A recent story reports on mis-selling and fraud by a bank in rural Rajasthan where they allegedly made bank deposit customers put their signatures on life insurance products of a group firm. While the story of people of small means being cheated out of their money is worrying enough, what is of greater concern is that this problem is not limited to one insurance company or bank, or location. Life insurance mis-selling and fraud by bank branches is systemic in the country. The evidence to this statement comes from three sources. The first is anecdotal: almost everybody who has a bank account has a mis-selling or fraud story to tell about life insurance. For those who superciliously turn away from anecdotes, there are three academic papers that nail the problem. In 2014, two economists and I, wrote a paper estimating that policyholders lost over Rs 1.5 trillion from mis-sold life insurance plans between 2007 and 2012. In 2017, I published another paper that mystery shopped bank branches to catch mis-selling. I found that bank officials lied most of the time on features around costs and costs of early redemptions to potential customers. A 2015 paper by Anagol et al find that agents overwhelmingly recommend life insurance products that are unsuitable to the customer but get the agent high commissions. Three, two government committees, Swarup and Bose, have found life insurance to have very high front incentives that cause sharp sales and fraud. (Disclosure, I have served on both the committees).
Most people have a “where I was” story about the night of 8 November 2016. Some of us also have a story on ‘how much money I had’ on the night that Prime Minister Narendra Modi invalidated 86% of Indian currency. I was just dragging myself back home after my Iyengar yoga class (those who join the Beginners will identify with my use of the word ‘dragging’), ready to eat some dinner and collapse. But of course, the team and I were up until midnight, reporting and writing on the biggest news of a personal finance journalist’s lifetime. How much money did I have? I had three Rs500 notes that day. Having moved to cards and then digital, I’d moved my household staff to bank accounts and electronic transfer of salaries some years back. Cash was needed for everyday buying of milk, bread, eggs, vegetables kind of stuff. The local Mother Dairy booth was accepting old notes for future purchases, so I was spared the lines to deposit my money. We all have our stories of what happened that night. This was mine.
Apart from the personal shock to our money lives, demonetisation quickly became a huge political, social and intellectual battle. The battle lines got drawn deep in the ground and your pro- or anti-Modi stance decided where you stood on the demonetisation debate. I wrote a column one day after demonetisation in which I said that the step will raise the cost of black money, it will not eliminate it. That it is one step in a larger plan to go after corruption. You can read it here: bit.ly/2mmdYeZ. How does it look a year later? Modi gave four reasons for demonetisation: to curb corruption, black money, fake notes and terror finance. To judge the success or failure of demonetisation on these four metrics is almost impossible because demonetisation was one of the several weapons the government has deployed against these issues. But let me try and unpack them.
Has there been a dent in corruption and black money? Anecdotal stories say that high-level corruption in the central government is gone, but the cancer of graft elsewhere in the system still thrives. It is unrealistic to expect the deep-rooted habit of graft to disappear overnight, but at least there is serious political will behind the anti-corruption war in India today. What of black money, or money on which income tax has not been paid? Black money is back in the system—talk to any builder (real estate is the biggest sump of black money and talking to builders is a quick way to figure out if cash deals are back) and they say it is as if demonetisation never happened. But they admit to the cash ratio going down and the fear factor lurking at the back of every deal.
Two weeks after the sudden death of a bulk of Indian currency notes, the most obvious panic seems to be over but the elephant of demonetisation is yet to work its way through the system. The entire process will take months before the python digests the elephant.
Arguments, edits, opeds, conversations, debates and social media are sharply divided on what the currency replacement will achieve. I remain in the ‘it’s good for the country’ side of the debate and want to address some of the arguments against demonetisation.
When I began this column in March 2009, I remember writing my first piece on the macro mess India was in and how a spendthrift government, which took an 8% growth rate and a 26% rise in tax revenues in the previous years as the new normal, messed up big time. You can read that column here: http://bit.ly/2bynE0d . With elections around the corner, money was splurged on massive loan waivers and many other let’s-give-them-money-and get-their-votes schemes. It worked and the government came back to power. The next five years got the country closer to disaster, with bank books getting stuffed with questionable loans, policy paralysis and big corruption in the central government and bureaucracy.
Suddenly everybody’s heard of the Pradhan Mantri schemes. The driver knows about it, so does the housekeeper, the sweeper, the plumber, the “pressguy” and the fruitwala. Some bank branches are buzzing—long queues and lots of excited chatter. What’s up? We could call it the Modi push. On 9 May, he launched three financial inclusion schemes that offer life cover, accident insurance and pension. These ride on the first Modi push—the Jan Dhan Yojana, under which 125 million bank accounts were opened by 31 January 2015. This, in turn, rides on the Aadhaar unique identity card. With more than 810 million unique identity numbers covering 67% of residents in India already issued, the base for a large-scale financial inclusion programme has been built.