Demonetization: Politically Sound

Of late I have written quite a bit about the recent demonetization, and am still writing a few more pieces about the same, but it is fair to say that it is not yet time to pass a judgment on the efficacy of the measure in terms of what it set out to do. However, it is not too early any longer to say that the measure would have a fair share of unforeseen consequences, and many — if not the most — of these consequences might not be happy. No matter how well thought out the measure might have actually been, it seems — at least for now — a gamble in terms of its effectiveness¬†in achieving its stated objectives, but a calculated risk so far as the politics of it goes.

To put it differently, regardless of the outcome of the measure, the ruling party would not be in a politically disadvantageous position because the credit for having taken on a demon that no other political party could gather the political will to engage is by itself a major political advantage even if the steps taken are a mere eyewash that do little more than put a great number of people through a lot of suffering. Fighting is better than not doing anything for the fear of failure, or, worse, for some dark, carefully concealed reasons. So, even if nothing even remotely close to a lasting victory over black money, terrorism or fake currency is achieved, the credit for having waged a war against the dark forces goes to the government anyway.

The ones suffering would readily pardon the¬†hardship in the name of the country and for the sake of the war against the ‘dirty’ rich.¬†In fact, a large portion¬†of Indian populace¬†doesn’t quite¬†see¬†the ‘dirty rich’ category anyway. To them there are no ‘clean rich’. And I am unsure¬†if there is anyone in India who has even used or read the expression ‘clean rich’ or its equivalents anywhere. So, a fight against this evil, formidable¬†colossus is unlikely to go underappreciated by a hero-worshipping people. Besides, in a country where queues are an everyday¬†affair, the present hardship will hardly be remembered as anything more than a minor inconvenience.

True, if things¬†do not improve anytime soon, the situation might change, but the party in power is not going to suffer politically even then because they would have the Income Tax notices they have been serving on the small fish to fall back on. Therefore, the move might be useless otherwise, it’s politically quite sound, or so it seems at the moment.

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Demonetization: The Give and Take of It

Forced into long queues, a woeful-hopeful India is supporting the demonetization¬†kicked into the works like the proverbial spanner by the government purportedly to make the black economy bleed and to bring it to a grinding halt by practically vaporizing hard cash — supposedly the lifeblood of black economy¬†— through demonetization. We are given to understand¬†that the move would hurt the black economy so severely as to put it on the deathbed. The common man believes that this is the death knell for the ‘dirty money’, which has been the cause of all financial ills, including massive income disparities, that India has been reeling under since independence. The poor and the lower middle class have always blamed the rich for their miseries, and the demonetization move plays the psyche quite¬†deftly. Fueled and buoyed by his¬†own elaborate fancies, the common man paints the¬†mental picture of¬†an alternative reality in which he and the richest¬†man he knows are eating together in the same eatery.¬†It’s not the five star in which the poor man imagines the richest man eats, but the cheap dhaba¬†where the poor man¬†takes his meals. The poor man is still happy to see the rich man suffer like he does everyday. ¬†

banksSome other poor man may dream differently, and in the alternative version of the imagined alternative reality of the post-demonetization golden era as imagined by the poor, the roads are paved with gold and there is no poverty because there are no rich and poor any longer; only happy people with more than enough for everything and everybody because all black money is flowing on the roads like rainwater. If you think it’s overly fantastic a vision for even the simplest of the hoi polloi to entertain, you might have ignored that these are some of the same people who not only believed that a different government could not only bring back¬†the offshore black money but could and would also —¬†as promised — have it¬†deposited in the bank accounts of the common people and everyone would be richer by a few lac overnight simply for being the citizen of the country with a bank account. To them our Prime Minister is nothing short of a miracle worker, which, in some rather unflattering ways, he indeed is.

crying-manThe poor and a large number of have-nots are willingly suffering for what they believe to be a noble¬†cause, and while the merits of the move are debatable, it remains the first major¬†assault on black money so far. It’s only the swing and sweep of it that might turn out to be unwise. And that’s what the government must be prepared for. People have suffered a lot for no fault of theirs in the hope that the nation would gain, and some kind of socio-economic justice will be delivered. The government must have something concrete in terms of results to show for all the suffering it has put the people through. Coming up with a list — no matter how long or heavy from¬†the heavyweights on it — of the people prosecuted simply would not do unless the government manages to recover substantial amounts in taxes and fines, and the sum should not be lower than 20,000 crore because that is the minimum the nation will have most likely lost directly or indirectly in implementing demonetization by the end of the first 20 days.

The government is free to experiment all it wants, but at the end of the day we’ll hold it to account.

Demonetization: The Rough Side of the Happy Shine

Most of the black-monied would prefer to burn, drown¬†or bury the paper currency gone bad instead of declaring it because of the fear of prosecution combined with the fear of being on the government’s radar for the foreseeable future. So, a great deal of black money is just dead. Not spent, not taxed, just plain dead. The filthy rich are no longer filthy and no longer rich. So what? And now what?

They¬†would get back to work and start earning and flourishing again in some time. Would they start paying their taxes for the fear of demonetization then? Unlikely, for the thieves don’t abandon stealing; they just find better ways. Black Money would start piling again and might return¬†with a vengeance, immune to demonetization.

Those who call it a ‘bold decision’ do not understand — or are in denial — that demonetization is always a desperate measure and not some¬†cool-headed, matter-of-course policy decision, much less a ‘masterstroke’ that it is being touted as, the flamboyance of the announcement notwithstanding. It’s not such a happy thing to admit that your currency notes are not good enough because of black market and counterfeiting, for it’s, in part, an admission of failure. It’s more like wiping the chessboard clean and starting afresh when you realize that you can’t win the ongoing game.

moneySo, what would this extremely inconvenient move do for us? Nothing significant really. Counterfeit currency will go out for a while and return because the notes are out, not the printing presses. If they can print this, they can print that. You say “let’s redesign” to your press; they say the same to theirs.

Black money will come back soon enough for the obvious reason that those who really have an awful lot of it would simply dump it and start over.

What it has actually done is this:

  1. You have no black money, but you are standing in front of the bank for hours to get your notes exchanged. You withdrew a large amount, say Rs 2 lac from the same bank branch yesterday for your daughter’s marriage, and now¬†you are back here and the marriage has to be postponed because you can’t get sufficient amount of currency in time.
  2. The poor and the very poor are also standing with you. Black money? What black money? They make less than Rs 70,000 a year and now whatever little savings they had in cash has to be brought to the bank for exchange.
  3. The banks and their employees are under enormous pressure and the system is creaking under the weight. They are badly overworked, and exchanging currency is not exactly what they are trained for.
  4. Long queues in front of the banks across the country means that a large number of people are standing uncomfortably for hours for no fault of theirs. It can make them angry and there can be clashes and instances of violence.
  5. The markets have nearly shut for the past two days across the country, which has already caused a loss of many hundred, if not several thousand, crores in business, and loss of business is also loss of taxes. So, the government has already lost hundreds of crores in taxes, if not more, and the loss would continue to accumulate.
  6. The estimated cost of replacing all the demonetized currency with the new currency is around Rupees 12000 crore.
  7. Almost every person in the country is inconvenienced to some degree, and a¬†great number of work hours have been lost causing loss of productivity across the nation. That’s also a loss¬†though harder to quantify. This loss, however, is also in hundreds of crore, given that we are a country of 125 million people.

So, in this adventure we have spent or lost, one way or the other, somewhere close to Rs 18,000 crore already. One might estimate the total cost to the Indian exchequer, including the loss of taxes from the temporary slump in the market, at a minimum of Rs 15,000 crore by conservative assessment.

Demonetization is an economic move primarily. So the losses and gains from the exercise are not completely incalculable in monetary terms, even if the immense hardship to the common people across the country is ignored for the purposes of cold calculations.

The government should ideally gain at least Rs 15,000 crore in taxes from this move. Else, this would be an exercise in vain because demonetization cannot really affect future black money a great deal. Also, it can take the fake currency out of the system temporarily, but cannot affect its¬†future inflow either. So, like in chess, your cleaning the board and starting afresh does not really¬†improve your chances of winning the next game; it only prevents a complete defeat in the previous one. But this also means you gave in for the fear of losing, having already conceded defeat in your own mind. Masterstroke? We’ll see.

Black Money Euphoria: The Laugh of the Jealous?

Indian currency of different denominations are seen in this picture illustration taken in MumbaiSurgical strike on Black Money, eh? Is it dead yet? Or has it changed colour and turned white, pale, cream or some other colour of your preference?¬†Good move, may be, but what’s in it for any¬†of those who are going bonkers over it? For the most of us, it’s yet¬†another inconvenience in our already inconvenient lives.

To re-explain the basics, just so we are on the same page, Black Money is the same colour as any other money, and gathers its melanic properties from being undeclared, which is not necessarily the same thing as ‘unearned’ or ‘undeserved’ or ‘looted’ or ‘begotten by unlawful means’; it simply means that the applicable taxes on this money have not been paid, which apparently dims its complexion. People don’t pay taxes because the fact is that nobody wants to hand over his or her hard earned money to the government in taxes, but most of us can do little about it because we¬†get our salaries TDS deducted. Then there are businessmen, who manage their own taxes and have a good deal of control over it. So, they do what most of us cannot — evade tax. Bad thing, yes. But they earn more, evade taxes¬†and get to splurge freely making us turn to coal¬†with jealousy. Disgusted, we call the tax-unpaid money ‘black’. But¬†that’s — for all practical purposes — money saved; you might also call it ‘money stolen from the government’. Yes, bad, very bad, evil, dishonest, loathsome and all that, yes, but it’s still extra money and a lot of it, which makes a good deal of it readily disposable.

Spurred by greed, they send¬†the black money to work and make more money. It changes hands and remains in circulation outside the books. It’s human to be generous when you have lots of disposable wealth¬†at hand. So,¬†the ones with black money are¬†willing to spend a lot more freely than, say, someone who has worked hard to earn his grub and has paid the government its dues, after which he is left with barely enough for his family. So, the black-money-rich¬†spend with a free hand, and the working class and small businesses earn more without having to break their backs for it. If there is any trickle-down effect, it is through such uncareful spending.

And then there is this guilty conscience of the nouveau-riche, who, having been brought up in the traditional middle class values, feel guilty about having so much when so many of their fellow human beings are struggling to eat. The Jagraatas,¬†the langars,¬†the bhandaras¬†and the Maa Ki Chaukis¬†are roped in to assuage the shrill little voice of the conscience. That’s more like bribing the gods to look the other way, but, intent regardless, the rickshaw-pullers, the beggars and the poor get to eat better food; the aspiring singers and musicians get to show their talent and make money to live and train, and the workers of the tent house also get employment¬†because the tent house gets work apart from marriages. So, the rich feel good and the poor get fed. And the government gets the indirect taxes on the material used for cooking the food and other things.

Black money is also the money that is freely¬†lent for high-risk, low security or no security, businesses on high interest rates to those people who can’t obtain loan from conventional financial institutions. The amount thus loaned out becomes seed capital for many small businesses, which aid the mainstream economy in their own small ways.

What happens when the people with large amounts of disposable wealth suddenly have no money? They would still have enough money to live¬†well. They would still have maids and servants; fewer, may be. Where they had four drivers for three cars with one driver in spare, they would now have two drivers for three cars, which is still good enough, but not quite as extravagant as four for three. Who loses? The drivers. You can talk of the maids and the servants and the gardeners and so on the same way. The rich would still live with much the same luxury. But they would have less to spend freely for some time.¬†There was a good reason why the ‘bold decisions’ of demonetization are not taken every other day.

While the government’s decision might be good, I don’t understand what’s it that the poor, the lower middle class and middle middle class are celebrating so gaily? Hidden money is not getting out in the open; it is getting burnt. And a lot of money that was about to be spent in your shop, Mishra ji, and your restaurant, Saxena Sahab, and your food joint, Arora ji, and your salon, Kallan Miyan, is not coming to you anymore; it’s going down the drains, quite literally.

The Black Money some people promised to bring back was the one that’s stacked away overseas. It could be enriching for us, as it is our money lying elsewhere well beyond our reach. As of now, we are just burning old paper at home. The government might gain in taxes, but your small businesses and your services are going to be spent less lavishly upon. Making the rich poor does not necessarily make the poor rich.

I am not an economist, and am still awaiting the pronouncement from the experts on this, but the euphoria around baffles me nevertheless. What exactly are the people so, so happy about? That the rich would¬†no longer be quite as rich as before? So, is it the sadistic laugh of the jealous? For the common people¬†it’s nothing but long hours in queues in front of the banks without any black money happiness in the past, present or future.

And soon enough you might hear chants about the government having delivered on its Black Money promise. But¬†that’s not the same Black Money, buddy. Sorry.