Demonetisation - Get Real

Much has been said and written about the Demonetisation decision of the Modi government. Everybody and his uncle, aunty and niece have an opinion about it. If the government thinks that this is one great way of winning the war against black money the opposition thinks this is the one great way to destroy the economy. 

Manmohan Singh has been Chief Economic Advisor to the Govt of India, Governor of the Reserve Bank of India, Finance Minister who helped turn the Indian economy around to become what it is today and was the Prime Minister for 10 years. Celebrated and hailed globally for his acumen in economics  he wasted a golden opportunity in Parliament when he spoke. He could have explained economic theory, impact of demonetisation, what exactly happens  and what the future is likely to hold for India. Instead he chose to throw some numbers without any basis, filmy dialogues and even the one quote of the father of economics John Meynard Keynes was misused.

The complete quote of John Meynard Keynes which Manmohan Singh and most of us use often is as below.

"In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again."

In other words, he's slamming economists for being sanguine about near-term troubles, merely because in the long term, stability and equilibrium will return. If one were to give him credit for his intelligence as a Economist, I would say that by partially using the quote, MMS may have actually been supporting the Modi govt & criticizing its detractors. He was maybe chuckling inside himself and saying "Theek Hain"  

Economics is the art of being able to fortell the future in matters financial without being termed as a astrologer or soothsayer.  If anyone thinks that a economist is anyway different from a astrologer, then he is mistaken. This is not to belittle them since that is a subject I love myself. But the point is that nobody knows what is the impact of a path breaking economic decision. If Narasimha Rao or Manmohan Singh say that they knew what exactly would happen by liberalising, by cutting all shackles, delicensing etc in 1991, they would be lying. What everyone knew is that such actions should have positive results. Remember decisions economic cannot be predicted because its like letting water from a dam without a canal to guide it. No one knows where it will flow, how people will react and what obstacles will change its course.

The same is the case with Demonetisation today. A lot of the debate and even by acknowledged experts is juvenile in my humble opinion because of the following reasons.

Whatever estimates the nation has of so called black money is at best a wild intelligent guess. Also nobody knows who has this black money and if I were to guess – it may follow the 80/20 rule. 20% of the population may have 80% of the black money and 80% the balance 20%. We dont know how it is held - cash, real estate, gold, foreign currency ? If the government had precise figures and information then there is no reason why targeted actions cannot be taken to seize these.  Fact is that no government has actionable intelligence except in some specific cases.

Truth be told, no politician takes such decisions without a political gamble. So whatever the economic merits/demerits of the move, there is a political intent behind it and each of us can discuss these till the cows come home but the truth will be known only to the decision makers. If I were to guess, I would say that knowing that elections are around the corner in Punjab, UP it is reasonable to assume that political opponents would be hoarding cash to spend on the campaign and workers. So what better way than this to upset the apple cart.

From a economic standpoint, the results and benefits of this move will be known only after a period of 6 months to a year again assuming that some unknown unexpected event does not either help or hinder the consequences. In a globalised economy we are today not in control of our destiny and however well meaning a decision, the aftermath cannot be controlled.

Further talking of Demonetisation this is what Keynes also said. 

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

If Manmohan Singh wanted to convey a strong rebuttal against the decision of the Government this above quote would have served him in good stead. Coupling this with a masterful treatise on how the economy can unfold like a professor, MMS could have made even the middle class cheerleaders of Modi start doubting the decision. Above all given the respect that he so obviously seeks after the scams under his leadership this was a golden opportunity for both him and his party. Instead he chose to fritter it all away by using a language that actually attracted attention to the scams under his watch. He then partially quoted Keynes which even a first year economics student would use and made himself look like a juvenile economist.  It was as if the Congress party wanted to discredit him further and make him look like a joker and make the history that would judge him more difficult to be kind.

But then this is not about Manmohan Singh, he is history anyway in a manner of speaking.

There are 4 possible scenarios that can play out.

Demonetisation flushes out say 10 to 20% of the black money coupled with a huge economic upturn giving growth/jobs	Demonetisation flushes out say 10 to 20% of the black money but global events like say war with Pakistan or global & economic events in USA & other countries derail India
Demonetisation flushes out less than 5% of the black money but there is a huge  economic upturn bringing jobs/growth	Demonetisation flushes out less than 5% of  the black money but global events like say war with Pakistan or global & economic events in USA & other countries derail India

 

The above 4 scenarios show what may or may not happen. Can anybody predict this with any degree of certainty ? Unlikely. So whether it is the doomsday kids or achhe din kids, both are just jousting for space and both are taking huge risks. The opponents as I can see seem to getting their strategy all wrong.  

Firstly we need to understand that as a human race we Indians want free stuff, bribing is in our DNA. Everybody and his uncle & aunty makes pacts with their gods of giving him something as a payment if their wish is fulfilled. Every parent gives a chocolate to the kid either to do some bidding or just to shut up. Rewards after demonstrating to being the good kid are not very often.  So every bizman tries to save taxes or avoid it irrespective of what the rate of tax is.

I was talking to a friend who has a small unit that makes hose pipes. He was saying that most of the hardware shops would not buy from him unless he accepted cash and gave no bill & did not charge any tax.  The rate of tax ? 5 %. Yet these traders don’t want to pay even that. I didn’t actually believe him. So this weekend I took a walk along a road that had more than a dozen hardware shops. Every one of them was desolate and empty, when earlier they would be crowded as people got repairs done over the weekend at homes. Every single one of them refused to accept any card or other such payment modes. More surprisingly everybody said, they won’t change. They will wait till cash comes into the system and they continue their business but they had no plans to look at cashless solutions.

I visited a very popular hotel and while it had the mandatory “No 500/1000” notes accepted signage it also had clear posters stating that they don’t accept cards of any kind. The last time I was there it was crowded, but now I was the only patron on an evening when the roads were choc-a-block with traffic and people.  I enquired and he was again very clear – No plans to go for cashless transactions. My decades old family grocer finally started accepting cards very recently but only after one too many of the younger customers started moving to modern retail.

This can be a very rudimentary dip stick experience but I strongly suspect that this can be true with lots more people.  Yes, a large number of people will shift and start accepting cards but it will be a really long time, before, as a society we change. But we Indians change only when it is presented as a fait accompli, sudden and with fear behind the move. What benefits demonetisation will bring is anybody's guess, but one thing is for sure. A large number of people will start using cashless transactions and that by itself is a huge positive for a country like India. It seems that others seem to think likewise.

http://economictimes.indiatimes.com/news/economy/indicators/view-cash-is-risky-after-demonetisation-cant-say-what-modi-will-do-next/articleshow/55660485.cms

This article I think captures exactly what demonetisation is all about.

Where the opposition and media in my opinion get it wrong is in the analysis.  This again is from a quick dip stick poll of dialling up and talking to many contacts.  Also remember perception is often fact and that is one place where many of us go wrong.

1.  Wealthy, powerful businessmen have lost little money but enjoy the discomfort of their political friends who have lost money.

2.    Salaried class have lost little money and are the most happy with vicarious pleasure against politicians, wealthy folks & believe that BOTH have lost huge money.

3.   The traders, middlemen have lost money, have been hurt in varying degrees and while they started off with anger, they soon found their customers (No. 2 above) cheering the decision and so went silent.

4.    The poor have no money anyway and so they lost nothing. Also they are held captive by the middlemen (No. 3 above) and they know that this class lost money, so they are happy.

The media and politicians are highlighting the travails of No. 2 and 4 forgetting that they have been vocal supporters of this move. Never mind if they don’t understand the implications or consequences. They are enjoying their moment in the sun so to speak. So whether it is opposition or media, they are only further strengthening the Modi govt at this point with their outrage. 

For Modi, depends upon how the next 6 to 12 months will pan out, he would have created a new constituency of voters that would vote for him. Where he can go seriously wrong is, if in the coming budget, he does not at least as a gesture “reward” the honest tax payer. Secondly if the income tax department hounded the odd housewife for having deposited upto 2.5 lakhs into her account – never mind it belonged to her uncle – inspite of Modi vociferously stating that such housewife’s would not be touched. Going by past record the IT department I have often said behaves like having gone rogue when dealing with government initiatives for goodwill and investments. The goodwill can quickly turn to rage & derail all plans of Modi. But then that is the nature of the beast that politics is.

I personally love economics as a subject but on a lighter note it must be understood that economics is an esoteric subject. Most economists are like the expert who stood next to an empty swimming pool and whispered “The pool is empty” as a diver prepared to dive in and after the diver had hit the ground shouted “I told you so”.  So dear reader, listen to every theory and opinion you hear on the demonetisation but you will know the results only after the mandatory 9 months so to speak. 

Lastly on a more humorous note, for those still debating if Demonetisation is good or bad, just check out these cartoons and remember that whether it is the government or the experts or yourself, the reader, all of us are in the same position.

This one I love since it reminds me of my Economics Professor, who who shared an experience with us from his illustrious global experience as a Economist. Consulting for a Dictator country his team presented to the supreme leader that his country's revenues were half of itsheir expenditure. The dictator took out his gun, banged the table and in a rage called his chief economic/financial advisor. As the poor chap stood trembling he asked him to issue a executive order immediately - to double all revenues. THAT our Prof told us is also economics.!!!!!!!

 Who doesnt have a theory or opinion on matters economic, you tell me ? Just talk to your taxi driver, vegetable seller or the Chairman of your company - everyone will with confidence tell you what the country is doing wrong. 

Economics is often a illusion and the same situation can look different to different people. So to believe one or the other is always a mistake. The truth as always lies somewhere in between.