Understanding demonetisation: Who is behind the war on cash (and why)

The cashless idea went from theory into practice when businesses and governments funded the Better than Cash Alliance in 2012. India joined it in 2015.

This is the second part of a three-part essay.

Part I: Understanding demonetisation: Why there’s a war on cash (and you are in the middle of it)

Part III: Understanding demonetisation: The problem with the war on cash

There are two well-known economists who pushed forward the idea of eliminating cash initially: Willem Buiter, now Chief Economist at financial services behemoth Citigroup and Professor Kenneth Rogoff of Harvard University. (Buiter was a thesis advisor to current Reserve Bank of India Governor Urjit Patel, and they have authored many papers together.) Willem’s 2009 piece titled “Negative Nominal Interest Rates: Three Ways to Overcome the Zero Lower Bound” came exactly at the right time, when many advanced economies were grappling with the issue of low growth, lower-than-targeted inflation and interest rates that were close to zero, and it got much attention. I can’t resist quoting the part where Buiter shows he is aware of the reaction his proposal would cause, and then suggests how to deal with it:

“But politically, the abolition of currency would run into opposition from some of the legitimately cash-dependent poor and elderly, from those for whom the anonymity of cash is desired because they are engaged in illegal activities, and from libertarians. The first constituency can be helped, the second can be ignored and the third one should take one for the team”!

Rogoff presented his paper, “Costs and benefits to phasing out paper currency in 2014” at the National Bureau of Economic Research’s Macroeconomics Conference at Cambridge, Massachusetts, and I must quote him:

“Paying a negative interest rate on currency, or on electronic reserves at the Central bank, may seem barbaric to some. But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency.”

Rogoff’s special contribution to the debate was to flesh out the idea that currency is tainted and dirty, facilitating tax evasion and illegal activity. He ended his paper thus:

“Given relentless technological advance, embodied in everything from mobile banking to cryptocurrencies, we may already live in the twilight of the paper currency era anyway. Nevertheless, given the role of paper currency (especially large denomination notes) in facilitating tax evasion and illegal activity, and given the persistent and perhaps recurring problem of the zero bound on nominal interest rates, it is appropriate to consider the costs and benefits to a more proactive strategy for phasing out the use of paper currency.”

Since these two men made their case, others have added their own powerful voices to the chorus, including former US Treasury Secretary Larry Summers (who was considered for appointment as the Federal Reserve Chairman) and Nobel Laureate Paul Krugman. Both Krugman and Summers argue that in the situation that advanced economies are faced with, there are only two choices: either have negative interest rates (along with its inescapable corollary, currency elimination), or tolerate much higher levels of inflation, so that real interest rates can be negative, even if nominal interest rates are not. Both of them prefer currency elimination to much higher levels of inflation.

Krugman foresaw the outrage these suggestions will cause, and countered it this way:

“Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!

“But in a liquidity trap, saving may be a personal virtue, but it is a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it is the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something that the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.”

From left to right: Willem Buiter, Kenneth Rogoff, Paul Krugman, Larry Summers
From left to right: Willem Buiter, Kenneth Rogoff, Paul Krugman, Larry Summers

Advanced economies

This chronology of how the idea developed also gives us a good window to where one of the primary drivers in the war on cash, Central banks in advanced economies, are coming from. They are trying to perfect the primary tool they have, so that they can use if effectively in the current situation they are faced with – as well as in similar situations that may arise in the future. In fact, many are comparing the idea of currency elimination to the giving up of the Gold Standard during the Great Depression of the 1920s, which helped many economies revive.

These ideas are gaining momentum. Denmark, for example, is predicting that it will eliminate cash by 2030. In Italy and France, it is illegal to make purchases exceeding 1,000 Euros in cash. In Spain the limit is 2,500 Euros. Last year, European Central Bank decided to stop printing and issuance of the 500 Euro note, though already existing notes will continue to be legal tender for ever.

At a conference that was held in London on May 18, 2015 titled “Removing the Zero Lower Bound on Interest Rates”, Buiter and Rogoff were the keynote speakers, and other speakers represented the central banks of Switzerland, Europe, US, Denmark and Sweden, Soros Fund Management, insurance company Generali, Asset Management Company Brevan Howard and so on. So by 2015, the war had already been joined by many financial service behemoths who had begun to see the gains to be had from pushing currency out of the system. And by October 2015, the International Monetary Fund itself had released a paper titled “Breaking Through the Zero Lower Bound.”

Emerging economies

However, a key part of the war on cash will happen not in advanced economies, but in emerging markets in Africa such as Nigeria or in Asia such as India. This is because these markets are seen as holding the biggest potential for business gains and gross domestic product growth. There is also a belief that emerging markets are where new digital financial technologies will evolve, by leapfrogging the stages that the advanced economies had to go through. This possibility exists because while the difference in income levels between advanced economies and emerging economies is impossibly high, the difference between them in terms of mobile penetration levels and availability of bank accounts is much less, and these two are the essential infrastructure necessary for the move towards cashless. In the words of Bill Gates:

”One interesting feature of digital financial innovation is that some of it is happening in poor countries first… entrepreneurs in developing countries are doing exciting work – some of which will “trickle up” to developed countries over time.”

One could say the first concrete expression of this belief was the creation of an organisation called the Better than Cash Alliance in 2012, hosted at the United Nations in New York and funded by the United States Agency for International Development (commonly known as USAID), Bill and Melinda Gates Foundation, Citi Foundation, Ford Foundation, Mastercard, Omidyar Network and Visa Inc. The United Nation’s Capital Development Fund serves as the secretariat. The Alliance states its goals as advocating for the transition from cash to digital payments; conducting research; and catalyzing the development of inclusive digital payments ecosystems in member countries. What is worth noting is that the Alliance has 24 member countries, ranging from Kenya to the Philippines to Vietnam. India joined it on September 1, 2015.

Why 2015? Because in the previous year, during their bilateral meeting, Modi and US President Obama had discussed solutions to financial inclusion and the decision to join the Alliance can be seen as one result of that discussion. It was announced in the January 25, 2015 Joint Statement by the two, during Obama’s visit for the Republic Day.

Prime Minister Narendra Modi and the Chief Guest US President Barack Obama at the 66th Republic Day Parade 2015, in New Delhi on January 26, 2015.
Prime Minister Narendra Modi and the Chief Guest US President Barack Obama at the 66th Republic Day Parade 2015, in New Delhi on January 26, 2015.

But there were other steps too. 2015 in fact can be seen as a major watershed in India’s move towards cashless, in terms of acceptance of the principle. In his Union Budget speech in 2015, Finance Minister Jaitley said:

“One way to curb the flow of black money is to discourage transactions in cash. Now that a majority of Indians have or can have, a RUPAY debit card, I propose to introduce soon several measures that will incentivise credit or debit card transactions and disincentivise cash transaction.”

In June 2015, the finance ministry put up a draft proposal on its website, recommending tax concessions to reduce the cost of credit, debit and online payments. In July 2015, 11 new payment bank licences were given out, including one for PayTM. In November 2015, a Memorandum of Understanding was signed between the Ministry of Finance and USAID – the same agency behind the Alliance – to start working on interoperable digital payment models to drive transactions that involve small businesses and low-income consumers.

If 2015 was a year when the idea of a cashless economy was wholly accepted, much of the real action started in 2016. In February 2016, the prime minister chaired a Cabinet meeting that decided to “discourage transactions in cash”, and “shift the payments ecosystem from cash-dominated to non-cash/less cash payments”. The Cabinet decision was followed by the establishment of a task force in April 2016, which was asked to recommend short-term measures to promote payments through cards and digital means. In his Mann Ki Baat address in May 2016, the prime minister even made a call for a move towards a cashless economy – as the “whole world” was doing. The task force made its recommendations within three months, in July 2016. The very next month, August, saw the creation of the Committee on Digital Payments headed by former Finance Secretary Ratan P. Watal.

On October 14, 2016, USAID, one of the founding partners of the Better Than Cash Alliance, announced the launch of a new initiative called Catalyst to drive cashless payments in India. According to the USAID press release:

“This launch marks the next phase of partnership between USAID and India’s Ministry of Finance to help catalyze the rapid adoption of digital payments in India as a step towards achieving Prime Minister Narendra Modi’s vision of universal financial inclusion to end ‘economic untouchability’ in India.”

The CEO of Catalyst, Badal Malick, described the organisation’s objective this way: “Catalyst’s mission is to solve multiple coordination problems that have blocked the penetration of digital payments among merchants and low-income consumers…”

“The rubber is about to hit the road,” Malick said during the launch of Catalyst.

And it did.

Less than a month later, Modi announced demonetisation, the kind of push to cashless economy that no government anywhere had so far given.

This is the second part of a three-part essay.

Part I: Understanding demonetisation: Why there’s a war on cash (and you are in the middle of it)

Part III: Understanding demonetisation: The problem with the war on cash

Tony Joseph is a former Editor of BusinessWorld and can be reached at tjoseph0010@twitter.com.

We welcome your comments at letters@scroll.in.
Sponsored Content BY 

India’s urban water crisis calls for an integrated approach

We need solutions that address different aspects of the water eco-system and involve the collective participation of citizens and other stake-holders.

According to a UN report, around 1.2 billion people, or almost one fifth of the world’s population, live in areas where water is physically scarce and another 1.6 billion people, or nearly one quarter of the world’s population, face economic water shortage. They lack basic access to water. The criticality of the water situation across the world has in fact given rise to speculations over water wars becoming a distinct possibility in the future. In India the problem is compounded, given the rising population and urbanization. The Asian Development Bank has forecast that by 2030, India will have a water deficit of 50%.

Water challenges in urban India

For urban India, the situation is critical. In 2015, about 377 million Indians lived in urban areas and by 2030, the urban population is expected to rise to 590 million. Already, according to the National Sample Survey, only 47% of urban households have individual water connections and about 40% to 50% of water is reportedly lost in distribution systems due to various reasons. Further, as per the 2011 census, only 32.7% of urban Indian households are connected to a piped sewerage system.

Any comprehensive solution to address the water problem in urban India needs to take into account the specific challenges around water management and distribution:

Pressure on water sources: Rising demand on water means rising pressure on water sources, especially in cities. In a city like Mumbai for example, 3,750 Million Litres per Day (MLD) of water, including water for commercial and industrial use, is available, whereas 4,500 MLD is needed. The primary sources of water for cities like Mumbai are lakes created by dams across rivers near the city. Distributing the available water means providing 386,971 connections to the city’s roughly 13 million residents. When distribution becomes challenging, the workaround is to tap ground water. According to a study by the Centre for Science and Environment, 48% of urban water supply in India comes from ground water. Ground water exploitation for commercial and domestic use in most cities is leading to reduction in ground water level.

Distribution and water loss issues: Distribution challenges, such as water loss due to theft, pilferage, leaky pipes and faulty meter readings, result in unequal and unregulated distribution of water. In New Delhi, for example, water distribution loss was reported to be about 40% as per a study. In Mumbai, where most residents get only 2-5 hours of water supply per day, the non-revenue water loss is about 27% of the overall water supply. This strains the municipal body’s budget and impacts the improvement of distribution infrastructure. Factors such as difficult terrain and legal issues over buildings also affect water supply to many parts. According to a study, only 5% of piped water reaches slum areas in 42 Indian cities, including New Delhi. A 2011 study also found that 95% of households in slum areas in Mumbai’s Kaula Bunder district, in some seasons, use less than the WHO-recommended minimum of 50 litres per capita per day.

Water pollution and contamination: In India, almost 400,000 children die every year of diarrhea, primarily due to contaminated water. According to a 2017 report, 630 million people in the South East Asian countries, including India, use faeces-contaminated drinking water source, becoming susceptible to a range of diseases. Industrial waste is also a major cause for water contamination, particularly antibiotic ingredients released into rivers and soils by pharma companies. A Guardian report talks about pollution from drug companies, particularly those in India and China, resulting in the creation of drug-resistant superbugs. The report cites a study which indicates that by 2050, the total death toll worldwide due to infection by drug resistant bacteria could reach 10 million people.

A holistic approach to tackling water challenges

Addressing these challenges and improving access to clean water for all needs a combination of short-term and medium-term solutions. It also means involving the community and various stakeholders in implementing the solutions. This is the crux of the recommendations put forth by BASF.

The proposed solutions, based on a study of water issues in cities such as Mumbai, take into account different aspects of water management and distribution. Backed by a close understanding of the cost implications, they can make a difference in tackling urban water challenges. These solutions include:

Recycling and harvesting: Raw sewage water which is dumped into oceans damages the coastal eco-system. Instead, this could be used as a cheaper alternative to fresh water for industrial purposes. According to a 2011 World Bank report, 13% of total freshwater withdrawal in India is for industrial use. What’s more, the industrial demand for water is expected to grow at a rate of 4.2% per year till 2025. Much of this demand can be met by recycling and treating sewage water. In Mumbai for example, 3000 MLD of sewage water is released, almost 80% of fresh water availability. This can be purified and utilised for industrial needs. An example of recycled sewage water being used for industrial purpose is the 30 MLD waste water treatment facility at Gandhinagar and Anjar in Gujarat set up by Welspun India Ltd.

Another example is the proposal by Navi Mumbai Municipal Corporation (NMMC) to recycle and reclaim sewage water treated at its existing facilities to meet the secondary purposes of both industries and residential complexes. In fact, residential complexes can similarly recycle and re-use their waste water for secondary purposes such as gardening.

Also, alternative rain water harvesting methods such as harvesting rain water from concrete surfaces using porous concrete can be used to supplement roof-top rain water harvesting, to help replenish ground water.

Community initiatives to supplement regular water supply: Initiatives such as community water storage and decentralised treatment facilities, including elevated water towers or reservoirs and water ATMs, based on a realistic understanding of the costs involved, can help support the city’s water distribution. Water towers or elevated reservoirs with onsite filters can also help optimise the space available for water distribution in congested cities. Water ATMs, which are automated water dispensing units that can be accessed with a smart card or an app, can ensure metered supply of safe water.

Testing and purification: With water contamination being a big challenge, the adoption of affordable and reliable multi-household water filter systems which are electricity free and easy to use can help, to some extent, access to safe drinking water at a domestic level. Also, the use of household water testing kits and the installation of water quality sensors on pipes, that send out alerts on water contamination, can create awareness of water contamination and drive suitable preventive steps.

Public awareness and use of technology: Public awareness campaigns, tax incentives for water conservation and the use of technology interfaces can also go a long way in addressing the water problem. For example, measures such as water credits can be introduced with tax benefits as incentives for efficient use and recycling of water. Similarly, government water apps, like that of the Municipal Corporation of Greater Mumbai, can be used to spread tips on water saving, report leakage or send updates on water quality.

Collaborative approach: Finally, a collaborative approach like the adoption of a public-private partnership model for water projects can help. There are already examples of best practices here. For example, in Netherlands, water companies are incorporated as private companies, with the local and national governments being majority shareholders. Involving citizens through social business models for decentralised water supply, treatment or storage installations like water ATMs, as also the appointment of water guardians who can report on various aspects of water supply and usage can help in efficient water management. Grass-root level organizations could be partnered with for programmes to spread awareness on water safety and conservation.

For BASF, the proposed solutions are an extension of their close engagement with developing water management and water treatment solutions. The products developed specially for waste and drinking water treatment, such as Zetag® ULTRA and Magnafloc® LT, focus on ensuring sustainability, efficiency and cost effectiveness in the water and sludge treatment process.

BASF is also associated with operations of Reliance Industries’ desalination plant at Jamnagar in Gujarat.The thermal plant is designed to deliver up to 170,000 cubic meters of processed water per day. The use of inge® ultrafiltration technologies allows a continuous delivery of pre-filtered water at a consistent high-quality level, while the dosage of the Sokalan® PM 15 I protects the desalination plant from scaling. This combination of BASF’s expertise minimises the energy footprint of the plant and secures water supply independent of the seasonal fluctuations. To know more about BASF’s range of sustainable solutions and innovative chemical products for the water industry, see here.

This article was produced by the Scroll marketing team on behalf of BASF and not by the Scroll editorial team.