6 December, 2020

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India’s Demonetisation Is Worthy Of Support: Mody’s Masterstroke – With Blemishes

By Kumar David

Prof. Kumar David

Prof. Kumar David

The demonetisation of Rs 500 and Rs 1000 currency notes which commenced on 8 November is worthy of strong support in principle. There have been a few cock-ups – serious ones at that – but that notwithstanding the measure is welcome. The acts of mismanagement are that the government was not adequately prepared to deal with the amount of cash that would pour in, nor to cope with the numbers that would queue up. The first point I cannot understand; how come the Reserve Bank (RBI) did not know the quantum of notes of the relevant denominations in circulation (to a layman like me it would be the number issued minus the number in bank vaults). Of course one cannot anticipate the rate of inflow on different days but surely it should have been possible to estimate the proportion of white, brown and black money out there and to prepare contingency plans to deal with the inflow. The mismanagement is not excusable, but certainly not a reason to oppose demonetisation. If you ask me “Look, you know the scale of things in India and the competence issues of its bureaucracy, so should the government have refrained from demonetisation?” my response is “Bollocks, knowing that cock-ups are unavoidable I still believe that it was entirely correct to demonetise”.

Regarding the long queues let me tell you about NM’s demonetisation in October 1970 when he changed Rs 50 and Rs 100 notes. I have some personal insight because only four people knew about it in advance, NM and Mrs B, the Secretary to the Treasury Chandra Cooray or some name like that, and my step-father Uncle Lloyd (L.O. de Silva) who was Senior Assistant Secretary in NM’s ministry. I found out that Uncle Lloyd knew only after the event. It came as a shock to NM and the Party (I was Secretary of the University Local at the time or had just handed over to Paul David) that many worker-comrades and trade unionists were in the queues selling their services and laundering money. They lined up and accepted gratuities to exchange black money. Demonetisation was less successful than it should have been because the working class let down NM.

I told you this little anecdote because the same thing is happening in India. Hoarders and currency criminals are paying commissions to ordinary folk to line up. Fortunately the Indian authorities are using indelible ink to make return visits more difficult and given the sheer size of the loot hoarded in India only a relatively small proportion can be laundered in this way. Another problem, due to size of the country and the number and remoteness of bank branches, is that bank employees help relatives and friends, not to launder money, but to circumvent sweating it out in the queue.

Plain Krishnan and Sita

There are three categorize of un-deposited currency. Hoarders and currency criminals (black money), small traders and small tax avoiders holding on to maybe twenty-five to fifty thousand rupees and the small man (worker, farmer) who would usually have no more than ten thousand rupees at home (brown money). Maybe these numbers are off by a factor but we can proceed because it does not change the qualitative nature of what I am saying. The third category is legitimate household savings which together with what is in bank deposits and business liquidity is white as snow. The government and RBI should have been able to make a plus or minus 10 to 15 % accurate estimate of each category and should have been well prepared for the length and pressure of the queues. It should have been possible to make a guess of how many people would line up on behalf of financial criminals to sell their services – this was going to happen but if it was kept to below 15% of the total amount demonetised I would consider the exercise a success. To believe my left inclined friends in India, they are of the view that the government got much of its planning horribly wrong; it underestimated the problem.

This certainly does not change my mind, I believe demonetisation had to be done; it simply makes me fault the authorities for not implementing practical aspects better. Former Prime Minister Manmohan Sing has shot his mouth off in all the wrong directions. He says targeting black money is correct. He then says it was badly managed; not as badly managed as the government of India when he was PM, but still so far he is right. But then instead of extending critical support he goes off damning demonetisation with gusto. When reminded that in about two financial quarters these difficulties will be ironed out and a strong economic recovery may follow, silly Singh quotes Keynes “In the long run we will all be dead”. Singh neither understands the time scales Keynes had in mind nor does he seem to be aware that Keynesian Economics was discredited 40 years ago by the onset of stagflation.

Chief Minister Mama Banerjee of Bengal and anti-corruption hero Arvind Kejerwal are also playing politics, condemning demonetisation instead of extending conditional support. Ah well, you know, the overhead costs of democracy! Obama says Yes, the Republican Congress says No; Obama says No, the Republican Congress says Yes. It has been the same story in Lanka for 70 years of uninterrupted parliamentary democracy, so it’s not unexpected that Mama Banarjee and Kejerwal play politics.

Still this is not to deny that there has been considerable dislocation of the economy (unavoidable) and a lot of inconvenience for poorer people (plain Krishna and Sita) who had to line up for a whole day which could have been much reduced by better planning. Some people lining up are errand boys of black money merchants working for commissions – this too was foreseeable. A diagram on the web (fig 1) shows the costs of demonetisation. The numbers are an overestimate but I have reproduced it so that readers can judge for themselves.costs-of-demonetisation

Despite the inconvenience and sweat and heat there is good humour in the queues because the sentiment is that unless black-money wallas are defeated there is no way India can go forward. The public grumbles but knows this has to be done. Three people are reported to have died from heat exhaustion and better management would have avoided such tragedies though in a country of India’s size scores people pass away during the massive pilgrimages in Varanasi and elsewhere.

The anticipated benefits

Thanks to demonetisation there has been an immediate cessation of terrorism in Kashmir and the North-East. Millions of rupees slashed away by these organisations have been rendered useless at the stroke of a pen. Property transactions were often more than 50% paid in black cash; this has ended and property prices have plummeted. This will benefit buyers and small people and low interest rate loans will become available. The government thinks the economy will be depressed for two quarters and then rebound and investment all round will pick up. It argues that “limited pain for two quarters is worth it.” Most economist agree that there will be a 1% to 2% slow down in the growth rate for the next two quarters but anticipate much improved performance thereafter. the-anticipated-benefits

The government has so far not given a breakdown of the amounts deposited by categories or indeed an overall figure for deposits. This is understandable; it would be premature for more reasons than one. Mr Mody will have to address parliament on demonetisation and a full accounting can be expected at the time. This may be after the “50 day” period – demonetisation commenced on 8 November so 50 days is the end of December.

The motives for demonetisation are said to be many; flush out or destroy hoarded black money, render fake currency sterile, push the country into a banking (and cashless) economy by forcing people to open bank accounts and perhaps most important, to end tax evasion. When hoarders and tax dodgers make huge deposits to rescue at least a part of their loot, the rest is confiscated unless the cash can be explained. This is a boon to current year revenue. But more important is that once tax dodgers are flushed into the open the taxman can keep them under surveillance in future. Demonetisation is a unique, large and complex exercise; parts of the project will fail. Nevertheless, overall it is to the good.

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Latest comments

  • 2
    22

    “Demonetisation was less successful than it should have been because the working class let down NM.”
    But then, NM let them down badly in 1963 by wrecking their “21 Demands” campaign and the ULF by joining Mrs B’s Cabinet.

    I do not want to respond point for point to the arguments presented by Prof. AKD.
    From what I have read in the Indian media (except some pro-Mody papers) the move is a failure with adverse implications for the rural poor as well. Also and the entire Indian left and many mass organizations are up in arms against the move (perhaps because they are incorrigible “Stalinists”).

    Just one news item should help to awaken the writer to reality. Within days of demonitization massive sums of money in new currency notes (Rs 500 and 2000) were discovered in the hands of dodgy businessmen in Karnataka.

    There is much for India to learn from Sri Lankan experiences. They never do.

    • 18
      0

      “”There is much for India to learn from Sri Lankan experiences. They never do. “”
      “push the country into a banking (and cashless) economy””

      The two of you are like Shashi Tharoor the obtuse working class nut.

      India boasts many of the world’s top IT companies, tech entrepreneurs and digital startups. Yet, it’s also home to nearly 900 million people who do not have access to the internet – ranked 127 in the world @26% with access.
      Sri Lanka ranked 141 in the world @ 30% with access.

      Cloud Technology is not for the working class 3 rd world for sure.
      That is where we are heading- to many cooks spoil the soup.

      USA:but you need to add 60 trillion more to that as there has been some real creative accounting going on, and there is 32 times more currency in circulation since the day Obama came into office, but there is only 250 billion in circulation of that monopoly money in this country. What does that math tell you? Look what a dollar bill worth 3¢ will buy you today! And what does all this have to do with this article? Who is going to see it when you can no longer afford an internet service provider and the system?

      • 3
        0

        What about the BIG ticket corruption – off shore bank accounts people with Panama Papers deposits?!

        This is a joke – catching the Middle fish, hurting the poor and letting the biggest crooks with their funds in overseas bank accounts off the hook to satisfy global capital and the IMF which are the most corrupt!

    • 13
      0

      sekara

      “There is much for India to learn from Sri Lankan experiences. They never do.”

      My Elders had seen long queues forming in front of certain branches of Bank of Ceylon in Colombo two days before N M Perera’s demonetization announcement.

      So the Indian rich should have been informed the move by Mody people if they were to learn anything from Sri Lankan experience.

      By the way it was in 1972 N M Perera the champion of workers who broke Ceylon Bank Employees Union strike which held out for 108 days.
      Once he was thrown out of the cabinet by Felix immediately his Trade Union wing organised a strike which fizzled out within few days.

      All these betrayal of workers happened while Siri Mao was running the country.

    • 19
      2

      Sekara the blind Maoist who hates India. He should defend himself from Hoole’s credible attacks on him.

      • 9
        14

        Any attack, credible or otherwise, deserves response only in appropriate fora.
        You may relish mud-slinging in the media; I am sorry that I cannot join the fun.

        ps. Kindly use Braille to communicate with the blind.

        • 8
          0

          You are hardly credible, Sivasegaram! See my comment below where I mention how demonetization is politically popular. The Indian Marxists are a lost cause outside Kerala. And there is no pro-Modi media in India, except for the Pioneer. You are very warped and meek mills may be right.

    • 0
      12

      Jayalalitha is dead. Good for SL.

      • 4
        0

        CT
        How do you tolerate such cruelly unethical comments?

  • 6
    16

    Prof. Kum is entitled to his opinions regarding demonetisation of notes. But what is not understandable is his attitude reflected in the article to express the view to the effect that even if there are some serious snags in implementation, the scheme is good. Now that is far beyond the scientific thinking and is not expected from a man like Prof. Kum.

    What is expected of modern day rulers are to make decisions on information and with a distinct target in mind and executed precisely to achieve the purpose. If there are under performances it reflects that the planning of the execution was poor. For that, one with a right mind cannot say “Nevertheless it is good.” What happens if it is so badly planned that the entire scheme is a flop? Can we yet say it is good. I am reminded of a famous saying of a native physician “ලෙඩා මළත් බඩ සුද්දයි.”. Tranlated as “Though the patient is dead his intestines have been cleansed”.

  • 9
    0

    I do not know why we are comparing Modi’s Demonetisation with NM. India known for long time dealing with black Money. Sonia alone imported large quantities of Pakistan printed money through Old Royals. As a poor country the tax collection very much need. India is growing. But the income is still very much short to service welfare of the high percentage of poor, development projects left alone.

    That was not the case with Lankawe when Sirimavo took in 1970s too. Few years ago to their government, Ceylon had donated shiploads of food to India. Though 25 years had passed from freedom, still country was less corrupted like current India. NM’s Demonetisation was only ploy. There was no black money hoarding person equal to Sirimavo that time. Even the current Royals may not match her, proportionately and the money value of that time. But she was allowed have her money cashed before the project started. Further he played the game twice. That is not an economist’s or Finance man’s action.

    They brought it because the country was in utter chaos. Sirimavo did not had any plan to offer in election. She came power with free rice from moon. NM’s budget did not have any inducement for West to Invest. JVP broke out. Famine struck. With their communist policies they failed to get West’s was not support to NM’s budgets. To get out of these NM brought Demonetisation. Then at the end they ended losing their franchement to JR. I do not think it was need at that time to Lankawe. I do not think that kind money was hoarded that time. I do not think that was the last resort either. This is how the successive Modaya governments shrunk an economy that was equal to Korea to this small, poor one.

    I don’t like Demonetisation of old bills like this. It do some damage. RBI can introduce a commission on commercial Banks to deal with large old bills for a limited time like three years or five years and while improving interest rate for deposits in that periods. If Old currency deposited without spending for five years will have higher interest rates! Spent that Money in five years or deposit it. That’s all! No re-cashing at all with new bills. When big bills can not be changed small bills they are safe from hoarding. Further a plan to protect small wage earners from being paid by big bills needed. Stores can be allowed to deposit these bills and write checks. Commercial banks will pass this to noteholders. Particularly, at start it will induce to hoard more. But eventually most will be surrendered.

  • 0
    0

    SO then how does one ferret out the blackmoney? SL is flush with black money? Raids? Look at Colombo’s hotels. I feel poor and get class envy when I go back and see people plunking down 20,000 to 30,000 rupees on booze and food. things are so damned expensive. There is an elite class of people who are mostly politician’s kids of UNP; SLFP and any bloody damned Pee. There are kids of military guys who made it rich with war. And of course there are genuine successful entrepreneurs; you can see they are different. For example the big export houses and the young people who made it big in the big old corporate houses. But there seems to be a class with wads and wads of cash

    I am retired as a lecturer and get only a tiny pension but luckily my wife still works and we go to SL to visit family and even airline tickets are not cheap but it is something we do like a lot of expatriates. When we go out to eat, we see people tossing money out far more than anyone would do in USA. My gosh I have not seen such vulgar ostentation anywhere except perhaps with the Trumps and Hollywood stars..

    I see fancy cars and fancy people all over and then there is the glaring inequities in society. So that means there are lots of people who made money off the wars; commissions; contracts SLFP UNP or whatever hell Pee.

    So Mr. David, how will you get black money and terrorist money out? There are very few people who pay income taxes there right? So why not change the taxation system then?

  • 2
    2

    Well black money was moved to charities and being white washed !! many peopled have died in ques! modi is going to be hated !! those money saved and hidden by poor ladies is going to be pulled off !! already many industries have entered banktruptcy!! cinemas..mobile phone businesses etc !! do some research !! see what Pa Chithambaram said about this !! its said that even Manmohan singh’s advisors wanted to do this during his period , but luckily he refused because he knew the complexity and seriousness of this issue!!

    • 11
      0

      Good article. Modi’s party won the civic polls in Maharashtra and Gujarat AFTER the demonetization. He is expected to win Karnataka in a few months. The opposition Chief Minister of Bihar supports demonetization. Demonetization is popular.

      • 3
        5

        I did not talk of popularity.
        As I said, the move has hurt the rural poor and there is no prospect of controlling black money as counterfeiting and black money have ways of surviving in corrupt societies (and it is the corrup that rule India, as here or perhaps worse). That is my view and let us wait a few more months to find what this coup by Modi was all about.

        Some of the most critical views are not from left or centre-left sources but from capitalist analysts as you may see from a few items below. The general impression is that short term prospects for the middle classes and workers (informal sector especially) are bleak. Things may improve with time, but not in a hurry.

        Modi’s Demonetization Is a Cure Worse Than The Disease For India
        http://www.forbes.com/ (2 Dec 2016)

        The Supreme Court will hear the demonetization matter on Monday. The apex court had earlier on December 2 adjourned the matter because of problems faced by cooperative banks.
        Chief Justice of India TS Thakur has asked the government to see if something can be done. “People are suffering, it is a serious problem,” he said.
        http://www.dnaindia.com/ (5 Dec.2016)

        India’s service sector activity plunges in wake of demonetization, composite PMI drops below 50
        http://www.econotimes.com/ (5 Dec 2016)

        Have fun while it lasts.

        • 6
          0

          I tend to agree with Kumar David and Punya.

          The CPI (M) called for a nationwide general strike that failed miserably. The Congress and Trinamool initially supported the strike but then backed off. There were no riots nor massive protests against the new policy. That only goes to show that many did not oppose the move.

          If the big bad world of corrupt capitalism is inconvenienced, so be it. The hoarding of capital has to stop, the tax base has to be widened to pay for social welfare, and the banking sector deepened.

          Forbes, the Economist etc do not reflect nor commiserate with the Indian reality. The Supreme Court – really?? The fact remains that it did not stay the Government move and had repeatedly adjourned the case. That should say something.

          Corruption in India is endemic and needs tough measures. The corrupt must be already trying their tricks to convert their illicit cash into other assets, as Sekara alluded to by citing the Bangalore incident. The IT Department fortunately is somewhat ahead of the curve and catching them.

          This does not mean that the informal sector (and small enterprises) would be initially impacted. It too for its own protection shift to moving its assets into the banking sector, not keeping it under the pillow.

        • 0
          2

          Ajit,
          Thanks for being cultured.

          As I said earlier, I was not talking of the popularity of the move or of protests.
          The examples I gave were a handful of the many predominantly negative observations that I spotted after a quick glance.

          One point that I made was that Modi’s demonitization has caused much hardship to the lower strata of society. I do not think that there is much evidence to contradict that.

          The other point was that demonitization cannot control black money in the corrupt South Asian context.
          Black economy in India is not cash dominated and has other robust forms including gold and other forms of wealth. Add to that, black money in investments and bank accounts abroad, which is growing rapidly.

          I do not want black money to thrive any more than I want capitalism to thrive.
          But I am painfully aware that we have to live with both for some time to come and there are no easy answers.

  • 2
    0

    One family has declared of 2 lakh crore. This could be around 70 Billion US Dollars.

    This family probably has not been listed in billionaires list. Certainly even if they 45% tax, they are going to targeted by Revenue service and Central police, probably some others too. This will hinder others doing the same thing. Indian government should not targeting taxing first(45%).

    First bring a program over 5 years of teaching the the people to start business with banks. Insist them to deposit first. From village farmer to all have to be taught to deal with banks.

    Give time like five years with less punishments. One brave will come forward and declare his money first. If he/she is not hurt, over the period, all others will follow the suite.

    But by the current method, Indian government may get some income for three months. But the hoarding culture will be left alone in tact. Now the Indian economy is normalised in that. So, as soon as the fear is gone, all will return for that habit.

    So Indian government should demonstrate that taxing and punish is not their object. Their higher bracket is 30%. They should stay with that for the people who are declaring not to feel being punished.

  • 2
    8

    The poor people in India thrive on cash economy.

    Cash economy is not black economy.

    Black economy is however cash based.

    If Modi wants to hit at Black economy which is cash based then he needs to adopt a different approach.

    Demonetisation hit the poor and ordinary people worse than the hoarders.

  • 3
    0

    Kumar David,

    “Keynesian Economics was discredited 40 years ago by the onset of stagflation.”

    It seems like the Milton Friedman in Kumar David is coming out.

    The post-Keynesian economist Nicholas Kaldor provided a robust explanation of stagflation in an essay in 1976.

    Keynes’s General Theory was easily capable of showing that rising unemployment can occur with rising inflation.

  • 7
    0

    Sekera.

    PM Modi rushed in where the angels fear to tread! Had he known that you were around with your knowledge,in every conceivable subject,be it Politics,Economics,Philosophy etc etc etc he[Modi] would have consulted you for sure!

    • 5
      4

      Dear Pygs,
      Thank you for your wise words.
      What can I do you for?

  • 1
    1

    There is also the speculation in New Delhi Modi & Company alerted their super-rich friends well before the De-monetization date – to do the needful. It is an open secret Modi/BJP also were handsomely supported also by Corporate India in his election. If this is true, then a terrible disservice has been done to the poor, the lower and middle-class, who form the bulk of the Indian population and who suffered most. Prof. Amartya Sen notes to punish a few bad men Modi hit each and every Indian. Modi’s much assured steps to rope in several crores of US$ and other foreign-currency in overseas banks was almost a failure. Nothing further is heard of this since.

    But, to agree with Kumar David, the DM exercise will break the backbone of the black-market economy. To that extent it is a bold and welcome move. The black-market housing market will be hit and may eventually find levels to benefit the mass of buyers in the future. The other target of big black money – the film industry, the Gold-Diamond Jewellery market also will take bit hits. But by the time the issue settles done in the next few months it will hurt the poorer sections of the country more than the rich and the super rich. India will be driven towards an Online cash society.

    Above all the DM exercise virtually assures Modi/BJP victory in the next General Elections.

    Kettikaran

  • 3
    0

    sekera.

    What can I do for you? You ask.
    Nothing for me mate;Relax.The poorer section of India needs your superior knowledge,on every conceivable subject,to pull them out of poverty!

  • 0
    2

    Pygee dear, Sorry to disappoint you.
    Read carefully what I wrote.
    I did not ask “What can I do for you?” but “What can I do you for?”

    Sad, with a name like yours, you should have known what it means!

    Maintain a healthy sense of humor.
    Better luck next time.

    • 0
      3

      Good one, Sekara!

  • 0
    0

    sekera.

    That was a googly no doubt!

  • 0
    0

    How nice. David’s support was vital for Modi’s success!

  • 0
    4

    Things are not as clean and smooth about Modi’s demonitization exercise as many here appear to imagine. (I give just two interesting items from today’s news)

    The name of mining baron and former BJP Minister Janardhan Reddy has cropped up in the suicide note of a 30-year-old driver of a Special Land Acquisition Officer (SLAO) of Bengaluru. The driver, who killed himself on Tuesday, has accused the officer of helping Mr. Reddy convert Rs. 25 crore in old notes into new currency ahead of his daughter’s lavish wedding.
    (http://www.thehindu.com/news/national/karnataka/Driver%E2%80%99s-suicide-note-says-Reddy-laundered-Rs.-25-crore-for-wedding/article16776323.ece?utm_source=true&utm_medium=Email&utm_campaign=Newsletter)

    “Govt. should heed Advani’s good advice: Cong.”
    The Opposition will observe a black day on Thursday, exactly one month after Prime Minister Narendra Modi made the demonetisation announcement. Party leaders will meet in the morning to decide the form of protests for the day.
    http://punemirror.indiatimes.com/news/india/Neither-Speaker-nor-parl-affairs-minister-is-running-LS-Advani/articleshow/55859530.cms

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