Demonetisation or Demonization - Interesting Aspects of a mini-Black Swan event in India

About a decade & half back, I was working with HSBC Saudi Arabia as Senior Credit Analyst (see http://tinyurl.com/osq7rvt). Since there is a rule in Saudi that all foreign banks shall begin their name with the word ‘Saudi’ it is known as Saudi British Bank (you thought prohibition of 'women drivers' is the only strange rule in Saudi? you won't be disappointed! there are many!). At that time, one of my seniors, Tariq was from Pakistan. He was very jovial and friendly and used to tell interesting events that happened in an undivided India, as told by his grandfather. Tariq’s family was basically from Patna, India and during the partition, migrated to Pakistan because his father was educated and was practicing as lawyer. He ‘understood’ the advantages of the move to newly created theocratic Pakistan ; while many of his father’s relatives who were not that educated, did not move to Pakistan. According to Tariq, now his father deeply regrets his move to Pakistan as their relatives in India is far better off and living in a peaceful, modern and progressive environment compared to the ‘Islamic Republic of Pakistan’, which as the majority opinion goes, is a failed experiment.

Lipton Tea

Now let us come back to the interesting story during undivided India. During the early 1900s, Lipton tea was expanding its operations in India and wanted Indians to consume tea. Unfortunately, tea was not so popular in Patna. One fine day, the police of Patna distributed free cup of tea to all people moving around in Patna city. The catch was that after taking the tea, the person will be led to a counter manned by policemen, who forced the person to buy a half kg pack of Lipton tea. Well it looks like the efforts paid off as tea is now a prominent drink in north India (south India still prefers coffee ‘e.g. Tamilnadu’s filter coffee’). As with typical Indian fashion, the tea has been indianized as we have ‘karak tea’, ‘masala tea’ etc.

It is sure that Patna people likes tea and ought to be thankful that it is introduced to them. Probably, their only wish may be that Lipton could have found another way to introduce tea!

Withdrawal of currencies

Just like the forceful imposition of tea in 1900s, I think Prime Minister Modi is trying hard to bring in banking culture in India, by pursuing demonetisation, although it has some additional benefits (i) stopping counterfeiting of the current banknotes both within and neighbouring countries (ii) crack down on black money in the country and reduce corruption, etc. While the counterfeiting, black money hoarding may come back again and corruption in India is likely to continue (1757 Battle of Plassey is the best example of corruption – Robert Clive paid bribes to a rival General to turn the tables in favour of East India Company and it worked!), the everlasting advantage will be the increase in the number of people using banks and bank facilities.

Advantage Banks

Heads of e-commerce companies and IT experts have hailed the demonetisation as it gives an impetus to bank based digital payments. The demand for point of sales (POS) or card swipe machines has increased manifold across India while more people are using E-payment options as well. Many leading retailers have stated that debit and credit card transactions doubled since 9 November 2016.

Moreover, more than eleven lakh crores currencies have been deposited in Indian banks, making the banks cash rich. One Deputy General Manager of leading bank in India told me (when I was in India in Nov) that even a massive deposit drive would find it difficult to bring half the amount into his bank! No wonder banks are fully supportive and working hard without complaints even into the mid night!  Advantage banks.

Many sharp critics in India and abroad state that Demonetisation has become demonization for common man in India who are forced to stand in ques overnight and postpone purchase of land and other properties & even marriages! But, for Banks it shall be a good news in the long run.

Despite, criticisms, Financial Thoughts believe that the move will bring in long term advantages, if implemented correctly and intelligently.

Is it similar to Pavlov Reform?

Although many are quick to point out about the failed Demonetisation reform of 1991 in the erstwhile USSR ( i.e. Pavlov Reform), the Indian context is different and the circumstances of USSR will not happen in India – e.g. anti-Gorbachev factions led a military Coup in 1991 and Ukraine decided to get out of the USSR; such things will not happen in India thanks to Pandit Jawaharlal Nehru, the freedom fighter and the first prime minister of India, under whose direction the Constitution for Indian Union was drafted (delegated to a team led by Ambedkar) and sealed.

Brexit - Europe & Britain will not be the same again

Napoleon Bonaparte may be turning in his grave again. The French Emperor had a grand vision of United Europe and he almost accomplished his Vision. At his peak day in 1810, the United Europe under him stretched from Spain to Poland. However, his grand vision of ‘United States of Europe’ was squashed by British in the fields of Waterloo around 201 years back on a rainy June 1815. British went on to enjoy one of the best centuries in their history post 1815.

Now on another rainy day in June 2016, British ended the European dream of a ‘United States of Europe’.  Europe will not be the same again after British left European Union (EU). By 2010, the European Union was expanding its geographical reach by including more countries. Even Ukraine was eager to join, divorcing from Russia, who was their long term friend and cousin. In fact, snatching Ukraine from under the nose of Putin irritated him leading to a civil war sponsored by Russia, bringing in misery to many parties concerned. Even here, one can draw some remote / rough parallels of Russia’s war with Napoleon in 1812, which resulted in tactical advantage to Russia. Tsar Alexander declared war on Napoleon as he expanded his empire close to Russia territories. Similarly it can be argued that Russia moved against EU using Ukraine as proxy after European Union decided to annex / add Ukraine to EU.

EU Commission President Jean-Claude Juncker (French) is putting up a bold face and asked United Kingdom (UK) to quit EU as soon as possible. However, will Jean’s bold stand pay off?  What would be the aftermath of British decision of quitting European Union? Will it bring in an era of prosperity and glory to the UK just as the hundred years after Waterloo? Or will Britain will fall into an era of despair and it will go back to pre-1600s, when it was known to be a cold island of fishermen? It is remarkable how a fishing nation transformed into a nation of shopkeepers and spearheaded industrial revolution and finally controlled about a third of the world at its peak.

While many post-colonial generation, who study their own version of history lambast Britain for the colonial era atrocities and excesses, it is undeniable that they have left lot of positive qualities and imprints that still form the strong cornerstones of post colony nations, such as India. In fact, it is through the English language (and not through Hindi or any of the 22 languages spoken in India) that Indian Information Technology industry flourished across the world. The fundamental institutions such as Courts, backbone of Indian bureaucracy Indian Administrative Service (IAS), Companies Act, modern medicine, chartered accountancy, mullaperiyar dam - that sustains the lives of millions in the state of Tamil-Nadu etc - are the legacies of colonial rule in India. They restrained Afghans in the North and ended ‘IS activities’ of Tipu in the south while China never dared to stare across the border or annex Tibet while British moved around in India. However, within 7 years after Britain left India, China conquered Tibet and India watched silently as Tibetan leader (Dalai lama) rushed across the border seeking India’s help!.  Similarly, Iran kept their hands off the islands owned by UAE till 1971. Once UK left UAE in 1971, Shah of Iran snatched and occupied unlawfully the islands that belong to the UAE.  This is not intended to justify the colonial times in India and UAE, but just to give another perspective so that the reader may take a balanced view of those times.

Coming back to 21^st century from the dark & dim aisles of 18^th and 19^th centuries and somewhat brighter 20^th century, how would Britain and rest of Europe evolve after the historic voted in June 2016? Financial Thoughts believe following scenarios are possible, depending upon how the Britain and European leaders will decide:

Scenario 1 : Although Britain is out of EU, it may still continue to be a member of European Free Trade Association (EFTA). In order to do this, Britain should continue some contribution to EU budget. This scenario will enable Britain to get access to European markets stretching from Spain to Greece & Italy to Poland. Possibly, Germany may support this scenario as Germany tops as one of the largest import partner of the UK. The trade will continue unfettered bringing in associated benefits to Britain and Europe. Also under this scenario, it is assumed that other EU nations will continue as one bloc under the leadership of Germany and France, just as Winston Churchill visioned soon after the end of the second world war. This is possibly the best scenario.

Scenario 2: Encouraged by the victory of ‘Leave’ vote, far rights in France, Netherlands may force a ‘referendum’ and if those countries move out; it will spell disaster to EU. Then, of course, the existence of Euro as a currency will also be in doubt. Disintegration of EU and Euro needs a separate study as how it will impact the various economies all over the world. Luckily, the risk of such a scenario seems remote as no thinking leader of EU nations will rush into such a referendum in the near future.

Scenario 3: Encouraged by the victory of ‘Remain’ vote, Scotts have started asking for independence from UK. If that happens and Scotland separates and Britain is denied a member in EFTA by EU as retaliatory measure, that would end Britain’s whatever glory it has hung during the post colonial era. London will cease to be the financial capital of the world and its economy will shrink. The names ‘Britain’ or ‘UK’ will disappear from new headlines just like the mighty USSR disappeared from the contemporary world. Only ‘England’ will remain!. Without ‘Scotts’, England will be a weaker. All the good times, England enjoyed in the world, was with the company of Scotts. Let us see; how events will unfold. Undoubtedly, scenario 3 will be a nightmare for UK and if this happens the next generation of English will regret the vote for ever and will cause Winston Churchill turn in his grave.

Scenario 4: Although UK voters voted themselves out of EU, the UK Parliament has to officially put their stamp of approval and authorize UK Government to invoke Article 50 of EU and notify EU officially that would like to quit. This has not happened yet. There is a speculation in the market that UK may not ratify the referendum in the Parliament in which case the referendum may become void. However, this will tantamount to rejection of people’s choice articulated in a referendum.

It is not clear which of the above scenarios will play out. It depends upon a lot of factors and decisions by UK and European leaders. As of now, it seems that Scenario 1 has some good chance, provided their leaders take right actions.

What all this holds for Indian stock market? Will it be in trouble? Will it continue to be strong performer going forward? Financial Thoughts believe that despite the recent sharp volatilities in the Indian stock market, there is not much to worry as far as Indian stock market is concerned. Now India is officially the fastest growing large economy in the world. India has surpassed China as the fastest growing economy. Every dip in Indian stock market may throw up great opportunities to make Warren Buffet like long term investments that ought to multiply your wealth in the medium to long term.