» Business » The demonetisation 'demon' is in the details

The demonetisation 'demon' is in the details

By S Muralidharan
December 02, 2016 11:41 IST
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AAP workers protest against demonetisation in Patna on Monday. Photograph: PTI Photo

IMAGE: AAP workers protest against demonetisation in Patna, November 28, 2016. Photograph: PTI Photo

'We have the political will to take this to the very end.'
'But what eventually happens depends on the effectiveness, honesty and missionary zeal of the officialdom in the frontline of the battle against corruption,' says S Muralidharan.

Three weeks into the demonetisation, the picture that comes to my mind is of a 19th century thought experiment involving a box, some air molecules and a demon sitting inside a box trying to make the impossible possible (for the curious, it is Maxwell's Demon).

Narendra Modi trying to corral black money is reminiscent of this demon's impossible, hopeless and forlorn endeavour.

According to some, Modi himself is the demon, but sitting pretty with all his money neatly bundled and safely stowed in a box.

First, the facts, which appear not to matter in the frothy aftermath of the Demon(etisation). As former Reserve Bank of India governor Raghuram Rajan pointed out, it is not demonetisation: It is an 'exchange' programme.

Demonetisation renders designated currency notes, usually of high value, 'not legal tender.'

As a result the said notes cannot be exchanged for anything of value, for example, like other (still legal) currency notes, food, services, goods, etc.

Modi's demon is not exactly a demonetisation; it provided (until November 24) for free exchange to new notes, deposit into one's own accounts etc or even to be used as legal tender in certain places like government hospitals, etc.

Old money could also be exchanged for some specific items (like medicines) at specific establishments.

By calling it 'demonetisation,' Modi and his government appear to have needlessly shot themselves in the foot. Their spokespersons have not done themselves any favours by not contesting the moniker. So demon it is, in the collective consciousness of India.

Round one: Media/Opposition=1, Modi=0.

Some more facts: Banks have collected over Rs 4 lakh crore of deposits by way of old notes. That is 4% of their total deposit base. Compare that with deposit growth of only 9.9% in 2015-2016.

Over 40% of last year's deposit growth came in just one week.

By the way last year's deposit growth fell to single digits for the first time since 1962-1963.

By the end of the calendar year, the government hopes this figure will have increased to Rs 10 lakh crore. That is more than last year's 'organic' deposit growth.

Although I do not recommend that this kind of shock be administered in order to grow bank deposits, is that growth alone not something to celebrate, especially when it gets rid of a chunk of black money while also causing interest rates to fall?

Modi=1, Opposition=0.

Yet more facts: India's leading bank has dropped its deposit and lending rates already.

These are early days still and there is a body of opinion that there is room for far bigger cuts in lending rates.

Some analysts expect a 1 per cent reduction in lending rates to happen over the next six months.

Modi=1, Opposition=0.

If we assume that Rs 10 lakh crore will be collected by banks, it still leaves Rs 4 lakh crore to Rs 5 lakh crore undeclared and now worthless.

In effect, this is a cancellation of government obligation to pay the holder. That is a big drop in the government's obligation and can enable the government to increase welfare spending significantly.

The less that is officially surrendered, the greater the reduction in the government's obligation and more available for welfare spending without stoking inflation.

Even if all of the money in circulation is legitimate, as claimed by the feckless, clueless political Opposition, the fact is that much of it was sleeping -- one estimate has it that only a small fraction of the Rs 13 lakh crore was used in daily transactions. Then it was obviously sleeping, earning nothing.

When it comes out, it will be put to use for lending, for governmental spending and so on, thus lubricating the legitimate economy.

What is so bad about that?

Modi=1, Opposition=0.

Envy and anger makes people take leave of logic -- envy that someone else has done something he himself would have liked to, but could not, and anger that a former chaiwallah has out-thought an Ivy League alumnus. One former minister claims that the scheme could have been implemented slowly.

Does anyone honestly believe that preparations could have been made without tipping off the very people the scheme aimed to catch?

These people are rich for a reason: They move quickly when ordinary you and I are wracked with doubts and concerns and hesitate to put a foot forward lest we put it wrong.

They just charge ahead and if they put a foot wrong, they move the earth instead of their feet.

They have extremely sensitive noses and have their ears to the ground in all the corridors of power.

A sitting chief minister avers that it is the black money that saved India from recession post 2008. I am sure he is in line for next year's Nobel Prize for Economics. (Overcome with embarrassment, judges are not even scoring this round).

This move has made it possible to nail the holders of significant amount of black money.

In the initial panic, many rushed out to exchange the notes or to have them deposited at various locations and in smaller amounts. The early birds bought all the gold. The good news is that all these are traceable.

The fall in the price of gold after the initial spike suggests a certain discomfort even holding gold.

If it has been able to create some fear about holding illegal forms of wealth, the scheme has already succeeded.

When all the evidence is gathered and analysed, it should be possible to pick out who had large sums of money and gold.

Thereafter, they can be and should be prosecuted without mercy.

I do hope Modi has some plans for that.

For gold, Modi=1, Opposition=0; for future Modi=0, Opposition=0.

People queue up for money outside a Mumbai bank

IMAGE: People queue up for money outside a Mumbai bank.

Real estate prices are reportedly collapsing. I have episodically heard of transactions agreed earlier, but not concluded going through at 100 per cent 'white' price.

A builder friend is rubbing his hands in glee at the discomfiture of his business rivals -- unlike them he completes the projects and then sells on cheque only basis.

If the government does not bail them out with liberal bank financing, we can see real estate prices once again becoming real.

Modi=1, Opposition=0.

In the midst of all this cashless chaos the e-commerce business is multiplying its efforts to gain firmer foothold.

With Indian cell-phone ownership exceeding 1 billion, m-commerce of various varieties is poised to take off.

I know of a two-year-old 'delivery' start-up employing 20,000 youngsters and giving them motorbikes for making deliveries. That is a significant employment by just one outfit.

In order to side-step the cash crunch many have been ordering even vegetables and groceries from online vendors -- something that has been traditionally bought for cash.

With online commerce of various types taking off in a big way, just imagine the new jobs than will be created.

Yes, traditional vendors may lose out to well-funded and well-designed online services. But that is the nature of the world: Nothing is forever.

There is certainly a role for them in the new economy, but just not the old one.

Unintended consequence; so no scoring on this count.

What about the much ballyhooed ATM queues?

Yes, what about them?

In my admittedly not very scientific observation the so-called queues which make Mamata Banerjee see red (literally too) and Mulayam Singh Yadav go soft, mostly do not comprise of the poor who are so dear to their hearts.

For one, the poor do not have so much stashed in Rs 500 and Rs 1,000 notes. If they had, they won't be poor, would they?

In the half a dozen banks near where I live, everyone queueing up had a declaration form in hand. This, my friends, is not required for depositing money in your own account. Clearly they are exchanging notes at a bank other than their own; probably in more than one.

Suddenly, the men in the lives of our maids, who have not worked most of the last five years, have been 'going to work' since 9/11.

When pressed, I was informed they were queueing up to change money, the payoff being a Rs 500 note for a day's work.

They are obviously not the only clever ones. They are just a few among thousands if not lakhs who see an opportunity to make a buck or two out of the misery of the wealthy, and why not?

Modi=1, Opposition=0.

Why was there no 'suit-boot-wallah' in the queue? I was there, dear Rahul Gandhi, I was.

Without a suit or even a boot, although I would qualify for your epithet. I cannot get angry at your ignorance when it comes with so much naivette.

There is a saying about the one who knows not and knows not that he knows not being a fool to be shunned. The suited and booted hire people to stand in queues.

If you mean the big businessmen, whose numbers grew during the United Progressive Alliance regime between 2006 and 2010, mostly in 'extractive' businesses such as coal (remember coal, Rahul? You really must widen your reading, dear baba), their money is not in cash and they never dirty their hands with it.

They have paid minions and private bankers to do it. They would rather emigrate to where they are welcome than part with a big slice of their wealth.

If you will let Parliament function perhaps we could have enacted some stricter laws to prevent these people from hiding behind dubious investment structures investing in India.

Modi=1, RG=0.

In the frenzy of reporting man-bites-dog stories the electronic media have only been highlighting the regrettable but exceptional deaths in queues.

Reports about sacks full of currency being burnt, dumped in sewers or otherwise being destroyed are appearing each day. When there is an option to exchange, why would someone destroy it for good?

Even if it is money that evaded taxes, still the department has to discover it, initiate an investigation and make a case.

Even after all that they can take their due share and no more.

So why would someone destroy their cash and lose 100% when they could perhaps retain 30%?

I have the answer to this one: When that someone knows that the cash is fake and discovery involves not civil forfeiture and penalties, but criminal action and a serious jail term.

So is all the high-decibel drama and post-prandial saunter to the Presidential Palace simply skilful acting? No. It is real pain being felt.

Not pain for the plight of the really poor, but pain that they themselves feel; fear that minus their hoards of cash, their political future has all but evaporated; pain felt as Modi has cut the ground from under their feet.

He has basically demolished the power of the Opposition. They will never forgive him for that.

Can we therefore take it that black money is all gone? Not so fast.

What we are seeing being targeted is the black money that is in cash and which underpins political funds, corruption, feeds terrorism and internal strife, real estate business, bureaucratic corruption etc.

The non-cash component of real estate has not even been touched. I doubt it can even be touched unless states go on their own crusades against it.

I doubt states will cut off the source of their own political power.

What about gold then? It is a holy cow not even the Bharatiya Janata Party dare touch.

Whatever Modi has announced so far concerns only black money that has already been made and stashed. He is yet to tackle future generation of black money. The latter depends on eliminating political and bureaucratic corruption. Easier said than done.

Rent-seeking behaviour is deeply ingrained in the Indian psyche and must be eliminated: First through fear of punitive actions and in the long run through restoring our native value system that kept our society on the straight and the narrow for centuries.

Improved transparency and effective use of Right To Information are required if we are to achieve corruption-free allocation of natural and scarce resources.

Political ownership of banks and financial institutions is a sure way to ensure that crony capitalism flourishes.

Will Modi's demon succeed in its objectives?

The success or failure of this scheme will depend on how efficiently, effectively and without corruption the tax inspectors go after those identified from bank records or gold purchases or whatever.

Today we have the means to sift through a vast amount of raw data and identify patterns and link apparently unlinked accounts.

We have the political will to take this to the very end. But what eventually happens depends on the effectiveness, honesty and missionary zeal of the officialdom in the frontline of the battle against corruption.

In other times they have been hamstrung by contrary instructions from political masters.

This time they have a boss who means business.

Let us hope they rise to the occasion.

The demon(etisation) is in the details; in how diligently, painstakingly and purposefully the tax men pour over the details and identify possible cases of tax evasion and go after them single-mindedly.

Is it a well-considered move?

I would answer it with another question: Does Modi and the country have an alternative?

S Muralidharan retired as the managing director of BNP Paribas after serving the bank for 20 years. He began his banking career at the State Bank of India and worked at SBI for 12 years.

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