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Friday, November 11, 2016

Currency shock: political gimmick or anything more?

On Tuesday, November 08, 2016, the Prime Minister told the nation that in a ‘bold and unprecedented move’, the government was going to demonetize all 500- and 1000-rupee notes effective from midnight. Following the amnesty scheme which was announced a few months ago to mop up black money – which, as everytime before, has obviously been a dismal failure – the government, as it had threatened earlier, has gone in for a truly draconian measure. Now let us calmly consider whether it is likely to work.

To start with, let us first take note of what the PM (and indeed, it was virtually the PM’s unilateral decision – even some Cabinet ministers apparently did not know about it before the announcement was publicly made, leave alone chief general managers of the biggest banks, who sounded clueless that night on TV – makes one wonder whether parliamentary democracy has already been given a quiet burial in this country) purportedly intends to achieve with such a measure. According to him, it will serve three main purposes: a) suck in black money and/or destroy it, b) tackle the menace of fake notes being shovelled into the country from across the border, c) make it difficult if not impossible for terrorists to stay solvent enough to be effective. All most desirable objectives, no one can doubt that. The question is, how likely are they to be achieved, and at what cost?

To take them in order: suck in black money? Was this the right and only way? The vast bulk of the so-called hoard of black money, it is well known, is held in numbered accounts abroad, over which our government either has no control or won’t do anything about (obviously because it will hurt too badly the fat-cat collective which can and will bring down any government which tries – remember a certain V.P. Singh?), or as bad loans taken by large corporates (I have heard the mention of eleven lakh crore rupees floating around – how many luxury cars, condos and even private jets have been bought with that money?), or in the form of gold and real estate. Unless those are touched, nothing significant can be achieved in this regard. Besides, it is not as if the government is going to shrink the money supply permanently and force the entire populace to shift rapidly to a cashless economy (anyone who knows India outside the metros will not have to be explained why that will remain a pipe dream for some decades yet): they are simply going to replace old notes with an equal number of new ones – what is to prevent millions of people from building up their hoards again within a few months, or at most a year or two? How many times can you render shock therapy of this sort – once in three or four decades (it has been done in living memory only twice before, in 1946 and 1978)? As for lots of people voluntarily depositing large sums of black money with the banks by December 30, who but a fool believes that most people with large stashes are going to do that, when it is much more profitable to suffer a certain one-time loss than get into the white on-record economy once and for all: especially when it is widely known that a very large percentage of black money holders do not even have incomes from legal sources, and can therefore never declare their incomes (think of those whose bulk incomes come from bribes, cutbacks, under-invoicing, passing off vast sums as ‘agricultural income’ on which the government deliberately refrains from imposing a tax, or crime of various sorts, including systematic large-scale theft, racketeering or fraud)?

As for the second claim, the best I can say in favour of the government is, let us see. One thing I know – nothing can be designed with technology that cannot be technologically copied. I have heard of tamper-proof and forgery-proof stuff far too often to be naïve enough to believe that any such thing exists. If powerful agencies – I mean national governments with an axe to grind – are hell-bent on forging the new notes again, I think it will be just a matter of time before they succeed, and not too long either.

Regarding the third claim, I really must say ‘Oh yeah?’ I don’t wish to add much to that. Terrorist organisations are going to be stopped just by changing some currency notes? Ask the FBI and CIA… It is a wonder that in this day and age governments can find large numbers of people to believe such promises. But of course, people like Donald Trump can become President of the United States. Makes one despair for the prospects of democracy…

Therefore it makes one wonder: was the whole thing done as an exciting gimmick by a government with flagging popularity, or one with an immediate, purely political agenda (such as crippling the opposition in the forthcoming Assembly elections in certain key states, who were depending largely on distributing unaccounted largesse to buy votes en masse)?

So what is the deal we are actually getting? A very large number of people, including very ordinary people (in the sense of being non-criminal and non-rich), like me and my doctor, my driver, my cook, my gardener and lots of friends are having a more or less bad time, running over and over again to their banks and queuing up for hours either to deposit cash or withdraw money, because they need it to meet regular household expenses, whereas a smaller number are facing much worse trouble because they owe relatively large sums to people who won’t take cheques, like hospitals, hotels and wedding caterers. A lot of even more humble people, like slum dwellers and villagers, many of whom don’t even have bank accounts and stuff like Aadhar cards, and have always put aside much of their savings in 500 and 1000 rupee notes, are in even worse straits: they simply don’t know what to do, whom to turn to. Heaven knows how much they stand to lose, and certainly they don’t know why they have suddenly been made to suffer like this. If the whole thing had simply been done gradually, with more forward planning and logistical preparation, this needless nuisance could have been avoided. The last time they (P. Chidambaram) did it, it happened so smoothly that nobody had occasion even to raise an eyebrow. But then, the last time they didn’t launch a massive propaganda blitz about slaying dragons! Meanwhile, how many tens of millions of man hours are going to be lost merely standing in queues?

So, then, if we really wanted to rein in black money in earnest, are there ways it can be done? Yes. Emphatically so, provided the government is honest of purpose, determined to do it, and has the requisite skill and finesse. First, get every adult in the country (remembering that nearly 70% of them still live in villages, some in very remote ones indeed) into the banking net. It will be as difficult as making every adult literate, and we are still far from achieving that. Next, shrink the money supply permanently (did you know that though India’s economy is a tiny fraction of the size of the American, we have far more money in circulation than they do? It is an open permission, nay encouragement, to people to hoard cash and make even very big deals in the black, from buying jewellery to houses), and make it mandatory that all large transactions – say, for argument’s sake, all purchases above Rs. 50,000 – must be made online, or by card or cheque. Third, reduce taxes that are inordinately high, and only goad people to deal in the black: when you buy a house in India, you pay stamp duty and registration fees to the tune of 6-7% of the value of the purchase, whereas in many advanced countries it is only 1% or a little more; and all self-employed people are unwittingly encouraged to avoid paying direct taxes because, firstly, they find it grossly unfair that compared to salaried people, they are heavily overtaxed since they do not get any non-taxable perks, and the income tax slabs are absurd, putting a man who earns anything above ten lakhs a year – a modest sum in today’s India, especially for any city dweller with a family – in the same tax bracket as a film star, cricketer or business tycoon who earns thousands of times more. Fourth, make tax filing a far simpler, faster and less tricky business than it is now, reward those who voluntarily disclose the bulk of their incomes and pay taxes on them, catch and severely punish those who still cheat without any kind of fear or favour (this must start with removing all immunity, official and informal, that senior bureaucrats, politicians, lawyers, journalists and tycoons currently enjoy).

Just those four steps, assiduously implemented over one whole decade, will change the whole ball game. Is any government ready to do that? I do not think the present government at the centre qualifies. What do you say?

P.S. 1) Two PILs have already been filed in the Supreme Court challenging this government order. The Court will hold the initial hearing on Tuesday, November 15.  And at least one political party has given official notice calling for a debate in Parliament on the subject.

P.S. 2) The mechanic who services my kitchen chimney and gas oven happily accepted five hundred rupee notes from me today, saying he has no problems with depositing such currency with his bank once a week till December 30. If he can do it, why can't Big Bazaar, I wonder? Indeed, they could make a killing over the next six weeks by advertizing their willingness to accept old notes for all purchases. That would make things a little less inconvenient for a lot of people, I think.

P.S. 3) This is what the BJP said in 2014 when the same move had been launched by the Congress government, albeit with far less fanfare and shock effect. Can anyone tell me which part of the ground reality has changed in these last two years?

P.S. 4, Nov. 14: This is an edit-page article in Anandabazar Patrika on the subject, linked here for all who can read Bangla. And here is a balanced assessment of how far we can rely on the current measures to make a significant dent on the black economy.


Debotosh said...

Yours is the first sane voice that I have heard in the last few days. All this noise about this demonetization seems to have got on my nerves. I would like to make a few observations, some of which may not be related to the post.

(1) There has been a perceptible rise in right wing, implicitly fascist, populism-driven agendas across the world. Trump believes climate change is a hoax, women are like animals, and then gets elected President of USA. India brags about surgical strikes for weeks at a stretch, and the government takes credit in a manner suggesting that such strikes have never happened in the past. China keeps flouting international norms and preserve its one party system on the back of clever propaganda and promise of 'economic miracles'. All this leads me into thinking whether we are slowly hurtling back towards the 1920s and 1930s when similar chest thumping and unrealistically ambitious promises by ruling government and demagogic leaders had translated into the worst human atrocities ever. May be, with all the rhetoric around international peace and security, and expansion of democracy, we are actually inching towards a 3rd World War.

(2) Despite all the hoopla surrounding literacy levels, education, information revolution and internet, the 'common man' in India seems to have learnt nothing significant. Keeping the rural folk aside, who are anyways brushed aside because of their lack of education and 'modernity', what worries me is the comical manner in which urban, educated youth are getting fed on utter crap, day after day. Nobody cares about earthquakes and floods wiping out entire districts and states (which happens somewhere ever year in this country); nobody is worried about the millions of hungry people in India or the deplorable health conditions in villages of UP and Bihar; nobody seems to know about the crisis of unemployment and frustration. All that people find worth discussing is whether India can wipe out Pakistan with its nukes. And the moment someone questions the rationale of such discussion, he is either asked to sing the national anthem or somehow prove his patriotism. We even have movie theaters playing the national anthem 10 times a day like some promo song!

(3) People are SO impressed with our PM for his bold move (demonetization) that there is literally no scope of asking questions or getting into a debate with such loyal fans. The sheer lack of deliberation on this serious issue gives me goosebumps. Once upon a time, Hitler had created an entire Ministry of Propaganda to convince Germany that his madness was actually sheer brilliance. Even though such comparison may be extreme under present circumstances, but India seems to be headed in a similar direction. Besides, it was also a democracy that had put Hitler in power!

(4) At the end of the day, it makes me both sad and angry. Do these educated people, who despite having all the creature comforts of life and access to books, internet and information, prefer to live like naive and faithful animals deserve the so called 'reforms' in governance and daily life that are sometimes talked about? Are they even up for such serious things?

The most worrisome thing is that people seem to be accepting everything with unquestioning obedience, for reasons I cannot fathom. All the moves of the government - from surgical strikes to Twitter messages to demonetization - are becoming immensely cool with Facebook and Twitter brigade. Whoever questions is indirectly made an outcast. So much for democracy!

May be a violent revolution of the type suggested by Marx may soon be upon us. Only then there will be some peace and sanity for the next 70 years. And, as Machiavelli had so rightly pointed out, human history will continue to go in cycles. So true!


Shilpi said...

Suvro da,

Quite what this ‘bold and unprecedented’ move is geared to do in terms of manifest motivation, I don't know. The latent motivation, which you cover – I had no clue about. The fact that it seemed utterly unconstitutional dawned on me late at night but then I’d been expecting something even more severe in 2014.

I don’t see why money cannot be forged within a year. A day ago people were saying that the new notes would have some ‘microchip’, which was reported to be a rumour. I don’t see terrorist organisations saying that they’ll give up terrorism and take up something else because currency notes have been changed. Your ‘Oh, yeah?’ sums up the message. Pupu and I expressed identical emotions and thoughts on both of these manifest intentions.

The taxation system is certainly what needs to be addressed. I was told the tax rates are lower at 5 lakhs (per annum) and level off after 10 lakhs (per annum) – but it's still not equitable for a person earning 10 lakhs or even treble the amount to be paying the same tax as a multi-billionaire film star or tycoon.

I had no idea of all the ways that people deal with black money that you’ve mentioned but from a few real-life tales I’d heard, I thought it silly to think that people who were dealing with multi-crores of black money would suddenly go and tamely hand over all of it to the banks. And you’ve mentioned this here – sure, they might be hit once and this time but how is that going to prevent them from illegally dealing with and hoarding the new notes!

That much of the black money is actually in off-shore accounts was something I was too embarrassed to think I might even be right about but now that you have clearly said that it is a ‘well-known’ fact I can’t help but think - hasn’t anybody mentioned it to the PM…?

With the Finance Minister saying that ‘honest people’ are now ‘happy people’ and that the move can change the 'mood of the nation' (it’s there in one of the linked India Today articles from one of the links you’ve provided) – I wonder how many non-rich and non-criminal people that you’ve mentioned in the 6th paragraph are actually happy and what 'mood' change he's talking about. So none of these people you mention matter and the people who deal with the bulk of black money are not going to be caught but we are supposed to believe that black money and terrorism have been dealt with in a 'bold' move with a 'mood change' in the country? And since now there are reports that the talk of demonetising the notes was already in the pipelines and going on since last Thursday – did those in the know keep all of their 500 and 1000 rupee notes or would that be too improper a question to raise? I couldn't help arguing with a random passenger regarding the 'bahut accha huya' move in an auto and with all the fthree-page full-ads in the newspapers praising the Prime Minister for his ‘bold’ move – I think of what you said a couple of posts ago about the world having gone mad. I think, however, the government will make a big deal about a few people who get caught in the net and what with the relatively smaller fish trying to frantically buy and cancel railway and aeroplane tickets and buying gold.

Many of the big shops though wouldn’t want to touch those notes though at this point, I'd think. But it’s a field day for touts.

I hadn’t known about the results of the US elections until Pupu told me about it two evenings ago. I was convinced that it was a circus and clowning act that was going on for the better part of the year and even when Pupu told me – the news didn’t register...

I don’t think any government will put into practice all the four measures you say, any time soon. Just the first one would take far too long and would not lead to front page news/ads.The links you provided regarding the cases filed against the government order is promising although I can’t say I feel very hopeful. I was quite sure you’d write about this bit of news. Take care. Shilpi

Abhishek Anand said...

Respected Sir,

I have been following these events ever since thing were set rolling on the 8th of this month with some serious interest. This is what I have to say:

1) I completely agree with you that the vast bulk of black money that has various addresses and forms will remain largely untouched by this decision. Besides, traders of real assets-such as jewellers, gem merchants, real estate agents, etcetera- will have to be carefully tracked by the tax department if the current decision is to taste success. Therefore, I personally believe that it's too early to call the move 'revolutionary'.

2) I don't think this decision was taken by the Prime Minister unilaterally. The chiefs at the Reserve Bank of India certainly had a role to play. Besides, the RBI had recommended this demonetisation.

3) The government could certainly have implemented this move better. The general inconvenience can certainly be tolerated, but there are reports of newborns dying in hospitals as the authorities refuse to provide medicines against old notes. Also, a grocery shop was 'looted' by the public in Madhya Pradesh on Saturday morning. The point that you have raised about the slum dwellers hits the nail on the head. The government was under- prepared to implement this move.

4)I do not think that this decision is a political gimmick. On the contrary, there are huge political risks involved here. If the troubles that ordinary citizens are facing is not mitigated quickly, the public move can turn against the government in no time. Besides, the small traders , who have been loyal supporters of the BJP over the years, will be directly hit by this move (Media reports already suggest that some traders are out on the streets). So far as chocking the funds of rival parties is concerned, the ruling party shall too suffer here. Given the kind of 'horse trading' the BJP has engaged itself in the past few years, it is easy to predict that the cash stashed by it would be quite significant. In that regard, the decision was certainly a brave one.

5)Despite the obvious inconvenience caused by this decision, media reports(as well as my experience in these few days) suggest that people seemed to have welcomed this move. A certain individual proudly said to a reporter, "If our soldiers can stand at the borders for months at a stretch, can't we stand in queues for some days?" However, the more important questions are how long this patience will prevail and will our 'sacrifice' really bear fruit?

Abhishek Anand said...

6) I won't buy the enthusiasm that 'experts' in the media and the Finance Minister have expressed about this decision. However, what really has kept my optimism high is the response of Retired Justice MB Shah, the chairperson the SIT on black money that is working under the Supreme Court. Speaking to the Indian Express, he has said, "I certainly see this as a very bold and good move and I am happy that our task of taking out black money from easy circulation, which we thought was so complicated, has been resolved with one stroke.”
He further adds, “We had no idea this was coming. We have noted in our reports that black money and huge cash distribution takes place during elections in India, and that this should be curbed. We have also made suggestions that there should be a limit of around Rs 10-Rs 15 lakhs cash which people can keep at home. This may be needed for medical emergencies since some hospitals accept only cash. But this move will eliminate all hoarded cash and I am 100 per cent happy with the move.Evidently, people who have slashed away cash in their homes, offices and lockers with unfair and dishonest means will not go to the bank and either deposit the cash or want the currency changed for smaller denominations. Black money hoarders will not use the window given by the government. So this single step will go a long way and the SIT can only describe it as a welcome bold step." Although I don't fully agree with him, he could not be speaking completely out of context. In this light, I would also like to add that I don't think that the Supreme Court will decide against this move (in response to the PILs)unless things get completely out of control over the next few days. After all, the SIT working under it has endorsed this decision. Also, the Madras High Court has already dismissed one such plea, stating the government's move to be correct.

7)The new notes may still give rise to fake currency, but it may make the entire process more difficult. The RBI has specifically stated that the new security features will make duplication of these notes extremely difficult. Besides, this decision is likely to have an adverse impact on terror funding, especially with regards to the naxalites. The Times of India had reported on the 12th that India's investigating agencies, which have examined the security features, agree with the RBI.

8)The four steps that you have mentioned as measures against black money could not have been put better(the SIT agrees with atleast two of them). However, I think the government has partially moved in that direction. More than 220 million Jan Dhan bank accounts have been opened in the past two years(However, there's still a long distance to cover). Both the PM and the FM have promised more 'action', and here they may follow the recommendations of the SIT. Some believe that gold and property could be government's the next targets. So, the crux of the matter is that there is still a lot to be done before we can begin to celebrate and hail the '56-inch chest' of the the PM!

Abhishek Anand said...

9) I feel that it is still early to be sure if the present government at the centre is truly determined to tackle the menace of black money. However, it has certainly been more serious about this problem than the previous government. In 2011, the Supreme Court had the asked the then government to set up an SIT on black money, but to no avail. Besides, over the period of 2004-14, the circulation of notes of Rs. 1000 and Rs. 500 denominations(the 'breeding ground' for black money) increased at an annual rate of about 30% and 20%, without any significant check. So, we should give the present government more time.

Sir, I have made an attempt to express this 'demonetization episode' as I understood it, to the best of my ability. However, as you know very well, I am no more than a layman on this subject and my words are largely based on the various media reports and articles. I remember that you had told me not to trust any single newspaper completely. One newspaper many mention an incident only in passing while the other may dedicate the front page to it. I've tried to do exactly that. However, I am still just a gullible 18-year old teenager and seek your guidance if I have been misled.

Yours faithfully,
Abhishek Anand

Suvro Chatterjee said...

Debotosh and Shilpi, thanks for commenting. I am looking forward to more inputs from you. And Abhishek, a double thank you:

a) because you took the trouble to write such a long, informed and intelligent comment - such a young man, too: I wish I knew a lot of people twice your age who could do it, and

b) because I can see I could really teach you a few important things, such as how to disagree with fact and reason, not blind anger and invective, essential requisites for democracy to survive and prosper.

That said, let me add that - perhaps only because of the difference in our ages - I am not half as hopeful about whether the ongoing 'revolution' is going to do anything significant to rein in the black money-monster (think: 1) how is the ruling party going to fund its own electoral campaigns: with ten, fifty and hundred-rupee notes? 2) are all government employees now going to stop taking bribes, and if not, how are they going to handle the stash they will build up very soon again?)

As you have rightly said, they are playing a very dangerous game, and not only because they might quickly antagonize their vote banks, but because it is well known that sudden and drastic demonetization almost invariably slows down economic growth, and how will a government which has made high-growth an ego issue survive such a debacle if it happens?

So I am now wondering about what could be the real motivation behind this compulsion they felt to go ahead with such a drastic measure. Any suggestions, Abhishek or any other reader?

Saikat Chakraborty said...

Dear Sir,

Here is something I read today and emphasizes on the same things you wrote two weeks ago-

With regards,