Covered in this report:
- Reaganomics (part 1)
- Global Liquidity Crisis (part 1)
- Global Crackdown on Black Money (part 2)
- India’s Informal Economy (part 2)
- Season of Bailouts (part 3)
- Crisis Comes Home (part 3)
- Crash Course in Demonetization (part 4)
- The Global War On Cash (part 4)
- The Great Indian Bailout (part 5)
- PARA – A Centralized Bad Bank (part 5)
- Once Upon A Time (part 5)
In the previous article we saw how after the banking collapse of 2008 as a measure to combat the growing liquidity crisis there began a global push by Governments, Central Banks and Multinational Companies to eliminate the use of physical cash around the world and replace it with digital money. This movement is often referred to as “The War on Cash”.
The Great Indian Bailout
With a televised speech India was plunged into this war unwillingly and rather dramatically with the entire population oblivious to its ramifications. With a warning of just 4 hours the war would commence from 9/11 midnight. Rs 500 and Rs 1000 notes of the Mahatma Gandhi series ceased to be a legal tender and would be invalid past midnight. In the days following the demonetization, the country faced severe cash shortages with severe detrimental effects across the economy.
In the first four days after the announcement of the step, about Rs 3 trillion (US$45 billion) in the form of old Rs 500 and Rs 1,000 banknotes had been deposited in the banking system. At the same time cash withdrawals from bank accounts were restricted to Rs 10,000 per day and Rs 20,000 per week per account from 10 to 13 November. This limit was increased to Rs 24,000 per week from 14 November 2016. A daily limit on withdrawals from ATMs was also imposed varying from Rs 2,000 per day till 14 November, and Rs 2,500 per day till 31 December. This limit was increased to Rs 4,500 per day from January 1, and again to Rs 10,000 from January 16, 2017.
Within a couple of months the banks had scooped upto 97% of the demonetized bank notes into their vaults, which have received a total of Rs 14.97 trillion ($220 billion) as of December 30 out of the Rs 15.4 trillion that was demonetized. This is against the government’s initial estimate that Rs 3 trillion would not return to the banking system.
What happened here is that a massive amount of cash was squeezed into the banking system with electric speed. However owing to the limits imposed on withdrawals people were not able to get their money out of the banks with the same speed or frequency, effectively trapping public money into the banking system. These are classic strategies to avoid a Bank Run. A Bank Run occurs when a large number of customers withdraw cash from deposit accounts with a financial institution at the same time because they believe that the financial institution is, or might become, insolvent. As a Bank Run progresses, it generates its own momentum: as more people withdraw cash, the likelihood of default increases, triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy. To combat a Bank Run, a bank may limit how much cash each customer may withdraw or suspend withdrawals altogether.
Now with a huge chuck of cash (read public money) lying in their vaults, the Indian banking system was able to breathe a sigh of relief from their liquidity crisis and impending collapse. It was the hard earned public money and their lifetime of savings that was used to bailout the entire Indian banking system. Only now the liquidity crisis the banks were in was shifted to the markets. There wasn’t enough liquidity in the markets for traditional businesses to operate.
As a combined effect of demonetization and US presidential election, the stock market indices dropped to an around six-month low in the week following the announcement. The day after the demonetization announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points.
About 800,000 truck drivers were affected with scarcity of cash, with around 400,000 trucks stranded at major highways across India. Due to scarcity of the new banknotes, many farmers were left with insufficient cash to purchase seeds, fertilizers and pesticides needed for the plantation of rabi crops usually sown around mid-November. The reduction in demand that arose in turn led to a crash in the prices of crops. Farmers were unable to recover even the costs of transportation from their fields to the market from the low prices offered. The prices dropped as low as 50 paise per kilo for tomatoes and onions. This forced the farmers across the country to dump their products on roads in desperation.
There was a reduction in industrial output as industries were hit by the cash crisis. The Purchasing Managers’ Index (PMI) fell to 46.7 in November recording its sharpest reduction in three years. A reading above 50 indicates growth and a reading below shows contraction. This indicates a slowdown in both, manufacturing and services industries.
The Purchasing Managers’ Index (PMI). The two downward plunge that you see above are of Demonetisation and GST. Source: TradingEconomics.com
When banks were inundated with cash deposits, one frequent question that was being raised is how much of these extra deposits would be permanent? Would bank customers withdraw the money after the situation went back to normal, or would they decide not to keep so much cash in hand, and rather keep it in the bank? The answer would determine whether the surge in bank liquidity would continue and, therefore, mean lower interest rates on bank deposits for longer. A vague atmosphere of conflicting policies that is being maintained discourages this practice and ensures that the deposits stay with the banks.
Whether the customers go for a Bank Run or not the extra cash deposits gathered by demonetization is sticky and the stark reality is that the entire demonetization exercise to bailout the banks may have just managed to sustain the crisis for another 6-8 months. The state of public sector banks has only worsened since. Even the RBI’s Financial Stability Review (FSR) released in December said that the gross NPAs for the banking system are expected to rise to 9.8 percent by March 2017 from 9.1 percent in September. This ratio, under the baseline scenario of economic growth, could rise to 10.1 percent by March 2018. The government has committed to infusing Rs 70,000 crore into public sector banks over a four-year period till fiscal 2019. Rating agencies, however, say the amount of capital needed is far higher than that.
PARA – A Centralized Bad Bank
To resolve the issue of Large Stressed Loans there is a push to privatize the public sector banks by creating a Central Bad Bank along the lines of the US TARP (Troubled Assets Relief Program) termed here as the PARA (a centralized Public Sector Asset Rehabilitation Agency). The idea is mooted by the deputy governor of Reserve Bank of India, Viral Acharya. Before appointed as the deputy governor Acharya was a professor at the New York University Stern School of Business. It is here that Mr. Acharya came up with the idea published in the co-authored research paper that analyzed “the precarious condition of public sector banks” in India. The paper found that “the onus of remedying this situation through radical reform lies primarily with the Government.” In conclusion the paper recommended a fix: Privatize public sector banks or reallocate their assets.
According to Acharya, “Banks in India haven’t typically failed except for small banks here and there. But the trouble is that a public sector bank cannot under the current statute be sold to a private sector bank.” It is here that PARA comes into picture. PARA would provide a mechanism to create a government-driven asset reconstruction company – a Bad Bank, where banks can park their stressed assets and be merged or picked up by private players.
Now with traditional Indian businesses at a standstill and government units stressed out the hedge-vulture funds are already circling India to pick up their prizes. The government itself has approved an ambitious plan to sell loss-making state-owned companies, subsidiaries and select manufacturing plants to strategic buyers, setting the stage for the return of privatization after more than a decade. Touted under what is called as the Strategic Sale of PSUs, there is a wholesale privatization of what is termed as distressed assets (state units) underway.
A 2017 Credit Suisse Investor Survey, Shifting Tides, revealed hedge funds managing about $1.3 trillion in assets are now looking at India as their preferred investment destination. At the helm, navigating these vultures is a company owned by the former controlling families of the East India Companies. UK-based Edmond de Rothschild Asset Management SAS; with about $115.45 billion in assets; is bullish on India’ consumer discretionary and industrials sector. The asset manager’s $335 million emerging market fund has a 12% allocation to India. With a team of about 20 investment bankers, Rothschild and Co. has managed to be part of over 230 deals ranging from one of India’s biggest in the oil and gas sector to automobiles and renewable energy, in 2016 alone.
What is taking place today is the greatest transfer of public wealth into private hands in the history of this world. Contrary to a myth long popular in the West and now espoused by the East it’s been the poor of the world that finance the rich not the other way round. At the end it was the decades of hard earned public money that was sucked to bail out the ailing Indian banking system that in turn would bailout and stabilize the bankrupt Western-European economies and corporations.
Once Upon A Time
When the European kingdoms faced an existential threat to their Empires after the fall of Constantinople they set their sails towards Asia (specifically India and China) to loot and plunder the wealth in order to save their civilization from eventual demise. The situation is not so different today, only now it is called bailout or asset relief programs or the likes. And we in India take pride in it calling it development.
As explained by John Perkins in his autobiographical book Confessions of an Economic Hit Man,
Economic hit men are highly paid professionals who cheat countries around the globe out of trillions of dollars. They funnel money from the World Bank, the U.S. Agency for International Development (USAID), and other foreign “aid” organizations into the coffers of huge corporations and the pockets of a few wealthy families who control the planet’s natural resources. Their tools included fraudulent financial reports, rigged elections, payoffs, extortion, sex, and murder. They play a game as old as empire, but one that has taken on new and terrifying dimensions during this time of globalization.
Also read: The Reliance 4G Scam – #JioYaMaro
Today, nations increasingly carry out geopolitical combat through economic means. Policies governing everything from trade and investment to energy and exchange rates are wielded as tools to win diplomatic allies, punish adversaries and coerce those in between. India is ill prepared for this new era of geo-economics contest, while rising powers are adapting rapidly. Modern India needs structures to combat the threats posed by this kind of war by other means that aims for the strategic de-stabilization of the country.
It is high time we Indians as a country pause for a moment of introspection and engage in a serious discourse on the kind of development we wish to pursue. Otherwise whatever we hold dear of our culture, heritage and traditions will be washed out in the name of blindly following the western models of development!
Read this exclusive research on the Global War on Cash with an impact study of India’s demonetization drive with a push towards a Cashless society published in the Apr-Jun 2017 Demonetization issue of GreatGameIndia – India’s only quarterly magazine on Geopolitics and International Affairs.
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