Demonetisation - Final Update
An early lesson I learnt when
dealing with customers was that invariably there is a Stated reason and there
is a Real reason. Not always easy to even know such a situation exists and very
difficult to know the real reason. Over
time I have realised that this behaviour extends to even strategic decisions of
companies, decisions by politicians and sometimes even within family and
friends.
My most interesting lesson in
this was in dealing with a giant multi billion dollar corporate where they
needed an electronic consumer product “reworked”. The estimated size of the
deal was hardly Rs 2 Million but someone two heartbeats away from the Chairman
was talking to me and putting pressure to close the deal. Sensing that there
was something I didn’t know – the Real reason - I doubled our price estimate,
he agreed without batting an eyelid. I then said extras not included and he
further increased price by about 15% and I had no choice but to agree. We did the
work, didn’t lose money and as we completed it, this gent became friendly and I
finally asked him what was the Real reason. He laughed and said that their
option was to scrap and import fresh items and the cost of that was actually
Rs. 120 Mil. He said he would have even agreed to quadruple my price. No wonder
someone so senior was handling such a small deal and didn’t negotiate price.
This Stated versus Real reason
lesson also dovetails into a logic that a boss of mine used to tell me – you
don’t know what you don’t know.
It is in a similar manner I view the
Demonetisation exercise and while the Raghuram Rajan’s of this world tell us
what we already know, this is my final update on the subject that fascinated me
tremendously. I use his name more as a
metaphor since the last few weeks he has been on a roll on this subject and I have tremendous
respect for him. So this is NOT about him.
Firstly the Demonetisation
exercise sucked up 87% of the currency in the system. Anybody other than a
deaf, dumb, blind, retard would know that this was going to be a costly
exercise, can scorch the earth and the govt if anything went wrong. Implementation challenges were humungous
since it involved printing new currency of a different size, recalibrating ATM
and other machines to handle them, the entire supply chain and managing the
uproar that could follow the decision. Foremost
this had to be kept so secret that the govt could not have made any advance
planning on any of these aspects since that would have given the game away. So when people talk of better management I find that a trifle hard to accept. Yes you can always do anything better.
Next we come to the stated
reason for this move – eradicate black money stock in the market. Once again it
would take an extremely stupid person to actually think that this black money
was held in cash under the bed or wherever and so would get flushed down the
toilet. That there were big time leaders
and the Rajan's who actually believed, that the govt believed, that money was
held in cash were being extremely foolish to do so. Even the beggar on the
street knows that the biggest chunk of ill gotten money is held in the form of
gold or land or in overseas bank accounts. The days of keeping cash under the
bed went out with the bollywood movies of the 70’s. Actually they know the truth, its about what they want to say.
I said as much in my first
blog written soon after the Demonetisation was announced. No less than the celebrated economist John
Meynard Keynes predicted disaster and destruction when you take such decisions.
The govt in India is not
some tin pot dictatorship out of Alice in Wonderland that one man, Modi can
take such decisions and shove it down the throats of the country. If that were
to be the case, I must say we have a very poor system and live in a delusion
about democracy. Any such decision would have involved various officers, RBI,
Finance Minister, etc and while the
basic intent maybe on a need to know basis, there is no way anyway can even
imagine that one man took the decision – one man ultimately took responsibility for and announced the decision which is what any half decent leader should do.
But lets get back to the
imperatives leading to the Demonetisation exercise.
One of the most important
points in the manifesto of the government was to address the black money issue.
This is not some simple instant coffee kind of exercise. It needs a multi
pronged approach which includes the political hot potato – political election
funding. Any action taken will hurt the entire eco system from the party that
is running this government to opposition to businessmen who actually fund these
parties on a quid pro quo and other corrupt folks. Trust me these folks can
quickly gang up and bring this government and finish Modi politically for all
time to come. So any action would need a multi pronged attack, lubricate the
system to support this effort, plan for contingencies where possible and do
things quietly and in a non threatening manner - a fait accompli for your friendly inner audience even if not in agreement with this idea. It would have to be like the Camel
in the tent story. However some action would be a big bang effort and convey a
signal about the governments resolve.
At the same time, every
political leader, Modi included, wants to win the next elections and so more
than any altruistic agenda, it is plain and simple politics. Except that, the
strategy is different, the marketing is different, the branding is different
and this to my mind is being taken with a view to change the rules of the game
in the long run from caste and religion to something more tangible that can
resonate across caste, community and religion and which can mobilise more votes
in bulk. Today the entire political strategy of any party is to divide votes on caste, community, religion and hope you get lucky. I sense that Modi wants to change this paradigm - how successfully, time will tell.
Before we come to the possible
reasons behind the move, lets examine some other actions taken that are what I
call as “creeping actions” which again have their own stated versus real reason
stories.
- Opening of a large number of bank accounts. Does anybody know how much black money was deposited into these accounts by those who were advised to do so and thus are safe ?
- Linking Aadhaar to every sneeze and cough be it direct benefit transfer of subsidy, mobile phone connections, bank accounts and what have you. This is being planned for even share market transactions.
- The gold monetisation and bonds thereof.
- Income declaration scheme.
- Real estate benami transactions act
- Digital India
- Linking Aadhaar to PAN
- Change in various rules related to cash transactions in banks or elsewhere
- Issue of RuPay cards to enable more citizens to go cashless
Here apart from giving enough
and more opportunities to convert the cash into legal tender, gold etc the
government had to show that they are doing something since none of these would
be understood as having a purpose. So Demonetisation. It had a huge political risk with a huge
political payback. The pint is that Modi took a risk as leaders should do and
gambled and well, whatever the economists may say and scream he walked away
with the accolades. Everyone and his uncle in the government knew that it would
impact growth. With GST also in the offing it would be a double whammy.
Anybody thinking that these
were not anticipated is living a pipedream. What nobody knew was the extent of
impact – 1 % 2% 3% ?? With GST and like
I said slick marketing and communication Demonetisation may have had economic
costs but it had huge political benefits.
Now lets look at the possible
target points that the government may have had.
Hurt your political opponent:
Anybody who was friendly could
have been tipped off in advance and hence ensured that they don’t lose their
cash. We didn’t see Nitish Kumar or Naveen Patnaik or even DMK/AIADMK complain
vociferously did we ? Even the Mulayam’s were muted. But who screamed loudest
and even today screaming ? Mamata and the Communists. For that matter even
Congress hasn’t screamed as loud as
Mamata. Arvind Kejriwal seems to have been shell shocked and seems to be still
wondering what hit him. Today Nitish is
back in NDA, AIADMK is talking of joining NDA and the so called opposition
mahaghatbandhan is in tatters. So politically Modi won the day here.
Now if anyone thinks that the
Congress when in power didn’t play similar games, remember that Raghuram Rajan
declared all notes printed prior to 2005 as not legal in the run up to the 2014
elections. Only that it didn’t have a big bang effect because it had limited objective
of hurting the opposition political parties and from what one heard it did hurt
them. That they won inspite of that is a different story altogether. This can
be considered more a sly effort than a frontal assault.
Terrorism and Counterfeit money :
It is a no brainer that most
of the terrorism is funded by forged money since which country will spend their
hard earned money to go down the drain forever and ever. Demonetisation hurt
this industry badly and had a direct correlation. If any proof was needed just
check the number of bank robberies that happened in the days after
Demonetisation. It hurt the sponsors, the local leaders, the foot soldiers and
nobody can guess or no government will ever publish the extent of damage
caused. That it was economically positive is fact but the numbers will never be
known.
Also in this case when
terrorism goes down, however briefly, the opportunity benefit to the economy in
terms of lives lost, properties lost, etc is incalculable.
Cashless/ Digital Economy :
While the economists and
statisticians can show up all kinds of numbers, the fact is that post
demonetisation cashless has grown. It’s a juvenile argument to say that it grew
less than ideally, that it reduced after growing since the point is that it was
a push towards this habit. From personal experience one can say that the number
of outlets where cashless transaction can be done has increased by leaps and
bounds. The option to use cash or cashless still remains an individual choice. Once
a habit is formed, a large section of the populace forced to give cashless as
an option, the habit can only grow. In
the absence of this push and nudge it would never have grown.
Here the government also has
the ability to limit the amount of currency that is floating in the market and
thus push/force the increase in cashless transactions.
Even if this growth takes
another 5 years to reach acceptable levels it would still be a winner. Now
whether it is possible for someone to predict and demonstrate the benefits and
link it to the demonetisation exercise is a big question.
Data mining :
Last but not the least when
you look at the various schemes announced by the Modi government and the way
the government has cleverly made the citizens share information at different times
for different reasons it makes it easy for them to find a linkage and connect
the dots. Every person intending to evade tax can only think through the
actions of one transaction to ensure that he doesn’t get caught. But if a
spiders web is created across your life, its well nigh impossible to think
through in detail and make a fail proof plan. The web is connected, there is a
trail, there is a digital footprint, there is a digital finger print which will
link you with your actual finger print.
The pay off here can be
humungous. The data mine created owing to a whole set of activities introduced
slowly and then the big bang Demonetisation which gave you little time to think
through means that the government is sitting on a data mine that cannot even be
valued. How long the government will take to sift through this and bring to
book the tax evaders is anybody’s guess. What will be the long term payoff is
again a guess but most likely it will be substantial.
Most importantly this exercise
can bring in substantial numbers into the tax paying base which is the winner
in this exercise.
Tax base :
The percentage of population
that pays income tax in the country is just 1.5 %. Some say it is more like 3
to 4 %. Lets accept the figure of 4%.
The number of households
having a car in India is about 11% as per a survey. 36% of households have a 2
wheeler. It is a bit difficult to digest that a person owning a car is not
liable to pay income tax. Even if one
were to owning a two wheeler, and assuming that 80% of these are still “poor”,
that still leaves more than 8% who can be paying income tax.
Even if assume that these
conclusions are incorrect, then should we assume that 97% of the population is
so poor? In that case we need to revisit our thinking that we are developing
country that has progress. We are saying that in 69 years only 3% of the
population has been developed. Shall we look at ourselves, our friends,
families and ask if over the last 2 to 3 decades we have progressed and become
more affluent or poorer? The answer is clear – we have progressed and developed
but owing to a variety of reasons we don’t pay taxes.
Consequently what is happening
is that a smaller proportion of population pays taxes, they pay higher percentage
of taxes, they get motivated to avoid tax. The answer is to expand the tax base
to around 10% though experts actually suggest around 23 to 25 %.
A country like USA has close
to 53 % that pay income tax and the benefit of such a large tax paying
population is clear – the bottom 50% paid 3.5 % tax while the top 50 % paid 27
% tax rate. In India forced by circumstances in 1991 and subsequently the
amount of tax collected has increased hugely by reducing the rate of tax. But
to me the situation is now nearing the point where the law of diminishing
returns is kicking in. either the government increases taxes and become
unpopular or they increase the tax payers base. Demonetisation may well make
that happen even if the immediate figures are disputed by the opponents.
Bring back black money cash :
This was the stated reason,
the populist reason, the reason that resonated with the vast swathes of the
population. Anybody who knows how the black economy works would know that this
would bring very little cash back into the system. Yes it would have some
marginal effect but that is more like getting pick pocketed. You didn’t lose
all your money, you lost what was in your pocket at that point in time.
Depending upon your luck it may be high or low but at a macro level it would be
negligible.
Conclusion :
In conclusion Demonetisation
when looked at the narrow prism of bringing back the black money cash into the
system can be termed a failure, a failure that I think was known and
anticipated.
However I think each of us
would be doing a great disservice to ourselves and our intelligence if we look
at this from this narrow prism. Yes the opponents of this government will look
at just this and nothing else. All that it will get them is some thrill and
self satisfaction of having made a debating point. To the vast voting
population unless they find themselves paying a consistent price for this
decision, they will cheer the decision and the ultimate prize is about politics
– the Govt would have won.
The 9 different action points I mentioned above together, separately will all contribute to combating black money but knowing the intelligence of we Indians, we will find ways to thwart this over time.
We will never know the real
reasons, the impact of the real reasons be it benefits or failures. Infact even the government will not know it
precisely except what blips on their radar catching their attention. However the
stated reasons will be known, the blips on the radar highlighted, the voting
populace informed and come the next state elections or the 2019 Lok Sabha
elections the party running this government will know if they have won or not. If
they win consistently and get another term till 2024, Demonetisation would have
been a huge success – whatever the Rajan’s of the world may say – you see the Rajan’s
of the world are not fighting the
elections.
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