Demonitization ……The latest buzzword that’s taken the social
media by storm and indeed the rest of India by the scruff of its neck. A lot is being said of its benefits, a lot is
being said of its damaging consequences, supporters are nationalists,
detractors are anti nationals and boy!the media is having a field day……The
supreme court asks the question “surgical strike or carpet bombing” , obviously
alluding to it neither being a high precision targeted operation nor one with minimum collateral damage which
are essential ingredients of a surgical strike. A touchy topic that has turned
India’s 1.25 billion population into arm chair economists and why not, when It
affects every single citizen of the country. So why should this “mango man” be
any different. So here's bringing out the economist in me …(By the way, I happen
to be an economics graduate, though at the bottom of the class).
To me, Prime minister Modi’s grand announcement appears to
be a case of putting the cart before the horse. It’s a good step, allright but
my skepticism about it is because of the fact that many loopholes continue to
exist which allows the real culprits to manipulate the system. Those in favor argue that this is the first step, a start has to be made somewhere and there
are many more to come…..My argument is whether this is the right FIRST
step…Without the requisite ecosystem in place, isn’t this step
counterproductive?. To my mind, at this stage of our growth trajectory, it’s
such a high risk bet that you needed to have odds very strongly in your favour for
it to come off successfully. Only time will tell if it delivers the benefits it
intended to and whether in the ultimate cost benefit analysis, it was well worth it. It may not fail completely
(I hope not) but the question is was it worth it at this stage. So what is this
ecosystem that we talk about? We know that black money exists and the bulk of
it exists in the form of real estate, gold, forex and in the equity markets.
The cash hoarding stock is much more limited though it is much more dramatic in
its existence in gunny bags, walls and under beds. The generation and
re-generation of black money also happens through these sources. Cash stocked
at home infact loses value over time and does not regenerate unless deployed
for economic activities. If each of these areas are taken as separate entities
and loopholes plugged within them to stop this regeneration, it would lead to
squeezing the deployment opportunities of black money. To me, the steps to
eradicate black money should have taken this route (but remember I am an
armchair economist)…As a first step, restrict high value cash transactions. For
eg. Any cash purchase of 50000 and above would require a PAN card number to be
provided…whether it is buying an Armani suit or a five star dinner date or a
car or a computer…..Establishments that do not comply or have been caught
violating faces a cancellation of license. Implemented as strictly as drunken
driving is implemented nowadays. An SMS
to go out immediately after to the purchaser to ensure its not fraudulent
transaction. That would restrict avenues
to spend or use this money. In real estate which is the single biggest source
of black money generation and transactions, buyers and sellers are known
through registration agreements….Tracking their financial activities, spending
patterns (when and if they make high value purchases to spend “unaccounted”
money as opposed to debits from accounts, credit cards, loans etc…..remember
high value purchases require PAN so all of this can be tracked). After all, the
IT authorities and Government t claims that they can go after all citizens who
have deposited more than 2.5 lacs in their accounts….. if that is indeed true,
it is much more better prudent and better use of resources to go after a much smaller subset in a much more
focussed and targeted fashion. Ofcourse all of these have their own
implementation challenges but the scale is much lesser and the path
significantly less painful. A surprise demonetization drive after closing out
all known loopholes and lack of any obvious exit opportunities would have the
culprits running for cover and therefore effected a killer punch.
My problems with this demonitization move stems from the
fact that the govt has turned the universally true Paretto principle (or more
commonly known as the 80/20 rule) completely on its head. For those who may be
unfamiliar, The principle states that 80% of the effects comes from 20% of the
causes. In our case, the government has inconvenienced 100% of its citizenry
to try and trap less than 10% or 5% of the citizenry who by the way hold 90% of
all black money……..see the twisted rationale here. And let’s be clear, we are
not even talking about the inconvenience in terms of standing in the queues.
That is indeed a negligible pain but evaluate it in terms of its impact cost of
the economy. Unfortunately no one knows the impact cost to the economy, not
even the government and most of it are assumptions but some estimates suggest that our growth rate would come down
to about 5.8% from 7.3%....that is a de-growth of 1.5% and is a significant
fall. Hows that for Cost Benefit? And does it mean that the economy will grow
at 10-11% in the years thereafter…….Unlikely…very unlikely
So then why the hurry and lack of preparedness? Surely the
same step taken 2 months down the line with the same level of secrecy would
have equal “shock and awe” value. Atleast it would have given RBI enough time
to print all the new notes that the system needs…..I think the answer lies in
the unstated. Call it conspiracy theory if you like, but in Indias political
underbelly It sure has a rationale…..UP and Punjab go to polls soon. With one
single stroke, the government managed to paralyze the opposition and gain a lot
of “money power” as well as moral advantage. Getting hold of UP will mean
control of the Rajya sabha as well which is critical for this government to
manage its legislative agenda. With election commission due to announce dates,
the government was probably racing against time. All’s fair in love and war??......
It is important to stress here that the intent (leaving
aside the political angle) is obviously very good but the question remains “at
what price”? ….. Lets not forget, most loopholes are still open and we do know
that its being exploited to the hilt at this point. Wouldn’t closing of all
known loopholes (and they are well documented) and then announcing a surprise
demonetization with fair degree of preparedness yielded much more encouraging
results. Wasn’t it the more prudent way to go about it? Wouldn’t it have been
much more effective? Taking a high risk political gamble on your personal
future is one thing…..Taking a high risk bet on the growth trajectory of a
nation is quite another story…..Some will call it confidence…some will call it
arrogance….I call it reckless…….. …..And of course You can drive recklessly and
still reach home……I guess lets have this conversation 2 years from now…….For
the moment, step out and get your cash, smell the coffee!!!
