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.