Demonetisation: Why I will give Narendra Modi 50 days to reset the system
It would be fair to say that the initial euphoria that greeted Prime Minister Narendra Modi's shock decision to decommission the banknotes has slowly given way to worry, frayed nerves and tempers
The last few days have been tough.
Apart from the usual work-life pressures that accompany middle-of-the-road professionals, we have had to take time out from insanely odd schedules to stand in queues and convert non-legal tender. The missus and I took turns to visit our respective banks and despite not a small amount of chaos, emerged with cash in hand. The banking officials were cooperative under extreme pressure and deserve unqualified respect for pulling inhuman shifts in a thankless environment. As they toiled, the non-functional ATMs were a reminder that even the best-laid plans can sometimes go awry.
Although we have tried since 8 November to channel our domestic spending through digital and plastic platforms, many transactions in India's largely cash-based economy still require cash. Guptaji, who runs the corner kiraana store, to our delight is accepting app-based payments, but a fishmonger has no such luxury and you cannot keep a Bong away from fish for too long.
The TV-based impression that there is anarchy on streets is wrong. But it would be fair to say that the initial euphoria that greeted Prime Minister Narendra Modi's shock decision to decommission the banknotes has slowly given way to worry, frayed nerves and tempers. And that is natural. If 86 percent of India's total currency in circulation is outlawed in one stroke, it doesn't take a CP Ramanujam to figure out that a country of 1.25 billion will face short-term, intense inconvenience. Given the sheer scale of the exercise and the total secrecy that preceded it, no amount of prior planning could have preempted the many glitches that have since erupted.
But how short is short term?
As daily lives remain suspended, the poor and the working class suffer losses, the economy grinds to a halt and the prospect of a deflation looms large just as the prime minister on Sunday asked for more time. He appealed for 50 days of hardship to rid the economy of black money and urged us to gnash our teeth and bear it. But is he justified in seeking that allowance? And should we give him that time?
There are two ways of looking at the decision to decommission the notes: Economic and moral. Both are intertwined.
The World Bank says India's shadow economy forms 19 to 20 percent of the GDP; most economists disagree. They say the actual figure is much higher considering the fact that only 2.5 percent of Indians pay any sort of income tax. In truth, the parallel economy that drives the nation's engine completely stays outside the tax net forcing the honest taxpaying citizens to pick up the tab.
Gautam Chikermane, journalist, author and New Media Director at Reliance Industries Ltd, says in his Facebook post: "Black money has become a culture, not paying taxes a best practice and laughing at taxpayers a national pastime… What may have begun as an idea to fill the pockets of politics for electoral funding (apart from personal coffers, of course) mushroomed into a culture that benefited the corrupt at the cost of the honest. The trickle down of this alternate economic system poisoned the mind of India. Essentially, it said: “Join us or be economically isolated. We have become the enemy in our own land, simply because we followed the law and paid taxes."
The prime minister has struck at the very root of this malignancy and hacked away the branches that sustained the corruption tree. The argument that black money hoarders rarely store their moolah in cash is specious. India's parallel economy is so huge that even if a part of it is converted into different asset classes, a mind-boggling amount of liquidity gotten from transactions that took place outside the tax net would still be around. Not only has this significant portion of black economy been rendered useless, in one fell swoop Modi also decapitated the fake currency industry that fuelled cross-border terrorism and nourished insurgency within our borders.
The parallel economy thrives on cash because unlike digital transactions, it leaves no footprint. Economists such as Richard Thaler of Chicago University or Harvard Professor Kenneth Rogoff believe that an economy overwhelmingly dependent on cash is more prone to corruption and in such a regime, the poor are the hardest hit.
While it is not possible for India to overnight rid the economy of all cash — neither is it warranted, demonetisation provides the government a great chance to press the "reset" button and actively move towards a regime that relies less on cash and more on plastic and digital money. According to the economists, that would make for a safer, fairer and a more resilient system.
If more money changes colour from black to white, the government will have more resources to spend and it may therefore target these spending towards social security schemes for the poor.
Now while demonetisation has sucked out the cash (both good and bad) almost in entirety, there should not be any illusion that the shadow economy will stay idle. It will absorb the shock and then proceed to rebuild. The legit question, therefore, is what was the point of this entire exercise?
Modi's move will go a long way in raising the cost of hoarding black money in India.
The attempt is to make the shadow economy a less profitable and more risky enterprise and ultimately trigger a behavioural change.
"Will this eradicate black money and corruption in India? Some 'experts' have warned that Indians are creative and will find ways to circumvent this demonetisation. That’s true — there are ways to bribe officials, make criminal transactions and evade taxes without Rs 500 and Rs 1,000 notes. But the removal of large bills will make several criminal and illegal activities more costly. Scaling back large denominations will not end crime, but it will force the underground economy to employ riskier and less liquid payment methods… This move will reduce corruption and several forms of criminal transactions in the economy."
Now for the moral reason why I believe that Modi deserves our backing.
The chaiwallah at Delhi's RK Puram, who backs the prime minister's move despite taking a major hit in sales; the senior citizens who voice their support despite appearing visibly wary from standing in an unending queue, the grocer who has switched to digital payments and urges customer to take advantage of them, the housewife who believes the time spent in queuing up for cash will provide better dividends for the future are not "bhakts in awe of their 'Supreme Leader'," as a section of our commentators and elites would call them while being dismissive. They are the cross-section of our people who are fed up with the system.
Unlike the elites and so-called liberals, who can afford to be dismissive of any effort because they are used to bending the system to their advantage, these are representatives of the lower middle class, poor and the subaltern who have long paid a price for their honesty and integrity. In the prime minister's decision, they have finally found a moral strength to take on the system and challenge it.
Modi's move to trash the cash has armed them with a belief that they too, in their own small way, can be a part of the nation-building process and no amount of verbal chicanery and moral turpitude from the entrenched elites will sway them. Economic logic of whether this will trigger a deflation or recession doesn't interest them. They have little patience for theory of positive shock that this move is supposed to bring. What moves them is the belief that in exchange for few days of hardship, they are helping the prime minister in building a better, fairer India.
Lastly, I would give Modi the 50 days that he has asked for because I am yet to come across any other leader who doesn't mind irking his voter base for a higher national purpose. Modi would've done a cost-benefit analysis of the move before making it. He'd have known the insane risk involved in the project that may end up scalding him for good. I'd back him because he has shown the guts and moral certitude to be different.
We have come a long way since those fateful months of 1991 when the country finally decided to jump on the free market bandwagon
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