The only function of economic forecasting is to make astrology look respectable” - John Kenneth Galbraith
The economic forecasting, like astrology, is nothing but a prediction of your future activities & situation. Since your activities are influenced by drivers known and unknown, you wonder if the forecasters can ever get it right! Yet the 'pundits', just like you, can't resist the seduction of trying! While the predictions of unearthing black money, gains momentum...it's time you revisited an old story!
Once upon a time, a wise king built a great highway for the citizens of his kingdom. For the day of inauguration, the king declared a contest open to everyone in the kingdom. The challenge was 'Who can travel the highway best?' and the reward was a box full of gold! Mind it - the king didn't explain the meaning of 'traveling best'!
On the day of the contest, thousands of people came for the contest. And each one had prepared to win - albeit - as per his/her interpretation of king's words! Some arrived in their fine chariots; some in fine clothing; some carried fancy food; some played musical instruments and some played interesting games to make most of the travel. Some wore their sturdiest shoes to run along the highway and show their running skills...And as the day passed, the wise king observed everyone to judge the winner!
All day long, the subjects traveled the highway and, each one when s/he arrived at the end complained to the king about a large pile of rocks and debris that blocked almost half of the highway at one point. Towards the end of the day a poor and solo traveler, both tired and dirty, walked up to the king and handed him a box of gold!
He said, "I stopped along the way to clear a pile of rocks and debris that was blocking the highway. I found this box under it, please return it to its rightful owner." To which the wise king replied, "You are the rightful owner for you've earned this gold, by winning my contest.". Then the King turned to face his people, who were shocked and exclaimed "One who makes the highway better for others to follow...travels the best!"
Sounds familiar? Recent as well? Because, on Nov 8, you were lulled into believing a similar story. The story of a solitary 'White Knight' fighting the ugly demons of 'black money'...and you were asked to endure and suffer so that he could make the guilty suffer much more! Whether you believed it or not depends on your own cost-benefit analysis and which side you found heavier.
So, this would vary from individual to individual & industry to industry and hence, we need to sum it all. Sadly, the total takes you into an undefined grey zone - some white...some black and deafening trumpets being blown from both the sides! The benefit camp hopes that the crackdown will end the scourge of black money while the cost camp says 'No!' as the new Rs 2000 notes and gold will keep supporting the black deals. Therefore, I think that an objective assessment is only possible if you allowed the silent facts to speak...and they can only speak if you with an open mind and silent tongue just listened to them!
#1. Are the numbers raison d'être?...How close are we to killing the devil?
There are no reliable estimates of black money generation or accumulation in India, neither is there a well-accepted method for estimation. By its very definition, black money is not disclosed and unaccounted, thus all attempts at its estimation are as good as the underlying assumptions.
While there are several conflicting figures on black economy, in my earlier post, I pegged it at Rs. 30 lakh crores (24% of GDP) - sizing the total economy at Rs. 155 lakh crores (White~81% + Black~19%). Further, the total cash demonetized is Rs. 14.2 crores (86% of Rs. 16.4 lakh crores in circulation) has been demonetized. Logically, it may render 19% or ~Rs. 2.7 lakh crores of the black cash in trouble. I am, deliberately, not adding another Rs. 400 crores of fake currency as it will hardly move the needle. This also means that the counterfeit currency issue may be a mountain created out of a molehill! Therefore, the surgical strike, at its best, is targeted at one tenth of the demon (9% to be precise)! You may argue that the estimates are simplistic and even conservative because the black economy is majorly about cash unlike the visible economy. Point taken and let the facts speak further:-
Black money in India, is held in cash, foreign banks & currencies, benami properties/ buildings/ financial investments, undervalued or undeclared stocks/ foreign assets, precious metals (diamond, gold, silver & gems).
But is this all?
Even we assume that the list is exhaustive, the cash still remains the least preferred source. Because cash, unlike other asset classes, loses value over time (say inflation) while all others appreciate! Further, cash is bulkier to store and vulnerable to natural (water, fire etc.) as well as man-made (theft, tracing) hazards.
Also a 2012 report prepared by National Institute of Financial Management on unaccounted income found that cash was the least preferred option for storing unaccounted wealth. Further, income tax raids (2012-13 onwards) have recovered only 6% in cash! Swaminathan S Anklesaria Aiyar, the consulting editor of ET says
"As a stock, probably not even 2% of historical black hoards are held in cash — almost all have been converted to gold, real estate and financial investments".
I surveyed around 25 people (bankers and people who know/run the markets and the mean figure was 11.37% with a median range of 8-12% (my first hand survey of 25 people).
Do you still think that my estimations at 19% are conservative? You may further argue that a journey of a thousand miles begins with a single step...Rs. 2.7 lakh crore is not a small sum...Yes it isn't - Only if you eventually get it!
#2. Are we hunting the devil?...or it's shadow?
Some of you have argued that in any form of investment or purchase, it is always a sell for someone who is accepting this 'black cash'...so one of them will have 'black cash' which needs to be converted or shown as it stands today.
In simple terms the black cash is circulating somewhere with someone and is not dead and hence is forced to reach banks now! We need to understand the basic flaw of the argument - A currency note is neither black or white - It is anonymous. For example, I am a honest tax payer who is forced to cough up a black component while buying a flat.
The money which was tax-paid and pure white suddenly turns black. The point I am trying to highlight is that the systems, processes and collective psyche of people in India are the factories which create black money and the color of money depends on where it is stored! Once the black cash is streamed into white economy or converted to new white cash - It is as white as white can get! This is what money laundering does as explained in my earlier post but we are talking about the black cash in the country.
That makes you think, how is that possible? Why in India converting black to white is so easy? I need to address these questions through devil's triangle and its three strong pillars which you know so well!
Pillar 1: Cash is King
India is a cash driven economy with majority of transactions happening in cash. The cash intensive nature of India is quite high even for a developing country. A 2012 estimate, carried out by The Fletcher School (Tufts University), estimated that around 87% of the transactions in India were in cash. While this figure might have come down since then, it will still be at a very high level.
According to a RBI report released in March titled "Concept Paper on Card Acceptance Infrastructure", debit cards are primarily used as a cash withdrawal tool at ATMs! The growth in value of ATM transactions has far outpaced the growth in the value of card payment transactions.
Hardly 12% of transactions (only 6% in value) are at the point of sale (PoS) terminals or buying something. Some of you (my banker friends) have argued that the quantum of transactions done through RTGS or cheque are so huge that the usage of cash to the extent of 87% is a misleading figure.
And you are right if you are talking about the institutional transactions which are a part of the white economy. I am talking about retail transactions. This results in India's high ratio of currency in broad money (money in any form) and a low velocity of cash (how fast money changes owner) i.e. a low ratio of GDP to narrow money (physical money).
In India, households pay differently for access to cash according to their place in society, determined by income, employment, age, and place of residence. They also hold widely differing views on the risks of cash and strategies for risk management. But what cuts across the demographics and psychographics is the fact that people prefer cash as they are completely aware of its benefits and limitations unlike other alternatives. Also, a vast majority currently lack the means to use non-cash payments, even if they want to.
Unfortunately, despite its prowess in the telecommunications field, India has been left behind by its peers in mobile payments. Probably, it could be also because of RBI's preference for a bank-led model over a telecoms-led one to achieve its financial inclusion goals. Aadhaar, the unique Identity project, too has not been leveraged for financial inclusion. In a nutshell, it means that cash is not the king now...but it may remain so for a long time to come!
Pillar 2: India is predominantly unorganized
The fight against black money, historically in India, has largely remained a well-documented failure of governance - with profound impact on tax revenue, corruption, and law enforcement. One of the major enablers of this poor governance is the unorganized sector which remains informal and hence, difficult to monitor and track.
Combining the data from Ministry of Labour & Employment and World Bank, you would notice that the informal economy, constitutes nearly 94% (~47 crore people) of India’s labor market (~50 crore). Over 65% of informal sector labor resides in agricultural and construction activities while rest are spread across manufacturing and services. The high proportion of labor in informal sector leads to less than one-third compliance and collection of personal income tax in India.
Similarly, the firms operating in informal sector (~40% of GDP) act as a hot bed for creating and circulating black money. The un-organised sector is largely made up of indigenous bankers, money lenders, traders, commission agents etc., some of whom combine money lending with trade and other activities. The black money as part of the un-organised money market is invested in jewelry, property, smuggling, speculative trade and real estate to gain handsome returns. So it is like saying that you are going to hunt the devil, hidden in dungeons and gutters, accessible to only those who reside there!
Pillar 3: Black hides in mindset...not closet...
Once, an aspiring chartered accountant (CA) asked me inquisitively "What is the difference between a good and a great CA? I smiled impishly at his innocent question and replied "A good CA reads and understands the lines of the laid out rules...and a great one...between them!"
In Indian mindset, the concept of black and white has largely remained a cultural tug of war. Our entire angst against black money is limited to the disparity it creates and not for the nature or origin of it.
We are fine, as long as, we are not at the receiving end! There is no public shame for people who deal in black - on the contrary, we have a concealed admiration.
Hence, less than 2% of the 76 crore adults enumerated in the 2011 Census filed personal income tax returns for the assessment year 2012-13. In fact, my friend enlightened me yesterday at 'Chai ki Tapri' that - had we not been forced to pay taxes, we would have evaded it as much as others do! He added "In India, if there are five people thinking about making a law, there are 50 thinking about breaking that law."
The problem is that this mindset seriously threatens to undercut the very premise behind demonetization, which was meant to punish tax evaders and bring out the black economy out of the shadows.
That is why you hear the stories of a retailer helping someone with his black cash pile by writing up invoices showing nonexistent past sales.
Accountants in Mumbai advising builders to pay sub-contractors with invalidated bills. So that the subcontractors uses the cash to pay laborers, whose meager earnings make their transactions scrutiny-free.
Every poor in India has gained his 15 minutes of infamy for tax dodgers.
Enough rich Indians know the trick of enlisting the poor to redeem small batches of cash at multiple bank branches.
So, the Ministry of Finance ordered banks to mark people’s fingers with indelible ink. Amusingly, this safeguard, which India also uses to prevent people from voting more than once during elections — hasn’t proved airtight.
As in recent times, the dingy auto-parts store behind the bank branches, helped people use diluted battery acid to wipe the ink off their fingers. The shop’s owner, obviously, wouldn’t say whether he sold them the acid. A lively trade has sprung up, in all parts of India, for converting voided bills into - new bank notes, gold or cheque, each for a different price. Some are busy buying gold with old notes and smuggling it out of the country, where it can be resold for hard currency. Amusing, because usually in India the gold-smuggling goes in the other direction!
Therefore, the unprecedented social-engineering experiment of demonetization has brought out the best in us! Business owners across the country are paying employees months of salary in advance, ringing up bogus sales and even buying gold they can smuggle overseas to get rid of stashed money or conceal its source.
While the government initially fixed the limits at 90%, the going rate was between 15-40% across India. Our industrious Kolkata was offering the best rates as it has always been an eternal hub for illicit financial activity. With plethora of shell companies and a well established culture of inflated 'cash in hand' (Note: 'Hawala' too is a cut throat competition in India) it can any day give rest of the India a run for its money! So, the mindset is beyond comprehension and concomitantly beyond correction!
In this part, I have just highlighted a few facts. While interpreting them, in my next part, I will be constrained by my prejudices, biases and experiences. I may not be right - but then - that is not what I wish for. I just wish to be independent...independent of the fear of being right or wrong...independent of the fear of being judged. Though, what I would judge is left for the third part - But the cue...
तेरे वादे पर जिए हम, तो ये जान झूठ जाना के ख़ुशी से मर ना जाते, अगर ऐतबार होता - मिर्ज़ा ग़ालिब
Meaning: My life itself would become a lie, if I lived it on your promise (of return), because if I had believed your promise, I would have died (long ago) of happiness!
This article was originally published by Ashish H.K Jha and is republished here with permission. Views expressed here are his personal.
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Ashish H.K. Jha {{descmodel.currdesc.readstats }}
Once upon a time, a wise king built a great highway for the citizens of his kingdom. For the day of inauguration, the king declared a contest open to everyone in the kingdom. The challenge was 'Who can travel the highway best?' and the reward was a box full of gold! Mind it - the king didn't explain the meaning of 'traveling best'!
On the day of the contest, thousands of people came for the contest. And each one had prepared to win - albeit - as per his/her interpretation of king's words! Some arrived in their fine chariots; some in fine clothing; some carried fancy food; some played musical instruments and some played interesting games to make most of the travel. Some wore their sturdiest shoes to run along the highway and show their running skills...And as the day passed, the wise king observed everyone to judge the winner!
All day long, the subjects traveled the highway and, each one when s/he arrived at the end complained to the king about a large pile of rocks and debris that blocked almost half of the highway at one point. Towards the end of the day a poor and solo traveler, both tired and dirty, walked up to the king and handed him a box of gold!
He said, "I stopped along the way to clear a pile of rocks and debris that was blocking the highway. I found this box under it, please return it to its rightful owner." To which the wise king replied, "You are the rightful owner for you've earned this gold, by winning my contest.". Then the King turned to face his people, who were shocked and exclaimed "One who makes the highway better for others to follow...travels the best!"
Sounds familiar? Recent as well? Because, on Nov 8, you were lulled into believing a similar story. The story of a solitary 'White Knight' fighting the ugly demons of 'black money'...and you were asked to endure and suffer so that he could make the guilty suffer much more! Whether you believed it or not depends on your own cost-benefit analysis and which side you found heavier.
So, this would vary from individual to individual & industry to industry and hence, we need to sum it all. Sadly, the total takes you into an undefined grey zone - some white...some black and deafening trumpets being blown from both the sides! The benefit camp hopes that the crackdown will end the scourge of black money while the cost camp says 'No!' as the new Rs 2000 notes and gold will keep supporting the black deals. Therefore, I think that an objective assessment is only possible if you allowed the silent facts to speak...and they can only speak if you with an open mind and silent tongue just listened to them!
#1. Are the numbers raison d'être?...How close are we to killing the devil?
There are no reliable estimates of black money generation or accumulation in India, neither is there a well-accepted method for estimation. By its very definition, black money is not disclosed and unaccounted, thus all attempts at its estimation are as good as the underlying assumptions.
While there are several conflicting figures on black economy, in my earlier post, I pegged it at Rs. 30 lakh crores (24% of GDP) - sizing the total economy at Rs. 155 lakh crores (White~81% + Black~19%). Further, the total cash demonetized is Rs. 14.2 crores (86% of Rs. 16.4 lakh crores in circulation) has been demonetized. Logically, it may render 19% or ~Rs. 2.7 lakh crores of the black cash in trouble. I am, deliberately, not adding another Rs. 400 crores of fake currency as it will hardly move the needle. This also means that the counterfeit currency issue may be a mountain created out of a molehill! Therefore, the surgical strike, at its best, is targeted at one tenth of the demon (9% to be precise)! You may argue that the estimates are simplistic and even conservative because the black economy is majorly about cash unlike the visible economy. Point taken and let the facts speak further:-
Black money in India, is held in cash, foreign banks & currencies, benami properties/ buildings/ financial investments, undervalued or undeclared stocks/ foreign assets, precious metals (diamond, gold, silver & gems).
But is this all?
Even we assume that the list is exhaustive, the cash still remains the least preferred source. Because cash, unlike other asset classes, loses value over time (say inflation) while all others appreciate! Further, cash is bulkier to store and vulnerable to natural (water, fire etc.) as well as man-made (theft, tracing) hazards.
Also a 2012 report prepared by National Institute of Financial Management on unaccounted income found that cash was the least preferred option for storing unaccounted wealth. Further, income tax raids (2012-13 onwards) have recovered only 6% in cash! Swaminathan S Anklesaria Aiyar, the consulting editor of ET says
I surveyed around 25 people (bankers and people who know/run the markets and the mean figure was 11.37% with a median range of 8-12% (my first hand survey of 25 people).
Do you still think that my estimations at 19% are conservative? You may further argue that a journey of a thousand miles begins with a single step...Rs. 2.7 lakh crore is not a small sum...Yes it isn't - Only if you eventually get it!
#2. Are we hunting the devil?...or it's shadow?
Some of you have argued that in any form of investment or purchase, it is always a sell for someone who is accepting this 'black cash'...so one of them will have 'black cash' which needs to be converted or shown as it stands today.
In simple terms the black cash is circulating somewhere with someone and is not dead and hence is forced to reach banks now! We need to understand the basic flaw of the argument - A currency note is neither black or white - It is anonymous. For example, I am a honest tax payer who is forced to cough up a black component while buying a flat.
The money which was tax-paid and pure white suddenly turns black. The point I am trying to highlight is that the systems, processes and collective psyche of people in India are the factories which create black money and the color of money depends on where it is stored! Once the black cash is streamed into white economy or converted to new white cash - It is as white as white can get! This is what money laundering does as explained in my earlier post but we are talking about the black cash in the country.
That makes you think, how is that possible? Why in India converting black to white is so easy? I need to address these questions through devil's triangle and its three strong pillars which you know so well!
Pillar 1: Cash is King
India is a cash driven economy with majority of transactions happening in cash. The cash intensive nature of India is quite high even for a developing country. A 2012 estimate, carried out by The Fletcher School (Tufts University), estimated that around 87% of the transactions in India were in cash. While this figure might have come down since then, it will still be at a very high level.
According to a RBI report released in March titled "Concept Paper on Card Acceptance Infrastructure", debit cards are primarily used as a cash withdrawal tool at ATMs! The growth in value of ATM transactions has far outpaced the growth in the value of card payment transactions.
Hardly 12% of transactions (only 6% in value) are at the point of sale (PoS) terminals or buying something. Some of you (my banker friends) have argued that the quantum of transactions done through RTGS or cheque are so huge that the usage of cash to the extent of 87% is a misleading figure.
And you are right if you are talking about the institutional transactions which are a part of the white economy. I am talking about retail transactions. This results in India's high ratio of currency in broad money (money in any form) and a low velocity of cash (how fast money changes owner) i.e. a low ratio of GDP to narrow money (physical money).
In India, households pay differently for access to cash according to their place in society, determined by income, employment, age, and place of residence. They also hold widely differing views on the risks of cash and strategies for risk management. But what cuts across the demographics and psychographics is the fact that people prefer cash as they are completely aware of its benefits and limitations unlike other alternatives. Also, a vast majority currently lack the means to use non-cash payments, even if they want to.
Unfortunately, despite its prowess in the telecommunications field, India has been left behind by its peers in mobile payments. Probably, it could be also because of RBI's preference for a bank-led model over a telecoms-led one to achieve its financial inclusion goals. Aadhaar, the unique Identity project, too has not been leveraged for financial inclusion. In a nutshell, it means that cash is not the king now...but it may remain so for a long time to come!
Pillar 2: India is predominantly unorganized
The fight against black money, historically in India, has largely remained a well-documented failure of governance - with profound impact on tax revenue, corruption, and law enforcement. One of the major enablers of this poor governance is the unorganized sector which remains informal and hence, difficult to monitor and track.
Combining the data from Ministry of Labour & Employment and World Bank, you would notice that the informal economy, constitutes nearly 94% (~47 crore people) of India’s labor market (~50 crore). Over 65% of informal sector labor resides in agricultural and construction activities while rest are spread across manufacturing and services. The high proportion of labor in informal sector leads to less than one-third compliance and collection of personal income tax in India.
Similarly, the firms operating in informal sector (~40% of GDP) act as a hot bed for creating and circulating black money. The un-organised sector is largely made up of indigenous bankers, money lenders, traders, commission agents etc., some of whom combine money lending with trade and other activities. The black money as part of the un-organised money market is invested in jewelry, property, smuggling, speculative trade and real estate to gain handsome returns. So it is like saying that you are going to hunt the devil, hidden in dungeons and gutters, accessible to only those who reside there!
Pillar 3: Black hides in mindset...not closet...
Once, an aspiring chartered accountant (CA) asked me inquisitively "What is the difference between a good and a great CA? I smiled impishly at his innocent question and replied "A good CA reads and understands the lines of the laid out rules...and a great one...between them!"
In Indian mindset, the concept of black and white has largely remained a cultural tug of war. Our entire angst against black money is limited to the disparity it creates and not for the nature or origin of it.
We are fine, as long as, we are not at the receiving end! There is no public shame for people who deal in black - on the contrary, we have a concealed admiration.
Hence, less than 2% of the 76 crore adults enumerated in the 2011 Census filed personal income tax returns for the assessment year 2012-13. In fact, my friend enlightened me yesterday at 'Chai ki Tapri' that - had we not been forced to pay taxes, we would have evaded it as much as others do! He added "In India, if there are five people thinking about making a law, there are 50 thinking about breaking that law."
The problem is that this mindset seriously threatens to undercut the very premise behind demonetization, which was meant to punish tax evaders and bring out the black economy out of the shadows.
That is why you hear the stories of a retailer helping someone with his black cash pile by writing up invoices showing nonexistent past sales.
Accountants in Mumbai advising builders to pay sub-contractors with invalidated bills. So that the subcontractors uses the cash to pay laborers, whose meager earnings make their transactions scrutiny-free.
Every poor in India has gained his 15 minutes of infamy for tax dodgers.
Enough rich Indians know the trick of enlisting the poor to redeem small batches of cash at multiple bank branches.
So, the Ministry of Finance ordered banks to mark people’s fingers with indelible ink. Amusingly, this safeguard, which India also uses to prevent people from voting more than once during elections — hasn’t proved airtight.
As in recent times, the dingy auto-parts store behind the bank branches, helped people use diluted battery acid to wipe the ink off their fingers. The shop’s owner, obviously, wouldn’t say whether he sold them the acid. A lively trade has sprung up, in all parts of India, for converting voided bills into - new bank notes, gold or cheque, each for a different price. Some are busy buying gold with old notes and smuggling it out of the country, where it can be resold for hard currency. Amusing, because usually in India the gold-smuggling goes in the other direction!
Therefore, the unprecedented social-engineering experiment of demonetization has brought out the best in us! Business owners across the country are paying employees months of salary in advance, ringing up bogus sales and even buying gold they can smuggle overseas to get rid of stashed money or conceal its source.
While the government initially fixed the limits at 90%, the going rate was between 15-40% across India. Our industrious Kolkata was offering the best rates as it has always been an eternal hub for illicit financial activity. With plethora of shell companies and a well established culture of inflated 'cash in hand' (Note: 'Hawala' too is a cut throat competition in India) it can any day give rest of the India a run for its money! So, the mindset is beyond comprehension and concomitantly beyond correction!
In this part, I have just highlighted a few facts. While interpreting them, in my next part, I will be constrained by my prejudices, biases and experiences. I may not be right - but then - that is not what I wish for. I just wish to be independent...independent of the fear of being right or wrong...independent of the fear of being judged. Though, what I would judge is left for the third part - But the cue...
Meaning: My life itself would become a lie, if I lived it on your promise (of return), because if I had believed your promise, I would have died (long ago) of happiness!
This article was originally published by Ashish H.K Jha and is republished here with permission. Views expressed here are his personal.
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