Demonetisation: Plumbing The Depths Of Indian Politics

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Mr. Modi’s evening strike on black money on the 8th of this month is the defining assault on India’s real enemy. Pakistan is an external adversary and can (and has) been contained by our armed forces. It is always more difficult to do battle against your own internal systems which have turned rogue, as in the case of auto-immune diseases. The dark or black money in India is one such malady which had been flourishing unchecked for the last forty years. It has been responsible for the culture of corruption, gutter politics and tax avoidance that has become our defining characteristic. It has widened the gap between the have and have nots where the top 5% of the population own 75% of the country’s wealth, even though only 3 million people pay Income Tax. Even more grotesque, this leprous culture has acquired legitimacy (if not envy!) as exemplified by the lifestyles of the rich, the famous and the politically powerful. The Finance Ministry has estimated that this parallel economy comprises 12% of our GDP or about Rupees 14,00,000 crores.

money-exchange

I have grave reservations about Mr. Modi’s governance model: its emphasis on industrialisation at the cost of the natural environment, his refusal to communicate with the people except at election rallies, his penchant for over centralisation of authority, his lack of tolerance for dissent, his religio-cultural brand of nationalism, his inability (or unwillingness ?) to take the minorities along with him. Nothwithstanding this, however, I have no words to adequately praise and laud the momentous step he has taken on the 8th of this month. We had believed till then that the Indian politician had lost for ever the moral essence to take such decisions. Most Indians are over-joyed to have been proved wrong.

The most effected are the politicians and the business – bureaucrat nexus which had evolved a symbiotic relationship of blood -sucking with them. But one is none the less surprised by the vehemence with which they are opposing, and trying to sabotage, the path breaking measure. In fact they are going further – trying to incite panic and disaffection in an already somewhat disturbed situation. When the going gets tough the crooks get going: Mr. Modi has managed the impossible – he has brought Mulayam Singh and Mayawati together: the only thing they have in common is their subterranean swag of illegal moneys. Mamata, buoyed by her success in Bengal, is now trying to strike a national pose. Kejriwal has made a terminal blunder by jumping on to their bandwagon like an organ grinder’s monkey: by joining them on this issue he is now tainted with the same brush as them – he will soon realise that if you lie down with dogs you will get up with fleas. Only Nitish Kumar, Chandrababu Naidu and Naveen Patnaik, to their credit, have come out in open support of the demonetisation. The rest, wily politicians all, are typically silent, like scavengers waiting to see which way the wind is blowing before committing themselves.

Specious, misleading and irrelevant arguments are being advanced to condemn the decision: What about the black money stashed abroad ? How will the common man, the farmer manage without cash ? Only 10% of black money is in cash – what about catching the other 90% ? This is the marriage season and therefore the wrong time to implement such an action. The timing is suspicious, the BJP is looking at the UP/Punjab elections.

 Prime Minister Narendra Modi

PM Narendra Modi

Its all self-serving, opportunistic balderdash. Of course there’s unaccounted money abroad, but its not even 25% of our own domestic black money; in any case its stupid to argue that one should not touch the latter before tackling the former! The common man is moving towards the banking system and this decision will only accentuate this movement: there are almost 700 million debit etc. card holders and they can easily migrate to a less cash dependent system. Yes, cash is only one of the forms of black money, but its the one which feeds the others, the prime others being real estate and jewellery/gold. Demolishing the cash haven will automatically erode the value of the others – property prices in Gurgaon and Delhi have already come down by 30-40% in just 72 hours, and gold will also follow suit . Its always festival or marriage season in India and if important decisions are allowed to be constrained by them we would never be able to move forward. The election argument is just as vacuous: ALL political parties – including the BJP – would be effected by this turning off of this illegal tap.

Mr. Modi must be supported in this agenda – changing initiative by all right thinking Indians. He must, however, not rest on his laurels but should move with the momentum he has generated and quickly take follow-up measures to consolidate this initial thrust:

  • His biggest immediate challenge is to normalise the situation on the streets and markets and to ensure that the cash starts flowing again to families and businesses, big and small. If the long lines at banks and ATMs continue for more than a week the back-lash from honest citizens will start to build up and he could lose public support.
  • It is common knowledge that gold traders and foreign exchange dealers have been working overtime to convert black money for the last five days. This has to be stopped with an iron hand, and quickly.
  • The current demonetisation is a grievous blow to the corrupt body politic, but it is not a mortal one, and this egregious monster can quickly recoup itself in a few years if secondary measures are not taken.

These should include

  1. Netting the self-employed and the professionals like Doctors, Lawyers, Beauty parlours, Private tutors, Property dealers etc., all of whom deal exclusively in cash and never issue receipts.
  2. Revise the circle rates of land to plug the real estate sector, especially the secondary one. In South Delhi, inspite of revisions, the circle rate is still barely 50% of market rates.
  3. Prohibit reemployment of retired bureaucrats, defense officers in ANY private sector employment-companies, trusts, societies, foundations, NGOs- for five years.
  4. Bring in legislation to stop the system of governments (both state and central) appointing retired bureaucrats and judges to PSUs, Commissions, Tribunals, Regulatory Authorities etc. by arbitrary nominations. Such appointments should be made by open selection by a statutory body.

[These last two suggested measures will break the nexus between government officers and business, and the even cosier one between politicians and bureaucrats/judges whose last year of service is generally devoted to establishing a quid pro quo to obtain reemployment.]

  • Clean up the political and electoral system by bringing in legislation mandating donations / contributions to political parties and candidates through cheques only, regardless of the amount. All mature democracies have this provision, and after blitzing the common man there is no reason why the politician should be exempted.
  • Impose a cap on how much gold can be retained by an individual, trust, religious institution. Any quantity in excess of this limit should be compulsorily depositable in the Sovereign Gold Bond scheme. This will bring huge quantities of gold into the banking system, curb demand, and drastically reduce imports of gold, which currently are the biggest drain on our foreign exchange reserves after oil.

All Indians have been served a bitter medicine this last week, for our own good. But the medication needs to be continued with follow up doses, like an antibiotic whose full course must be taken. Otherwise the disease will re-manifest itself in an even more virulent form very soon, and the next time we may not have a physician like Mr. Modi brave enough to prescribe the right medicine.

Avay Shukla retired from the Indian Administrative Service in December 2010. He is a keen environmentalist and loves the mountains.....he has made them his home. He blogs at http://avayshukla.blogspot.in/

3 Comments

  • Botoka Zhimomi says:

    Sir, you say that even the BJP will b affected by the demonetisation. The Modi-Shah duo are not stupid. They surely (they have) are well prepared in advance for the upcoming state elections.

  • Avay Shukla says:

    Sandip, I’ve NOT said that only 10% of black money is in cash- I’ve referred to it as one of the criticisms being made by those opposed to the demonetisation move. In fact, RBI estimates that between 25% and 30% of total money in circulation is unaccounted money; it expects that approx. 3.50 lakh crore rupees will not return to the banking system in the current exercise and will be ” extinguished”. This appears to be a fair estimate because in 1978 too about 25% of the total cash had left the system.
    Demonetisation should not be seen as an anti-corruption instrument only, it has other , long term benefits for the economy too. Some of them are:
    * By filtering 86% of the total cash in the economy ( the 1000/ and 500/ rupee notes) through banks, millions of additional people shall be brought into the tax net for the future. The govt. will now have their details for follow-up action.
    * More and more businesses and services shall now shift to the banking system instead of dealing in cash leading to better tax compliance.
    * Inflationary pressures are bound to decrease as now there will be lesser money chasing goods and services. Here’s an example- in my own housing society in Delhi the asking price for a three bed-room flat has come down from Rs. 2 crore to Rs. 1.50 crore in just a week. The difference is the black component.
    * With an additional Rs. eleven lakh crores or so coming into the banks the banking system will be strengthened significantly, interest rates will come down and credit flows will improve. This will give a fillip to both manufacturing/ services sectors and consumption once calm returns.
    I agree with you that the disruption of economic activity that is already visible will lead to a contraction in growth at least for the next quarter if not for the next one too. But GDP growth cannot be an end in itself: it has to serve the larger good in terms of more employment, better infrastructure, improved wages etc. Unfortunately, every non-BJP economist will tell you that that was not happening in India over the last few years. What we had was a distorted, sterile, job-less growth whose benefits were being creamed off by the top 5%families ( maybe somewhat like in the US where you are, and which has given you Mr. Trump as a thanksgiving gift !). Most Indians can live with lower growth rates, provided they are more equitable.
    Let us separate the policy from the implementation. The demonetisation policy is sound, the implementation faulty ( though how it could have been improved without compromising its basic objectives, no one has yet been able to suggest). Also, don’t forget that other factors, uniquely Indian, are also contributing to the difficulties: a blindly adversarial ( and steeped in black money) political dispensation trying to spread panic, the Indian genius for discovering new methods to circumvent the rules, a corrupted ( and most effected) bureaucracy extending only half hearted support to the campaign.a media more interested in sensation than in facts. Yes, the disruption is likely to continue for at least another two weeks or so, but things will calm down gradually as more and more of the new currency of 2000 and 500 denominations are injected into the system.
    Follow up measures are of course needed, as I’ve already argued in my piece. One more legislation needed ( which I omitted to mention) is to withdraw the exemption from Income Tax allowed for Agriculture ( above a reasonable level of income, of course). Just about every politician and bureaucrat uses this provision to launder his unaccounted moneys.
    Mr. Modi has already announced that he will come up with more stringent measures after 31st December.
    Its not economists who decide the future course of a nation, its the people, and they overwhelmingly support the demonetisation.

  • Amarjot says:

    It boils down to intention.
    I wrote a long comment lots of positives but questioning the timing and intent.
    It got deleted!
    Hence giving me a few more days to observe.

    And now someone’s comment sums this whole excersise.

    To catch the crocodile the lake was drained. One forgot crocodiles can survive on land too. But incidentally all the small fish died.

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