Demonetization - come December

If only there weren’t so many elements of avoidable tragedy in it, the demonetization drive could have been enjoyed as a gigantic farce. It’s becoming more like that with every passing day.

On a serious note, Dr. Manmohan Singh (with whom Narendra Modi won’t dream of comparing himself in terms of either economic knowledge or governmental experience) has categorically condemned the whole thing in Parliament as an instance of monumental mismanagement, as well as of organized loot and legalized plunder. Which, except to the determined zealot who will look at black and call it white, is becoming more and more apparent. And now, what with government functionaries being caught taking bribes of lakhs in new 2,000-rupee notes (and that too in Gujarat of all places) and terrorists being found dead with the same kind of notes on them – where did they get it from, so soon after the release? – banks giving out notes printed in a hurry which are so badly made they are themselves refusing to take them back until the RBI orders them to, government being increasingly forced to relax initial rules because distress of common people and chances of looming economic disaster are becoming apparent (as with the Nov. 23 announcement that Rs. 21,000 crore are going to be distributed to farmers, even through co-op banks and post offices so that they can buy seeds), people trading jokes about how they can use internet transactions to modernize bribe-taking, a Union Cabinet minister wondering aloud how much the common man must be suffering if someone like him can be harassed for asking to pay a hospital bill in old notes, an erudite and stern governor of the Reserve Bank being shunted out with undue haste only weeks ago and replaced with someone who has been ordered to keep his mouth shut, the fact that all the fat-cats of the country are carrying on with their high living as though nothing untoward has happened (which, it is highly probable, hasn’t for them), the prime minister acting like a village nautanki performer (mujhe jinda bhi jwala diya jaye…) and shedding tears every other day telling his acolytes how much he is agonizing over the plight of the poor whose service is his only aim but refusing to participate in parliamentary debates, even to explain how his scheme is ‘helping the poor’… one thing is clear, whatever else the whole thing was meant for, it was not meant to ‘fight corruption’, or to serve as an example of how efficiently our government can handle a vast undertaking to earn the admiration of the world. It would be a very quick war indeed if, God forbid, they have to fight one against any country more significant than Bhutan with this kind of preparedness. The tanks wouldn’t move and the planes wouldn’t fly because they had ‘forgotten’ to stock up on fuel.

Here is another media essay which at least gives him the benefit of the doubt, and those of you who remember Yes Minister and Yes Prime Minister will find reason to think that it is highly probable – perhaps the PM, naïve, attention-hungry and obsessed with destroying the Congress as he is, was quietly taken for a ride by shadowy people in high places for their own great long-term advantage. I have long known that the truly powerful do their damnedest to pull strings from behind the scene, and let those in public prominence take the rap if things go badly. Perhaps they assured him only too well that this way the country would experience a painless miracle, and he would go down immediately into the history books in a blaze of glory…

I have talked and written about and against corruption since long, long before it suddenly became fashionable, briefly owing to the nationwide ‘movement’ launched by Arvind Kejriwal and friends, and then Modi and Co. hijacked it. Most people do not have long memories and attention spans, nor the ability to comprehend involved arguments (imagine, after reading the last two posts, a student was actually stupid enough to ask me ‘Sir, do you think black money can be controlled?’!), nor indeed the desire to think about and understand any serious issue – all they are looking for is excitement of the football and rap music variety, or opportunities to assert their ‘opinions’, and they don’t even understand that opinions need to be buttressed by fact and logic. And this, I have found, alas, is as true about average teenagers as their parents – which is why I hardly talk in public about anything but the weather. But for the microscopic few who still appreciate good reasoned argument and the great need for it, here are a few things.

Remove ‘corruption’? First, one man’s tradition can be another’s corruption (think of idol worship and marrying among relatives) – who is to decide? Second, corruption is hardly coterminous with money and economics: kaamchori is corruption, cheating in exams is corruption, making a faulty diagnosis of your patient through carelessness is corruption, adulterating food and using false weights in your shop is corruption, favouritism with students is corruption, littering the streets is corruption, spreading nasty rumours about people is corruption, praying to God for material favours is corruption: who on earth is a mere prime minister that he even imagines he can stop it, especially when he isn’t even remotely interested in bringing about a social revolution? Gandhi and Stalin tried and failed, remember? And they were titans.

Third, if we are to limit the whole discourse on corruption merely to a ‘war’ on black money, is the country seriously interested in it? I have been laughing up my sleeve reading a lot of ignorant young people fulminate with righteous indignation in support of the PM’s crusade, blissfully unaware that many of their dads would lose their jobs and perhaps even go to jail if the broom really began to sweep clean: in the public sector, so many people have got their jobs and promotions only through greasing palms, and grown fat on bribes (and so many people have been drawing salaries from companies which have piled up gigantic losses and should have been wound up long ago to stop draining hardworking taxpayers’ money – corruption of the most disgusting sort!), while in the private, so many so-called jobs essentially involve swindling people into buying things they don’t really need, or can’t benefit from, at vastly inflated prices! My God, I wonder sometimes, do most people stop growing once they are five years old? And these are technically speaking educated people, too…

Funnily, not one person who is supporting the current crusade has read, understood and agreed with me that merely a one-time demonetization scheme will do virtually nothing either to destroy the existence of the current stock of black money or to stop its generation. Which makes me surer with every passing day that most Modi-supporters (except, of course, those who are making large gains from his project) neither know what this is all about nor care – they are just thrilled to bits that ‘something exciting’ is being done. Especially since they have been lucky enough this time round not to be seriously hurt. I wonder what they will say if and when the government takes away their mothers’ entire undeclared stock of gold jewellery next, because it is all ‘black’? Or are they secretly assured that nothing really drastic like that will ever happen, because the whole thing was designed just for people like them to have a bit of fun?

Thinking people, even those broadly sympathetic to our current PM, are now agreed that this man likes grand ideas far more than the nitty gritty of the implementation process, and so he keeps sending up one rocket after another, hoping some of them will reach their targets – someone has very aptly quipped ‘shoot first, aim later’. My own street bears loud testimony, for instance, to just how stillborn the great Swachh Bharat campaign has been; we can all see how many MNCs have become suddenly enthused by the Make in India slogan; the much publicized ‘surgical strike’ across the border has definitely and abruptly increased the death toll of Indian soldiers through cross-border firing; so also the much tomtommed Jan Dhan account project, millions of empty accounts created under which have suddenly filled up with thousands of crores this month, certainly not the money of ‘poor’ account holders. How many people needlessly suffer does not bother him, as long as he can console himself that he has several lakh supporters on his mobile app: the next elections, after all, are a comfortable two and half years away. Or maybe not… the people have borne the burden more or less uncomplainingly this last month, but December begins tomorrow, and all government employees (that includes soldiers, policemen, IAS officers and taxmen!) expect to get their salaries on or before the 10^th, and if they cannot withdraw more than a small fraction of the money they want – their own money, mind you – the public mood might sour very very quickly indeed (it cannot be a coincidence that the November announcement was made after most of them had already got paid for the month). And the silly craze about suddenly becoming a cashless society will deepen the rural-urban divide far more than the Nehru-Gandhi zamaana ever did, because plastic cards and e-wallets need basic literacy, electrical power and fast internet connections, and it will be a long, long time yet before such things are available in all 700,000 villages in India.

Be that as it may, I can put this much in writing: this entire episode in the history of our country has eroded my faith in democracy as nothing could ever do since the time I learned to observe and think. With so many uninformed, bigoted and foolish people around who claim to be educated, and whose enthusiasms are as gross, superficial and ephemeral as those of any illiterate slum dweller, it is no longer a system that can claim my respect. An exasperated George Bernard Shaw condemned it as a ‘haphazard mobocracy’ almost a century ago, and today I cannot think any better of it any more. Which hurts me so badly that I am still holding on to a faint hope that Mr. Modi will finally pleasantly surprise me by delivering on his promises. I never was fundamentally prejudiced against him, as this blogpost and this one will bear testimony.

P.S., Dec. 01: 1) That one of my worries was spot-on is confirmed by this news item in one of the Bengali dailies today. 2) People are already going around with large amounts of fake 2,000-rupee notes. I myself wouldn't have believed it could be done so fast! And we apparently don't need subversives from across the border to do this, either. So much for another of the PM's tall claims...

Currency shock, second part

Facebook and Twitter are apparently flooded with comments on the current anti-black money drive, some supporting it as blindly and vociferously as others are opposing it tooth and nail, but, though the blog counter keeps climbing as always, I have got only three people to write in rejoinders as yet! And I thought I was writing about something that touches everybody’s lives. Goes to show how painful most people find it to think and speak/write rationally and civilly, as opposed to screaming mindlessly…

There are two things that I want to add to what I have already written. Though the PM keeps murmuring ad nauseam that ‘ordinary and poor men’ are not being hurt, it’s only the dirty rich who are suffering, the mass media are either totally blind or else it must be accepted for a fact that no rich man has had reason to feel harassed. Tell me, how many tycoons, filmstars and cricket stars have you seen standing in queues before ATMs trying to withdraw a paltry few thousands over the last week, either with your own eyes or in the papers, the net or TV? What can you do with people who can stand under the blazing sun and chortle ‘What a lovely moonlit night!’? And what is all this about catching people with black money anyway?

Economic pundits differ greatly about the definition of black money – ask Google about it. But in order even to start finding and destroying or mopping up black money on a significant scale, the government must first decide on a working definition – and preferably get the permission of Parliament and the Supreme Court. They have never insisted that everybody who has an income must file a tax return every year throughout his working life. As things stand, only 3 per cent (or is it just one?) of the country’s population pays income tax, and they consist largely of salaried folks in the organized sector, besides a few corporate businessmen. I remember that back in 1991 I heard for the first time that we schoolteachers who also have ‘other sources’ of income must hereafter file returns on their own; their employers keeping tabs on their behalf and deducting tax at source would no longer be enough. I cannot speak for anybody else, but I have been filing returns, and paying taxes, ever since then: the practice remains unbroken though I have been self-employed for nearly fifteen years now.

But I know for a fact that a majority – maybe it’s the vast majority – of small and medium income earners in this country have never filed returns (I can personally think of lots of grocers and mishtiwallahs and small building- or labour-contractors and even doctors and teachers, especially in rural and semi-urban areas). If all income that is not declared to the tax authorities is black money, then most people, or at least a majority of them, deal in black all the time, all the money they have is ‘black’, though for a lot of them it might mean only a few tens of thousands a month! My driver in the early 2000s actually exclaimed ‘Why should you pay income tax? Isn’t it only film actors who do that?’ and I have satisfied myself that that is the attitude of a great many ordinary people. Besides, in how many places do you shop where they give you regular receipts as a rule?

So unless your real purpose is to harass a lot of perfectly ordinary and non-criminal people (and maybe shoot yourself in the foot by bringing economic growth to a grinding halt), you should first – and gradually – make arrangements so that every single income earner is persuaded to file returns. That, and not sudden demonetization, was the right way to begin. Do you have any idea how long that will take, and how difficult it is going to be? Imagine even explaining to a cattle-dealer in some remote village in Chattisgarh why he must file income tax returns, and how! And is the IT department ready to handle a sudden tenfold increase in the number of files it is called to deal with?

Next, if you really want to get the majority of people into the white economy, you must persuade them that paying taxes is good for them, not only because it is easy and not too heavy a burden, but they are helping the nation to progress in ways that they can see and benefit from. Any government which is visibly working hard to deliver basic everyday essentials – water, sanitation and sewerage, roads, lights, houses, schools and medical care – finds it much easier to do that than one which merely spends millions on advertizing that happy days are just round the corner. Likewise, any government which keeps taxes light finds it easier to collect. Under India’s tax regime, you are punished if you declare income honestly: that needs to change, and at once. If I had my way, income up to Rs. 50,000 a month in cities for self-employed people with families should be tax free, income upto a lakh a month should be liable to just 5% tax, upto three lakhs a month, 10% and so on. If a 30% tax rate is to be applied at all, let that fall only upon those who earn more than a crore a year. Isn’t that much fairer for all concerned? If such a system is applied sternly without fear or favour, it is virtually certain that overall tax collections are going to swell enormously. Does the government want that, or not?

Whereas it seems to me that the entire target seems to be the middle class (by which I mean all those whose family incomes are between one and twenty lakhs a month). It looks as if creating a big sensation by harassing them was the real purpose – heaven knows why. Look at this declaration of the government that those who are depositing upto Rs. 250,000 at a time in old big notes with the banks will not be ‘scrutinized’ by the taxmen. How ridiculous! Consider a man who has declared an income of Rs. 40 lakhs: he obviously must keep depositing more than that paltry amount many times a year, mustn’t he? So the above-mentioned warning means that even if all his money is white, hard-earned money, he may be bothered by tax officials if he deposits more than Rs. 2.5 lakhs in November and December this year. Is that a way to draw out black money, or one designed to drive even more people under the scanner?

And meanwhile there are tycoons who are merrily marrying off their children with lavish do-s costing tens, even hundreds of crores, apparently cocking a snook at all the powers that be. Am I to assume that in a country where a person who earns more than ten lakhs a year is officially considered ‘rich’, such people have ‘earned’ those zillions honestly, declared them in full to the tax authorities, and are now spending it all in white? Here’s a thought: why didn’t the government first go for all those who have bought Rs. 50-lakh-plus cars and Rs. 5 crore-plus penthouses and gone holidaying to seven-star resorts within the last ten years? And why not after the temples which routinely take in crores of rupees every day from devotees, and are well known to have stashes of cash and gold to the tune of tens, even hundreds of lakh crore rupees? Something is rotten in the state of India, and even more so with those few thousand zealots around the country who are praising the government to high heavens on the social media for seriously going after the seriously rich … to be blind is bad, to be blind and stupid is worse, but to be blind, stupid and bloody-minded really takes the cake.

P.S., Nov. 21: I should like to leave a link here to this open letter signed by a number of eminent citizens, dated Nov. 16, and to this editorial in my newspaper today, because they broadly share my standpoint. If and when this whole exercise turns out to be a damp squib achieved at enormous national cost, and the government has a lot of egg on the face, my readers should remember that I told them so. If it turns out the other way, I shall certainly praise this government fulsomely.

P.P.S., Nov. 26: Just to put things on record, for my own future reference if nothing else: Dr. Manmohan Singh has called the process a 'monumental management failure' and 'a case of organised loot and legalized plunder'; Amartya Sen has said 'at one stroke it has declared all Indians, indeed all holders of Indian currency, as possibly crooks, unless they can establish they are not', and that 'only an authoritarian government can calmly cause such misery to the people', while Mamata Banerjee has, quite rightly, I believe, taken strong objection to the PM posing as the only saint in the country, and calling everybody who does not agree with him a crook. I shall be very curious to know where the BJP itself got the money to fight and win the last Lok Sabha elections, and how much of it was white. 

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.