Modi’s demonetisation announcement: Great daylight legal robbery by the State


A Dummies guide to demonetisation: 

In order to understand demonetisation, first you need to understand how bank functions. Bank is like a company which borrows money at either zero interest rate (Current Account), a lower interest (Savings Account, 4%) or a moderate interest rate (Term Deposits) and then lends it to its borrowers at a higher interest rate.

About 80-90% of banks funds are generated from the deposits of its customers (in Current, Savings or Fixed Deposits). Of these, about 50% is in CASA (Current Account-Savings Account). Rest of the money comes from paid up capital and borrowings from Central Bank, Interbank Market and International Financial Institution.

Great daylight legal robbery

A high CASA ratio is favourable for a bank, since it is getting money at low cost. Other means of money comes at higher interest rate for the Bank, and so not favourable.

How does a Bank do its business?
It does by lending the money (deposited to it) at higher interest rates. However, it cannot lend its total money to borrowers; else the deposit customers would be shown a thenga (Y) when they want to withdraw their own money 😉

The banks are required to keep a certain percentage of deposits with RBI which is called CRR, and also maintain a stipulated proportion of their deposits in form of liquid assets like cash, gold or securities. This is called SLR (Statutory Liquidity Ratio). Most banks currently keep an SLR higher than required (>26%) due to lack of credible lending options

The rest of the money is lent out by the banks, and is called CDR (Credit Deposit Ratio). It is the ratio of how much a bank lends out of the deposits it has mobilised. It indicates how much of a bank’s core funds are being used for lending, the main banking activity. A credit-deposit ratio of over 70 per cent indicates pressure on resources as they have to set aside funds to maintain a cash reserve ratio of 4 per cent and a statutory liquidity ratio of 21 per cent.

A very high CDR is considered alarming because, in addition to indicating pressure on resources, it may also hint at capital adequacy issues, forcing banks to raise more capital. Moreover, the balance sheet would also be unhealthy with asset-liability mismatches.

Understood the basics? Now let’s move to the Real Game:

PSU banks account for nearly 70% of the financial market. Corporate take money (loan) from the banks and do not return it back. A loan is tagged an NPA if interest and/or installment repayments do not take place in 90 days. Once a company is tagged under NPA, it becomes difficult for it to get loans from the same bank or other banks.

However, Banks normally used to pushed loans into the restructured loan basket whenever they saw the first signs of trouble, and retained them as standard assets. This was a technical adjustment that they used to make which suited the cronies, as well as the banks. This adjustment enabled the cronies to borrow more, either from the same bank or nay other bank.

But why did the banks do such?
The readjustments suited both the borrower as well as the banks. Banks hide bad loans and show a healthier than real balance sheet to the investor. Which company (bank) would like to show its stressed assets which would erode confidence of the depositor and trigger withdrawals, leading to bankruptcy?

Moreover, the state also arm twists the banks to give loans to companies which don’t have a healthy reputation with respect to repayments of loans earlier disbursed to them. That’s how crony capitalism works. These companies fund the political campaigns of parties, and when the party comes to power, it returns the favours in forms of largesse, given to them in form of loans.

But this is not the end, the government also write-offs the loans disbursed to them earlier. Twenty-nine state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015, much more than they had done in the preceding nine years. Who arm twisted them for write-offs? The government of course.

Too much???
Nah, there is more. The government also write offs the taxes payable by these cronies (in form of corporate income tax, customs and excise duties) every year. How much?? 7 crore every hour or Rs 168 crore everyday in write-offs on just direct income tax alone. No, no these are not my figures, these are government figures which are tabled every year in the budget document, however it is placed at such a position that it doesn’t catch the attention of the general public.

It is tucked away at the very rear part of the budget document, a seemingly innocuous annexure- “Statement of Revenue Foregone” or which the government has now surreptitiously changed the title to “Revenue Impact of Tax Incentives”. As per the budget document, a total of 5.32 lakh crore of corporate tax (corporate income tax, as well as customs and duties) was written off by the government in 2013-14. Well, this was when UPA was ruling.

Then came the party with a difference. Difference? Really? More than 30,000 crore was spent by different political parties in 16th Lok Sabha elections. The BJP spent the most, and eventually came to the winning spot. Where did this money come from? Mr. Modi was often seen flying in Adani aircraft.

BJP carried this legacy of crony capitalism from the Congress. However, it committed a mistake. And that mistake was the brazenness in which this crony capitalism was now being promoted, that it caught the attention of public. Congress, a 130 year party had expertise in this. Cronies benefited under its regime, and were not visible to the masses.

The cronies are benefiting under BJP, and it is visible now; courtesy the brazen form in which the party is trying to promote the interests of its benefactors. Experience matters.

When the BJP came to power, the corporate tax write-off increased to 5.89 lakh crore in 2014-15. If you add up the total write-offs to corporate in the past 10 years (most of which comes under UPA rule) it nears Rs 42 lakh crores- which means Rs 1,110 crore, everyday.

Yes that’s the amount the corporate loots everyday, while you struggle for your subsistence daily, paying taxes and queuing up outside banks to take your OWN hard earned money- with a present withdrawal limit of Rs. 2500. With this money the government can fund the Mahatma Gandhi National Rural Employment Guarantee Scheme for 125 years, at present levels!!!

The coming of Raghuram Rajan:

When Raghuram Rajan was appointed the governor of RBI, he gauged the problem of bad loans early and forced a clean-up exercise of bank balance sheets. It was then that truckloads of skeletons tumbled out of the closet.

About 2 lakh crore of Gross Non Performing Assets (GNPA) was declared in just one quarter (January-March 2016), thus taking the GNPA of banks to 5,94,929 crore at end of March 2016. That means 6 lakh crores of bad loans!!!

Over 90% of this is on the books of Public Sector Banks (PSBs). Such grave was the situation that if timely remedy was not provided, they could translate into significant capital implications for the government that owns majority of these lenders. Rajan gave March, 2017 as the target to banks to clean up their balance sheets and disclose the entire stock of bad loans. If the problem of NPA was left unattended, it had the potential to drive Indian economy to ebb.

Rajan understood that the problem was at two ends- the propensity of the banks to dilly-dally on the situation, by making technical adjustments and pushing NPAs to restructured loan basket, and on the other hand the arm twisting of the PSBs by political masters to give loans to the cronies who have funded their election campaigns.

Addressing the second problem was outside the purview and authority of Rajan, so he addressed the first problem and made it mandatory for banks to make provisions on restructured loans at par with bad loans and forcing them to set aside 15 percent of the loan amount as provisions if they chose to go for fresh restructuring.

Earlier, banks used to conveniently push many stressed loans, especially in the infrastructure segment, to the restructured loan category to prevent them from slipping into the NPA category. But, with Rajan at helm, this was no longer possible. This irked the cronies, and they wanted him out of the establishment. The man who could have addressed to the situation was shown the door. That’s the power these cronies command.

Due to initiatives of Rajan, NPAs started to tumble out in truckloads. This scenario led to a crisis situation in banking sector, that if banks are unable to find sufficient capital to fill their coffers, they might go bankrupt. Banks needed trillions of rupees, if one includes the money needed to provide for bad loans, meet the Basel-III capital norms and fund their credit expansion plans. Banks, due to their fractured balance sheets were unlikely to draw investor interest even if they hit the market with bond issues.

So where would the money come from? Gathering capital for the banks was the biggest problem for Narendra Modi government, since the govt owns 70% of the banking industry. Moreover, the problem was also their (the government present and before) own creation. In its desperation to address to the capital problem of the ailing banks, the government committed a blunder, which the media is reporting as a “masterstroke”. It went ahead with demonetisation policy, triggering a panic among the masses. Deposits to banks have swelled and 3 lakh crore have been deposited within 4 days of the demonetisation.

However, the demonetisation policy is ill-conceived one, which purports to provide a short term solution to banks, the problem of which is deep rooted. The deposits being made in banks will go in CASA category, which is demand deposit and have to be given back to the depositor on demand. The government is tackling the situation with withdrawal restrictions on depositors, which is likely to continue for few months.

Else people would withdraw their money, and banks would again be back to square one. But the pertinent question is- for how long will the government impose withdrawal restrictions? Would it not trigger deflation? Will it not lead to an economic crisis, since if people have few money in hand, they would obviously purchase their monthly ration of groceries, vegetables and eatables and not mobiles, TV, cars or any other manufactured goods?

Will not the manufacturing sector be badly hit by this imprudent decision carried out in haste and without logical planning? Would it not lead to increase in unemployment, with most pink slips coming from the manufacturing sector?

The government says that the situation would settle down in 50 days. How? As per data furnished by the Finance Ministry, Rs 17,50,000 crore worth of currency notes were in circulation in October-end.

The government, through its demonetization of old 500Rs and 1000Rs note made 14.5 lakh crore rupee (84%) invalid in the market, leading to a currency crisis. As per FinMin, Rs. 50,000 crore dispensed to customers in first 4 days (10-13 Nov). However, there is still a currency deficit of 14 lakh crore.

In India, most of the transactions carried out are in cash. As per an estimate (carried out by Fletcher School at the Tufts University in 2012) 86.6% of transactions carried out in India were in cash. The economy is going to take a big hit, with 84% of the cash being made illegal due to demonetisation.

Printing of new currency began in August-September, and by October 2016, the RBI printed 480 million of Rs. 2000 denomination notes and an equal number of new 500 denomination notes. Total value of these new notes= 96,000 crore (1000 notes) + 24,000 crore (500 notes) = 1.2 lakh crore. Time taken (between August-October) = 50 days approx. (guess estimate).

So, it took 50 days to print money of value 1.2 lakh crore. Going by this, it would take approx. 500 days (One and a half year) to print the remaining 12.8 lakh crore needed to bring back the economy to its pre 8th Nov. state.

And the govt. wants to make you believe that in next 50 days it would print 14 lakh crore, to make up for the present Currency Deficit?

If timely ameliorative measures are not taken, we are headed towards an economic recession.

(The views expressed here are solely the author’s own. The facts and opinions appearing in the article do not reflect the views of Janta Ka Reporter and Janta Ka Reporter does not assume any responsibility or liability for the same)


  1. Sir,
    I understand the banking system and monetary policies work in this way only around the world. If they do not then there will be Chaos everywhere. What you are suggesting by just giving some points without solution is take us back 1000 years to anarchy when people used to keep their money with them. Sounds more alarming.

    Further if it is such a loot why economists are lauding the Government’s steps.

    Moreover by mentioning Mr. Modi using Adani’s helicopter during election 2014, you seems to be way polarised towards #AAP. So seems the article itself is totally biased.

    • Manish you are mistaken. You need to refer the history again. Many decisions were supported as good initially & later the same was found as unworthy. Because, today the boss does not like even a constructive criticism.

    • So, what matter is not that the country’s economy is going to go down the drain for the next many months, but if the author is biased towards AAP.

  2. Thank you, Mr. Rahman, for this enlightening piece, and others, as well. Have read all of them. Crisp and well laid out. Things make so much more sense now, but, alas, the ground reality is unlikely to change. People are so busy in surviving just another day that they just might overlook the disturbing truth.

  3. Question: firstly, why do you assume that notes can’t be printed quickly or in other words what makes you think the previous pace of note printing is maximum. Secondly, if states are involved, how come most regional parties are opposing the move? Lastly, given you assesment of the impact on economy, why would a corrupt politician hurt manufacturing sales of his fellow cronies?

  4. Very convincing indeed for the common man who thinks that demonetisation is a bad move by the govt (of course with his simple logic that a thief will always be a theif and this is just a temporary setback) and for those who think Modi is always right as he can never be wrong, all this (in this article) will be opposition’s view that knows only to oppose and nothing else.

  5. 1. //Then came the party with a difference. Difference? Really? More than 30,000 crore was spent by different political parties in 16th Lok Sabha elections. The BJP spent the most, and eventually came to the winning spot. //

    If money is the only criteria for winning election then how much money did Kejriwal spent to win 67/70 in 2015 Delhi election?

    2. Did RBI used all his resources 24×7 in last 50 days to print 2000s & 500s currency alone ?

    3. 84% transaction is made illegal due to monetaisation. But in the same length you forgot to add ANY UNACCOUNTED MONEY IS BLACKMONEY . And out of these 84% transaction large number of transaction are unaccounted money .

  6. This article talks about one side of the story only. Do not underestimate the real benefit I.e. killing the fake currency, which as almost 40%, it seems the article is written for the sake of opposing a good initiative. Look at other benefits as well, interest rate to come down, prices to come down , with excess funds will which otherwise lying idle at godowns etc got into the main stream and will benefit the public at large.

  7. Author is trying to confuse common people by making #DeMonetisation with big Economy jargons.

    Very simple meaning of current #DeMonetisation (announced by RBI) means people have to deposit all 500 & 1k notes they have into their bank accounts. Govt will issue new notes in return in some time frame.

    Now those who has legal money (shown in annual IT return as income) don’t require to worry. S/he can deposit it and continue his/her business through cheque/debit card or can withdraw it within limit for time being and after time limit, can withdraw all.

    But person who has stored huge amount of cash (may be in 100 or 1000 crores)(mostly builders, politicians, criminals, corrupt govt officers, doctors, lawyers, professionals, business men who do business without real bill, etc.) for years and has not shown true income in annual IT return are worried as they can’t deposit all in bank else IT raid is just door step away. These people wouldn’t dare to deposit all their stored money or has to find way to deposit in other accounts (mostly villagers, poor people – now they r charging 30% ) and will be dependent on them for return (many even would not return). And for big black holder, even this way is not possible . He has to forget that cash.

    So despite hardship, current DeMonetisation is good for economy in longer run

  8. This is robbery from tax thieves in country. We understand banking system it is nothing to do with it.

    Every great economist is praising it and its such a shame that petty sadak chhap reporters are trying to criticize

  9. I do not agree to all that is said. But there are certain good points. The objective of this demonetisation was twofold. One to choke the introduction of more fake/ counterfeit notes which will by achieved to a large extent. Second was to bring in money held in cash by hoarders into the mainstream economy. This is also happening to a substantial extent.
    Now, the withdrawals part. Each savings bank account is allowed to withdraw up to 24,000 per month or 96,000 per month. I do not think anyone requires more than this for household expenses. Thus itself is very high considering that many transaction is done through net banking and cards. Current account withdrawals are now at 50,000 per week. This may be low in industries where there is a lot of cash purchases or wages are paid in cash.
    By this a lot of illegal cash hoarding will come down which will help in reducing the corruption as most cases corrupt practices are made in cash. This will be good in the long run for the economy.
    Let us not vitiate the atmosphere further by writing such negetive things

  10. A lot of voids in your assumptions, good attempt thought, but a lot is missing in your conclusion which I could see being an economist myself. Only two inferences after reading “your” view – 1. You have a long way to go before you can have a much better understanding of political economics. 2. You have a biased source of information or biased conclusion.

    There are 1000 points in favor of demonetization and 5000 against it which you should read and give proper weights (beta) before building the equation and connecting the dots.

  11. Initial description was nice on working of Banks but what nonsense analysis of the demonetisation and its impact on the Banking. It seems your view is to malign the minds of common man that the present deposits will be transferred to cover bad debts. Nothing but utter nonsense.

  12. Printing of the currency doesn’t seem to have started in August-September. It probably started in September-October. Urjit Patel took charge on 4 September and the currency notes have his signature. So they couldn’t have started printing in August.

  13. Mr. Author…..

    Your article seems very convincing but u missed the fact that only 10-20℅ of the money demonitised is actually used in trade….rest is hoarded and donot see the light of day for years (barring elections)

    So as per ur article….Mr PM has already arranged or got printed 50% of currency traded or 25℅ if we consider tat 50℅ of the money printed is already converted in black again….

    So the future is not as bleak as u suggested….

    Also there are other means of recapitalizing banks….

  14. Sir, your contention that the demonetisation scheme is to refill the banks is totally misguided. No person let alone a PM would do it. The govt is liable to replace/repay every note it is asking for.
    There are other ways to refill the bankrupt banks. And that is called quantitative easing (QE). Of course a fancy term for printing new notes and increasing money supply. But that is how govts and economist s deal with bankrupt govt controlled banks.
    Nevertheless you made a great effort at Spin Doctoring. Kudos!

  15. Nicely presented but tilted towards opposition at end by hiding below info.

    To avoid printing remaining 12.8 lakh crore or more currency. Modi has already started Digital India project. After demonetization small businesses are lined up to get card-swipe machines to provide cashless facility to their customers.

  16. Why are you not citing your sources? It’s better writing style to share the source of statistics so that we don’t have google ourselves.

  17. good on how bank works … .. and an amazing work of fiction on later half where its talking about demonitisation… yes i will call it a fiction…. far from truth…

  18. Your concern is largely unfounded. There is temporary limitation on cash transction, not transaction. Even today you can use your debit or credit card for any amount. You can also make DD or issue cheque of any value (provided there are balances in bank account).

    So your justification of low cash withdrawl will impact manufacturing in long run is unfounded

  19. Let me highlight a couple of points: the most important of which is the 44 lakh crore amount of forgiven tax by (mostly) the UPA govt. And this is a political party which still has the temerity to stand for elections.

    2ndly as mentioned by others as well the demonitization measure does not necessarily have to convert all the cash previously present to new notes. A lot of these old notes were hoarded and will not see another day. It is a very good thing that money supply (M0 to be specific) is decreasing in the economy. This move is likely to decrease costs of luxury goods and real estate. Have you ever thought of why we earn in rupee terms but when we spend we spend equivalent to dollars? One of the reasons is the indiscriminate priniting of currency which the UPA govt did in the past 10 years or so. Just google RBI money supply and you can see it for yourself. Moreover, no one is limiting the spending power of the common citizen. If they want they can use debt/credit cards to make purchases – and SMEs will move to adopt these measures with this drastic step. Overall demonitisation is good and I would prefer if there are no notes above 500. Your initial notes were very illuminating, but the arguements against demonitization have been one-sided and according to me factually incorrect.

    A last note – I work at the European Central Bank in banking supervision. So, my knowledge about banking is sound and my comments should be seen in the same light.

  20. Too technical for me….but if I go by standard politics…Modi just don’t wish to rule India once and put it’s entire economy into trash….he must have people to give him pros & cons of his move…if the impact is going to be that big then I am sure he would have been informed before doing this….And finally…we have seen worst in our politics…I am ready to give Modi a chance at least.

  21. your article gives only one sided view. you haven’t mentioned anything about unaccounted money. Even if you think big croonies escaped ( which has no source ), how about a guy with unaccounted money few crores, bribe money, real estate.. what do all these guys are going to do.. with IT monitoring 2.5 lac.. every unaccounted money would get caught. they have to pay fine to IT. Once it gets to bank.. all accounts are linked to PAN gets exposed completely. your biased AAP supporter. How much unaccounted money do you have ? 😛

  22. If liquid cash is not there, Do you think people can’t purchase TV, mobile, and other electronics and manufactured products.. That can be done by online purchase not at all a issue. And the next thing is what ever liquid cash was there said about 14.5 lakh crore rupees. Need not to be hand over to all stake holders in form of cash notes that can be deposited in bank accounts and if any transactions they need that can be done online, or by DD,or checque- Digitalizing India making majority transactions online, which helps less chances of exchanging black money…

  23. Just because you belong to a particular religion does not mean you have to oppose everything by the BJP..the first section on banking was good the second half…. biased and devoid of any research or logic….lies interwoven with truth to sell it as all truth

  24. What an article !! India’s total budget was 19 lakh crores this year of which your saying, it wrote off corp loans close to 5.42 lakhs plus wrote off loans worth 1lakh crore. Does it even make sense? Where did you get your numbers from? If Modi uses adanis chopper, is he his slave? What if he had booked Kingfisher, you would have said he is Mallya’s slave. No matter what Modi does, ppl will always find a reason to blame him. Thank God he didn’t use my car !!

    To survive in the dirty political world, you need contacts. If Modi does it, then it’s corruption. If anybody else does it, its funding. How do you say that bjp won oly bcoz they spent more than anybody else? As if the other parties were out of cash? People of the country are tired of the 130 yr old party which have lakhs in scams. The so called prompt and corruption free party is having mla’s with hundreds of crores in unaccounted cash.

    Nevertheless, the author may be one among the crores of black money hoarders who is trying to provoke others with inaccurate dat. All the best

  25. The Basic point that has been missed that Money if kept in bank gives the depositor ‘interest’ which, at least to some degree would make up for the inflation. What’s wrong in that even if someone is forced to keep all his money in bank or promoted to transect with virtual money. Plus if same helps in writing of NPAs (don’t forget the farmer’s shares too), what’s bad in it..!!

  26. The writer want to save his black money. He also know that write off amount is just adjusted in balance sheet as part of process. When party repays it comes in bank’s profit. Nowhere claim of loan amount weakens.

    Writer is misguiding and seems to be man of Kejriwal who has lost the public confidence.

  27. You might have some valid points but what you forgot is a basic tenet of economics, “correlation does not suggest causation”. Demontization has been implemented because of the reasons provided by you still can’t be proven.

  28. After going thru this energy draining article, very much relieved to note greatly strengthening sharings from the comments section. Let the result speaks..and may god bless us all.

  29. How foolish..! People won’t buy manufactured goods???
    Buddy! U you could write so.. just because you always bought manufactured good(the comforts and luxuries) through unaccounted income of yours in cash. So you’re feeling it so. Many buy all these necessities comforts and luxuries with accounted income.. not like your black money.. however.. if someone wants to buy and will buy swipinghis card. Please grow up. Being RAGA is enough.

  30. Fine way of describing, and good post to take information regarding my presentation subject,
    which i am going to present in university.


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