 19.1 per cent during the first four months of this financial year in comparison to the same period in the last financial year. Hence, has demonetisation led to an increase in the growth of collection of direct taxes?
A press release put out by the ministry of finance on August 9, 2016, had this to say: “The figures for direct tax collections up to July, 2016 show that net revenue collections are at Rs.1.59 lakh crore which is 24.01% more than the net collections for the corresponding period last year.”
Hence, in the period between April to July 2016, the direct tax collections had grown by 24 per cent, without the demonetisation of currency which was carried out in November 2016. What this tells us is that direct tax collections grew faster before demonetisation than they are growing after demonetisation.
Personal income tax collections have grown by 15.7 per cent during the first four months of this financial year. They had grown by 46.6 per cent during the first four months of the previous financial year. So much for increase in taxes collected.
What this tells us is that demonetisation has slowed down the economy and given that the growth in direct taxes has slowed down as well.
Another point being made is that with all the money coming into the banking system, the interest rates have come down. Yes, they have. But has it led to increased lending, is a question no one is asking. Between the end of October 2016 and the end of July 2017, the total non-food lending carried out by banks stood at Rs 2,75,690 crore. The total non-food lending carried out by banks between end of October 2015 and the end of July 2016 had stood at Rs 3,43,013 crore. Hence, bank lending after demonetisation has fallen by close to 20 per cent, if we were to compare it to a similar period in the years gone by.
This is a point that I keep making. People and companies borrow when they are in a position to repay and not simply because interest rates are down. Demonetisation has had a negative impact on the ability of people to repay loans.
Another point that needs to be made here is that 62 per cent of household financial savings in India are invested in deposits. A fall in interest rates hurts people who invest in deposits. This includes senior citizens who use fixed deposits a generate a monthly income. It also includes people saving for the future for their wedding and education of their children. These people are many more in number than borrowers. With lower interest rates, they have to cut down on their current consumption expenditure. This hurts overall economic growth.
Demonetisation has also slowed down on overall economic growth. Take a look at Figure 3. It plots the GDP growth rate of India since March 2016.
As can be seen from Figure 3, the GDP growth rate between July and September 2016 had stood at 7.53 per cent. This was before demonetisation was announced in November 2016. It has since fallen to 5.72 per cent. This is clearly an impact of demonetisation. As Rajan said in an interview: “Let us not mince words about it – GDP has suffered. The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money – over Rs 2 lakh crore and maybe approaching Rs 2.5 lakh crore.”
He points out other costs as well: “The hassle cost of people standing in line, the printing cost that the RBI says is close to Rs 8,000 crore, the cost to the banks of withdrawing the money, and the time spent by their clerks, by their managers and by their senior officers doing all this, and the interest being paid on all those deposits, which earlier were effectively an interest-free loan to the RBI.”
An argument is being made that in the period April to June 2017 the growth fell because of the Goods and Services Tax which was supposed to be introduced on July 1, 2017. That is really not true. (you can read about it in detail here).
Also, even this fall in growth may not capture the situation completely given that the informal sector suffered the most because of demonetisation, and the GDP calculation does not capture that well enough.
All in all, demonetisation was a massive flop. It was an act of self-destruction that has hurt the Indian economy majorly and put us back by at least 1.5 to two years, on the economic growth front. This is something that India can ill-afford given the fact that 1.2 crore youth are entering the workforce every year.
Why I continue to write about demonetisation
People have been telling me the real aim of demonetisation was political, so why am I going on and on about the economic impacts.
I am not a dolt I understand that.
The subject of economics before it got hijacked by mathematicians was called political economy. The only place where economics and politics are different things are in an economics classroom or an economics textbook.
Hence, all political moves have economic impacts and vice versa, irrespective of what politicians and economists like to believe.
Also, will demonetisation negatively impact the Modi government, is a question I am being asked. I don’t know. But it has been a huge negative for the Indian economy, a problem which in the normal scheme of things, we wouldn’t have had to deal with.
And given that it needs to be highlighted and talked about, irrespective of whether it has made Modi politically stronger or weaker. That only time will tell. So, keep watching this space.
To conclude, I am a full-time writer and I am paid to write. I can’t do anything else. This is an honest way to make a living. So, I write.