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Financial Inclusion And Demonetisation: Let’s Not Spin Poverty Tax

The world is full of stark contrasts. Contrasts present great hunting ground for the spin-masters. Policy-makers and researchers working in areas of poverty globally would be familiar with conferences and events across Five Star hotels of the World Bank, whose sole objective is 'Working for a World Free of Poverty'.

The spectre of black money in India, estimates and forms of which vary widely but is a serious menace as the quantum is anyway significant, coexist with the world's highest population of extreme poverty. The contrast has been there for years.

India announced demonetisation of its two high valued currencies, of the value of Rs. 500 (roughly $7.5) and Rs. 1000 ($15), comprising 86% of the cash in an economy where cash transactions account for similar proportions, in order to fight the menace of the black money, fake currencies and terror financing.

More than ten days have passed since Indian Prime Minister Mr. Narendra Modi addressed the nation, highlighting the need and the broader roadmap ahead, containing 21 action points (and four bulleted sub-points). In his address, 'black money' comes 18 times, and 'poor/poverty' comes 14 times - starting with the 2nd para itself, implying specifically the poor people, other than the whole of the nation in general, would garner the most of the benefits of this demonetisation exercise. 'Terrorism/terrorist', in that speech, comes ten times, 'fake/counterfeit' comes seven times, 'economy/economic' comes four times.

So, if the 1st objective of the demonetisation has been to get rid of the black money, 2nd objective has been to ensure it benefits the poor - following the rhetoric/words of the speech (not scientific method and duly acknowledged). The prime Minister rightly stressed that the benefits may not come immediately as he rightly foresaw some of the initial implementation hiccups as 'temporary hardships' in his speech. Only question is the higher range of 'temporary' remains undefined here. This needs to be stressed because many of the other original road-maps announced by the Prime Minister on the 8th November, on the supply side of cash, or on the operational functionality of ATMs within days have not yet been met.

Policy-makers to researchers in any socioeconomic divide know this golden rule: 'Reaching the poorest of the poor was (is) going to be the most difficult of challenges.' As expected and as natural, since 8th November, a huge degree of crisis has engulfed the nation, the degree of visible suffering proportional to one being closure to that 'poorest of the poor'. Socioeconomic divides, be it digital divide or financial inclusion-exclusion is largely caused by three root causes, namely affordability, accessibility and skill-gap in the end user. The last part, developing skills by influencing user-behavior, through capacity building in many cases prove to be the most difficult and time consuming; and today India faces that challenge the most, arising from demonetisation.

Impact of demonetisation in India and the non-stop media coverage has resulted in a wide and unprecedented media and political malarkey. Google News throws around 2.9 million results to 'demonitisation India', and around 50000 results to '"demonitisation India"', much of the coverage, on the surface level, is on how demonetisation helps the country and or also to its large number of poor people or honest tax payers.

Mainstream local media have finally started raising difficult issues too, albeit late and still too few in number compared to the one-sided overall coverage so far, like Demonetisation: Why India's poor will no longer believe the news, drawing an analogy, whatever remote it be, with the Cultural Revolution of China (1966-76).

Revisiting the means as well as the ends

Socio-economic divides are complex areas of study, be it in areas of obnoxious rich vis-à-vis those under extreme poverty, educate-not educated, digital divide, and in this specific context - operational financial inclusion of Indian households - each with its unique characteristics.

As there is very little scope to add anything of substance to the ongoing coverage, this article would scrutinise the hypothesis, by asking: Do the ends as well as the means both make realisti policy-making sense in this demonetisation exercise? Because the media coverage, in general, tries to portray that 'the ends', the goals of achieving black money clean up beginning with demonetisation is great, with newer collateral benefits, cashless to many others, being cited on a daily basis. "The means' on the execution side of demonetisation, echo the 'temporary hardship' in general is being compared with the birth pangs of a new and rising India prevails.

The data that answers 'the end' and not the means in above is the near universal unanimousness, in spite of the differences in estimates in amount of black money in cash: the range, almost always, is in single digits (3% to 6%, in few TV debates higher figures have been stated but always lower than 10%).

So, the end, on its own, fails the scrutiny.

Demonetisation can still be a much-needed welcome step provided the means are of similar scale and proportions.

Important to note here that paper cash, per se (excluding fake currencies), is not black or white. Process and person holding illegal/untaxed asset can be illegal or legal, not the legal tender - the paper.

Operational financial inclusion and PMJDY

To answer the means, one needs to dig little dip as quality of household level granular data in India is messy, other than the census data. This can only be done by looking at the household level financial inclusion data, in an operational sense. This is critical because this demonetisation exercise has come after more than two years of a commendable step of the current administration, the Pradhan Mantri Jan-DhanYojana (PMJDY), aiming to improve financial inclusion drastically. 67% of urban households and 54% rural households were formally covered within financial inclusion, not necessarily operationally covered, as per the last census (2011).

The real problem is, the PMJDY being a recent ongoing development, be it the World Bank (last data on financial inclusion is of 2014) or the census (next due 2021) fails to capture its impact. However, various interim articles hinted at the challenges of that financial inclusion in India - be it World Bank's findings (72% of accounts had zero balance, prior to the demonetisation), or be it the case of Mary - an intended beneficiary for which PMJDY was initiated.

To analyse this financial inclusion at the household level, we need to review households within (1) formal and operational financial inclusion, post PMJDY, and households (2) without formal and operational financial inclusion. The operational part is critical as many of the PMJDY accounts, until now, were stillborn.

In order to do so, given the context and the constraints, the best possible alternative is to rely on latest data available from India's central bank, the Reserve Bank of India (RBI) and examine the rate of growth in India's 'cashless' economic status. Three data points are taken, starting with RBI's latest data of August 2016; the second being January 2014 - when India's ruling party in government was in opposition and termed any move of demonetisation by government back then as 'anti-poor' and the third defined the corresponding gap between the first and the second, thereby being June 2011.

In terms of cards, debit and credit cards, growth in number of cards outstanding during Jan'14-Aug'16 period, at 85% is much higher than 55% for corresponding period of June'2011-Jan-2014 period (naturally much of it is debit cards, credit cards, as in Aug'2016, is around 3.6% of the total).

But when it comes to transaction value, there is a slowdown in the growth in 'cashless' economy; growth rate for Jan'14-Aug-16 being at 35% from 61% of June'2011-Jan'2016 period. Until more credible research on formal and operational financial inclusion at the household level comes up, it simply means PMJDY did not prepare ground for demonetisation adequately, more so on the user-behavior side.

Smartphone and Internet access is yet to reach the majority of Indian households, and this is not the time to talk about how online payment services can be of help after the crisis.

A similar argument can be made on household level identity proof or address proof documents, a prerequisite for opening a bank account.

There surely were low hanging fruits!

Trickle-down economics means the poorest of the poor would be able to exchange their affected notes the last assuming they do not have a bank account, and when they have a non-or-semi-operational account, they would be able to withdraw the cash that they need during this 'temporary hardship' period the last.

Whatever has been happening in India since 8th November late evening, one can debate on the appropriate name it should have: demonetisation, or half-a-monetisation, or surgical strike or carpet bombing - whatever, that is more of technical in nature, for the arm-chair economists and academicians and policy-makers like us.

The poorest of the poor feels the taste and the pain, they do not need a name to identify every experience of theirs. Some in our circles identify it as 'poverty tax' or 'Ghetto tax'.

Let us have a conference in a five star hotel, or live discussion in a TV room in order to complete the Baptization of the new economic and military superpower coming out from India; let the mortal one-day old new born die, as a small sacrifice!

Did any ever say: 'What's in a name'? 'It's expensive being poor', more so in Mahatma Gandhi's India today. Poverty sells, in general, when a policy may - in all its rational senses as of now - looks to be anti-poor.

Let's stop the spin!

An edited version of the article first appeared in The Conversation