“Most of the evil in this world is done by people with good intentions.” ― T.S. Eliot
Muhammad-bin-Tughluq, one of the most controversial Sultan of Delhi (1324–51 A.D.) was a brave warrior and a religiously tolerant ruler. He was a scholar of logic, philosophy, mathematics, astronomy, physical sciences, calligraphy and liked exploring medicinal sciences. Tughluq was skilled in several languages (Persian, Arabic, Turkish & Sanskrit) and was an able commander (contended 22 rebellions) and a very intelligent administrator. Whenever he conquered a new area, he used to depute a taskforce comprising of revenue officials who would study and assess the area and its economy to compute its revenue potential and interventions required by the state. This study was used as an important benchmark for periodic auditing of the area by the office of the 'Wazir'. Tughlaq, created a new set of forward looking policies and pursued them persistently and ruthlessly. Though his policies were far-sighted, they were discordant with the socio-political structure at the time.
Tughluq is well known for his faux pas in shifting the capital from Delhi to Devagiri (Daulatabad in Maharashtra) believing that the shift would aid him in better monitoring southern India and also protect his capital from Mongol invasions. Interestingly, Devagiri-Daulatabad Fort is still believed to be undefeated in battle! However, it is relatively lesser known that Tughluq also attempted to implement monetary sector reforms such as the introduction of token currency - Coins of brass and copper, whose value was equal to that of gold and silver coins through government fiat. The idea failed miserably, as Indian goldsmiths started forging the new coins in bulk. The new coins only had engraved markings instead of the royal seal and hence, the ordinary citizens could not distinguish between the official and the forged coins. As a result, the value of coins nosedived - disrupting the trade and commerce and ultimately forcing Tughluq to demonetize the new currency by forcing it out of circulation. Tughluq's treasury was deeply drained because of exchange of copper coins with gold and silver coins. If you look closely, Tughluq's idea was very similar to modern concept of currency where a piece of paper carries value owing to a government promise and citizen's trust on it. Where he went wrong was the sheer implementation of it!
Manmohan Singh in his Dec 9 post in 'The Hindu' opined that money is a mere idea and trust which the citizens have on the government. He refutes the argument that all cash is black money and all black money is in cash. Further, he highlights that majority of Indian economy is informal and cash is king in India. Finally, he concludes that as the demonetization can neither tackle the black money, nor its flow - the negative implications of GOI's decision on commoners is a travesty of GOI's fundamental duty towards its citizens. The arguments of our Ex-PM is on similar lines as highlighted in the first and second post. Nobel Laureate Amartya Sen too has criticized the move arguing that currency note is a trust in government's promise and it should not be broken. You may think that the move has not caused much inconvenience to you individually and hence, is being blown out of proportion. Hence, keeping you out of the discussion may provide us an objective and neutral perspective. So, let us begin with the ABCD of demonetization:
#1. 'A' for 'Agriculture'...Long awaited A+
I am an agriculture graduate and have many interesting stories up my sleeve related to the sector. In one of the class, a professor asked a student "Why did you join Agriculture?" The student replied with pride "Sir! Agriculture is the backbone of India." to which the professor quipped "Agriculture is...but you are not!" The pro-demonetization camp, like the student, has already given its verdict that once cash is replaced as the mode of transaction in agriculture sector, all the pains of the sector would vanish overnight. Further, transformational changes like better access to credit for farmers, elimination of middlemen, direct transfer of subsidies to farmers and ultimately linking the Indian farmer to the global agricultural market is just on cards. But what they ignore to take cognizance of is that the past 2 years of sub-normal monsoons had muted the agricultural growth and amplified the need for plentiful rains. While the rain gods obliged, promising a growth of 4% this year, the demonetization move in the midst of the winter sowing season was feared to impact the ability of the farmers to sell their bumper harvest to the local traders and APMC markets.
Interestingly, the government's decision to allow tax free deposits of any amounts for farmers have led to many of them getting 20% premium from traders when transacting. Informal credit for daily purchases and use of old notes for key inputs and selling produce have kept rural economy going. the sowing for the current (Rabi) sowing season seems to be largely unaffected but the real challenge in making is another good harvest which would come after the arbitrage of dealing in old currency notes does not exist. Also, the story of farmers dealing in vegetables and fruits (which are perishable) is entirely different. The vegetable growers are finding it increasingly difficult to sell their produce to the local traders and APMC markets. From transportation to mandis to lower purchase prices offered by traders have led to the crash of wholesale rates while the retail prices have hardly dipped for consumers like me and you. What finally transpires, remains to be seen but for now the road ahead doesn't look rosy at all! Agriculture is but a part of economy and hence, let us look at the business cycles in general.
#2. 'B' for 'Business Cycles'...Bereft of beliefs & benefits!
Business cycles across have been affected. While the bigger businesses might feel the pinch for only sometime, the Micro Small & Medium Enterprises (MSMEs) might have a daunting task ahead. In case of MSMEs, most will be unsure of payments coming from customers for some time; this as liquidity in the form of unaccounted currency has dried up. If customers don’t pay, MSMEs will protect what they have and that will mean they purchase less and produce less. Purchasing less will mean further slowdown for the people who provide them with raw material and producing less will mean shortage of supply leading to inflation on what is available.
As a result, small businesses, already constrained by capital to stay afloat are already shutting down. For example the Dharavi slum houses around 5000 leather units & 4000 garment factories and in last one month, 80-90% of these have shut down owing to the twin blow of note-bandi and the collapse in the wedding season. The daily wage workers can’t find work easily, the fisherman dependent on cash sales of freshly caught fish are suffering. Leave alone Dharavi or fisherman, even e-commerce companies in India like Amazon depend heavily on cash on delivery as about 70% of online shoppers in India use cash to make even online purchase. As per Federation of Indian Micro and Small and Medium Enterprises (FISME) around 80% of MSME enterprises have been affected severely. And if the stress leads to shut down, it cannot be ruled out that these closed businesses may not reopen ever. Whatever be the extent of impact, needless to say, there is an impact and certainly it is negative. This is about businesses but what about the most debated common man in the country?
#3. 'C' for 'Common Man'...Caught in the crossfire!
Raghuram Rajan, as RBI governor, lamented the culture of impunity for rich and well-connected wrongdoers as they go scot-free. Not that he foresaw the millions of poor queued outside the ATMs and banks to buy food and medicines. Neither, was he aware that the Bellary mining mafia king would celebrate a 5-day big fat wedding ceremony of his daughter during the same time. Needless to say that neither the host and nor his guests seemed worried about converting their notes, though this function began barely four days after the demonetization announcement. Earlier in August 2014, while responding to a question on phasing out old currency notes, Rajan shared that while demonetization is often cited as a solution, the clever find ways around it. It is not that easy to flush out the black money. A better move would be to focus on the incentives to generate and retain black money which includes tracking data and better tax administration to get at where money is not being declared.
But, as is so often the case, the impact is not being felt equally by all. India’s wealthy, who are less reliant on cash and are more likely to remain unaffected. The poor and the lower middle classes, however, rely on cash for their daily activities, and thus are the main victims of this supposedly “pro-poor” policy. So, for common man, the difficulties extends far beyond queues. Reported incidents of Hospitals turning away patients; families unable to buy food and medicine and the rising death toll . There is no doubt that the savings of many women are held in the form of currency notes. The drive has wiped out their financial security, which they created so painstakingly over the years, in one stroke. Further, the refugees, the daily wage earners, the sex workers have been the most inconvenienced. Enough has been written about it and discussed. One answer is that they would migrate to other means of transactions as if it was so easy. Obviously, India has a long distance to traverse before it comes anywhere close to being a cashless economy. That will make you ponder whether it was a surgical strike on villains or carpet bombing on innocents? So, will the demonetization, ultimately lead to a pyrrhic victory? And why so?...Was it the intent or just the faulty design?
'C' for Cost to common man:- Centre for Monitoring Indian Economy (CMIE) has estimated the total cost of demonetization at Rs. 1.28 lakh crores which includes the cost to RBI and Government at Rs. 16,800 crores (13%) comprising of printing the new currency and destroying old currency is (11,000 crores); transporting them; paying highway toll agencies for making highways toll-free and man-hours to manage the implementation. Cost of wasted man-hours to exchange old currency notes is an estimated Rs. 15,000 crores (12%) and Banks are estimated to bear an estimated cost of Rs. 35,100 crores (27%) for facilitating the exchange by their network. Indian Enterprise are expected to pay the biggest price, as the entire supply chain of goods and services suffers a massive liquidity shock, estimated at a whopping Rs. 61,500 crores (48%). The cost on economy or GDP growth is also estimated at around 100 basis points through reliable estimates which is in sync with the study done by CMIE. And should we discuss any further about who is bearing this cost?
I believe that it is now a common knowledge that the entire decision was taken without due preparation. This has resulted in widespread chaos and uncertainty. Demonetizing old currency without releasing new one; recalibrating ATMs after the announcement; not making POS terminals mandatory for shops; not increasing the number of mobile, micro ATMs, especially in rural area were just a few. But the real puzzler is giving no extension to usage of old notes, at least 500 denomination. Also, introduction of a Rs. 200 note would have eased the problem rather than a R. 2000 denomination note. A larger denomination of ₹2,000 can be used for illegal activities more comfortably then why the introduction? Further, I doubt if the government evaluated its move legally as several petitions have been filed in the high court and Supreme Court, challenging the demonetisation or its specific aspects. A 3 judge Bench of Supreme Court has recorded 10 questions on demonetisation to adjudicate on. This could mean that there could be legal problems with the current demonetisation exercise as well. So what does it mean for our economy as whole?
#4. 'D' for 'Digital Money' - A panacea for the black mindset:-
The buzz word of the day for common man is that cash is the mother of all evil! And once our society turns cashless, there would be trail to every transaction made. The devils can no longer hide behind the paper as they would be visible for GOI to trace…track…and…hunt! The government is really serious and enthused with the idea. In fact, GOI has already launched its flagship initiative named‘Digital India Programme’ with a motto to go “Faceless, Paperless and Cashless” and a vision to transform India into- A digitally empowered society! Further, GOI has announced a slew of measures for capacity building and awareness with an intent to promote digital payments among people and within government. Further, GOI & RBI has enhanced its scrutiny and attention towards cyber security for digital payments. Interestingly, all these enhancements have been spelled out in second week of Dec 2016 (7th to 9th).
The notion being spread by GOI is highly debatable as the ramifications are far beyond the current debate on black and white money. It is similar to our past belief in building dams to harness water and energy as an isolated event. No one thought that these dams could have the greatest sustained environmental impact! Altering a river's flow, can impact aquatic life, permanently damage the ecological web of a river system! Similarly, before going berserk with cashless, let us at least deliberate the following points:
First, Cashless is costlier. In a cash transaction, your cash is printed by government and there are no middleman involved. Also, cash once printed can be used over years making it very cheap in comparison to charges on cashless transactions. In a cashless transactions, you have a middle man seeking convenience charges. These additional charges levied on you makes the transaction costlier. Add to it the cost of internet in India - still substantially high for the common man. There is no public Wifi and it works primarily on data packs from network operators.
Second, Cashless is not full proof. Cashless threatens privacy and may threaten even the very democracy we are so proud of. If every transaction had a trail and could be tracked, your every decision where a transaction is involved is up and available for scrutiny and concomitant action. It can be accessed by your government or any brilliant hacker and can be used against you. India already has no protection for its citizens in form of privacy laws, and data protection remains a big worry - as we keep hearing stories of one big hacking or the other. The fast pace of modern life, well aided by modern devices and accelerated urge for a faster decision making has led to data moving across a multiplicity of devices, including tablets, smart phones and even wearable devices such as smart watches. This means huge flow of data from devices to servers, servers to devices, sensors to devices and devices to devices. And all this is happening when every IT company in town is busy building a case for storing the data in cloud! Hence, it pays to have a diversity of technologies and not to become overly dependent on an electronic grid that may one day turn out to be very vulnerable. Paper currency diversifies the transactions system and hardens it against cyber attack, EMP blasts, etc.
Third, Cashless is not convenient. As per a study, vast majority of population lack the means to use non-cash payments, even if they want to. Fewer than 35% of Indians above the age of 15 have used a bank account. Less than 10% have ever used any kind of non-cash payment instrument. Mobile banking remains a banking product and not a robust retail payments system, with less than 3% of the value transacted by cards in the year ended March 2014. Even when the total value of ATM transactions increased by over five times (2007-12), the value of card transactions barely doubled! Also, while India has a well developed telecommunications sector, fewer than 2% of Indians have used a mobile phone to receive a payment, compared to over 60% of Kenyans and 11% of Nigerians.
My arguments are not against going cashless as I do believe in the benefits of the same. My limited point is that pushing an agenda of digital money through demonetization is absurd. While the ruling India polity celebrates that their demonetization pageant is all about being cashless...and sinless, the euphoria may not be better, just different. Technology is neither a demon nor an angel, it is our social psychology. While the generations who have not grown up with the web are struggling to get to grips with it...we the educated are all fascinated to march ahead and take our digital detox...but don't rule out a relapse. The black will flourish again and again, until we address what is lying beneath the surface...because that is the root of the black paradox!
#5. 'E' for Economy...Eternal extended endurance!
You would agree that what blood circulation is to human body, cash circulation is to Indian economy. Blood in your body supplies oxygen to various organs and makes your body work. Likewise, the cash in Indian economy gives life to everyday transactions. The similarity doesn’t end here. If you lose blood in limited amount, it can be replenished by your own body; in case of moderate loss, it can be infused from outside; but if you have lost excessive blood…you are in a danger zone…for your level of survival would depend on how much and how fast it is replaced! Since 86% of the cash suddenly bled out of Indian economy, an immediate and adequate infusion was warranted. Unfortunately, the sluggish and poorly planned replacement has resulted in choking of business cycles which had just shown some green shoots on the back of a good monsoon, the Seventh Pay Commission pay hike, and the One Rank One Pension scheme for defence personnel.
How much time it would take to normalize is a guess...and your guess is as good as an expert’s. Yet, it is sure that this uncertainty, coupled with a fall in consumption (also read rising inventories) is going to hit whatever fragile recovery we could achieve. Also, as discussed in my last post, the problem is far more compounded in the informal economy because it is cash intensive and the effects cannot be accurately measured or monitored. Reliable estimates suggest that the demonetization will directly impact the private consumption demand which constitutes more than half of the GDP. This may result in slicing a 80-120 basis points from country’s GDP this year which translates into an absolute loss of one to one and a half lakh crores! You may argue that the tremors are temporary and the gains would keep accruing over the long term. The improvement in GOI’s fiscal position, owing to better tax compliance, will enable GOI to reduce tax rates giving a huge boost to consumption. It's a possibility, certainly. But it's not a certainty. For economies are complex things with many moving parts. Yes it is possible that the inflow of money into banks will reduce interest rates and stimulate economic growth. The budget deficit also might reduce on account of tax collections. But there is a critical driver called 'money supply' and its impact is difficult to predict as it could go either way!
If we assume that the black economy in India is resilient and will rebound quickly, the velocity of cash (how fast money changes owner) would be high in informal sector but if the new cash is hoarded the velocity would become very low. You may argue that some may do the one, some the other - bang on target - Giving us no clue of what the overall effect could be. If the velocity is low in black economy, a part of cash would trickle into formal economy increasing the money supply and stimulating growth. But if the velocity of cash is higher in black economy, it will cause a contraction in formal economy. The limited point is that only economy itself can calculate an economy as the effects of a change are emergent from the system itself, not something that you or I can determine beforehand. But what about so many other reforms being taken by the government? and so many more promised?
#6. 'F' for 'False Promises...As if the promises are ever made to be kept!
The current government came riding on wave of promises and promised transformation such as transparency, hunting the black money, job creation and so many more. It looks like that the lackluster performance so far might have forced them to undertake a massive measure. Whether the measure would yield rich dividends remains to be seen but the overall promises doled out...are far from being completed. Yes there has been a lot of foreign trips and announcements and you may argue that it could be a game changer. Also, you may further accuse me of looking at the economy in an inside-out fashion. You would be right in pointing out that in an interconnected world, a lot could also depend on the global economy especially in the backdrop of their gradual recovery. I agree that a rising tide will lift all the boats but what if the rising tide never reaches Indian shores?
#7. 'G' for Globe...What if the world is not enough!
India was shaken and stirred when Pierce Brosnan, one of the sexiest former James Bond, appeared in an advertising campaign for 'Pan Bahar' and turned into a 'Gutka' poster boy. Those still reeling under colonial depression, celebrated that the Empire (read Britain) has finally fallen. The economists brushed it aside as one of the expected fallout of Brexit. The commoners like me and you felt that, probably, he took his movie 'Die Another Day' way too seriously! While Bronsman's desperation is debatable, the fact that the world is in no shape to come to India's aid is beyond debate.
Recent political developments like 'Brexit' and 'Trump' reflect the growing sentiment in developed countries against openness in global trade. The staple belief that the interconnectedness fosters growth for all via the productivity gains from specialization, competition & innovation is under serious threat. The evidence can be found in the surging electoral support for candidates favoring protectionism in the US and Europe alike. This rise in new-nationalism at the cost of international trade is detrimental to growth of all the developing economies. The growth of developing economies stands on the tripod of rise in exports, conducive global environment and international trade integration. Hence, the new ask for economic protection, in the backdrop of tepid external demand will diminish the external stimulus to growth for developing countries, including India.
Further, in long run, developing countries dreams of integration into global supply chains to pay off their debts are subject to a strong western leadership. A leadership which is committed to encourage domestic support for trade liberalization. The looming danger is just not about destruction of free trade resulting in widespread defaults on foreign debts, financial distress and the collapse of international capital flows. The bitter trade wars fanning geopolitical tensions may be next in line. After all, we do remember that the bad economics of 1930s also resulted in rise of opportunistic political decision making, Hitler & German re-militarization apart from economic depression. In a nutshell, we need to get our house in order and that too on our own, because our rich neighbors are busy tackling their own problems!
I would have loved to indulge myself in continuing the post because I believe that many aspects still remain unexplored such as the disturbing emergence of a doctrine of neo-nationalism and concomitant polarisation in India which crudely reminds me of the slogan "India is Indira and Indira is India." But something strange happened today and I decided to conclude. My mother, keenly observing my demand for more than the allocated quota of 'brown tea', walked up to my computer table and asked innocently "How many people read what you write?" To which I replied proudly "Around a 1000." She paused for a moment, I believe just to gaze if the numbers were significant enough! Probably her inability to gaze it fuelled the next question "What would you change by writing this?" to which I replied honestly "Nothing". And she added "Rather than spending your time here, why don't you try something else?" and I rebelled "What is the guarantee that something else will change anything?" to which she quipped with her usual smirk "It cannot be worse than nothing!".
Hence, to conclude, let me have the satisfaction of responding to Dr Akash Rajpal's comment on my previous post where he wrote "Well poetic for sure. However a nation's economy is too complex to be opined in depth by even a Nobel winning economist, forget a common man like you or me making technical opinions. Every country needs on various occasion a bold historic move to shake the nation out of its slumber. This is one of it. Black money or not, country sure has woken up after 70 years. I've never seen an entire nation debating over one common issue." And to my last defense, I choose to depend upon the timeless magic of Mirza Ghalib's brilliant lines:-
उसे कौन देख सकता के यगान है वो यक्ता... जो दुई की बू भी होती, तो कहीं दो चार होता...
Words:- यगान = Unique; यक्ता = Matchless/Incomparable; दुई = duality; बू = Smell; दो चार = face to face/ many of him
Meaning:- Who can see him (God)? Because he, the incomparable one, is so unique. If there was even a hint of duality (in his thoughts or existence), then (the chances of) confronting him somewhere, sometime could be a real possibility!
Epilogue: Arguments have typically a plurality of causes and hence, the only thing constant about my views and perspectives is that they change...and sometimes...@ diapers changed by an old man under the twin influence of - mobility impairment & loose motion. I rationalise it as an essential cost for being open! The views expressed are fluid in nature and a result of the subject, length and tone of my conversation/s at 'Brown Chai ki tapri'; the intensity and duration of scolding received from my mother; number of zombies killed by me in 'Plant vs. Zombies' & the gestation period of both the view & research done on the idea I am writing about...and hence, liable to change in time, space, degree or manner...even contrary to those you read today! Feel free to challenge, disagree, or share the wisdom that God is supposed to bless and not replace psychiatric treatment!!! The skeptics with action bias are further encouraged to file an RTI demanding the details, duration and expenses incurred towards my psychotherapy...but...I reserve my right to delete any comment even if your comment is an insufficient but important part of an unnecessary but sufficient argument! Or for any reason I may create (abusive, profane, rude, anonymous, not appreciative enough) – so would you just keep it polite...if you may...please...
Disclaimer: It would be dangerously unwise – even if the concomitant pauperism is not factored in – to play tic-tac-toe between my personal and professional opinion (read life), as defunct as either might be. Hence, if any/some/every-thing is stupid here - It is mine and mine alone (Sorry...you can't have what is mine!). Apologies, in advance for the cliched repeat "The opinions expressed here are strictly personal and my own and not those of my employer."