Colombo Telegraph

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

By 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.

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 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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