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.
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.
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.
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