DEMONETISATION DEFENDED

A media mascot and Leftist personally related to me is “speechifying” around the country, and writing obviously, in Leftist scumbags in circulation, on the “failure of demonetisation”. I wrote this piece in reply to the person in particular and publish as a blog for general information:

The tree of knowledge has/must have a plurality of roots. Political affiliation alone should not be your only source and inspiration for criticising Demonetisation or believing in the negative views. I used to believe what the philosopher Anjan Chakravartty at the University of Notre Dame, Indiana, in the US was right in saying that one does not believe a stance in the way that one believes a fact. But then Communists generally seem to have the unique capability to have both aligned and to nullify unsavoury facts to take political stances!

First let me take to the Congress party’s views on demonetisation to convince you that there indeed was a strong case for Demonetisation during their own rule. I quote Madhav Godbole, Unfinished Innings, 1996, pages 87-88 : “The National Institute of Public Finance and Policy, in its report, Aspects of Black Money in India, had estimated black income generation at 18% to 21% of the gross domestic product (at factor cost) for the year 1983-1984. There has been steep increase in black income since then. The direct taxes enquiry committee (1971), popularly known as the Wanchoo Committee, in its interim report, had recommended demonetisation of high value currency notes. The report was discussed in a series of meetings with the then finance minister Y B Chavan, on whose personal staff I worked at the time, and it was decided that the recommendation should be acted upon. In view of the importance of the subject it was decided that the finance minister should first discuss the matter with then Prime Minister Indira Gandhi before further steps were initiated. When Chavan called on Indira Gandhi and explained what he had in mind, she asked him only one question: 'Chavanji, are no more elections to be fought by the Congress party?' Chavan got the message and the recommendation was shelved.”

The Narendra Modi Government had decided from day one that it would move against the shadow economy and black money. The first decision of the Modi Cabinet was to constitute SIT under the directions of the Supreme Court (which the Manmohan Singh government had ignored for three years)! Most Communists and Socialists in the past used to rail against black money and suggest demonetisation in my memory.  That was why the Congress and the Communists shied away from showing their opposition to demonetisation directly and invented the ploy is to raise the people’s day-to-day problems with the banking system to question the government while the process was in progress! Only two crazy and crooked Chief Ministers were categorical in demanding a rollback of demonetisation, offering however no economic and political rationale!

When Demonetisation came into operation, the Union Government knew that people would experience some pain for a few months. Wasn’t it unbelievable the way people had extended support to the government? Such support cannot be interpreted in a limited sense; its wider meaning should be read along with the ideological contextualisation of demonetisation.

Now I will examine the recent flurry of criticism regarding the “failure” of Demonetisation and other aspects: Return of 99% of de-legalised currency into the banking system is cited as the sole test of failure of demonetisation by opposition, experts and media. The luminosity of some of the critics blinds people to understanding the grey areas of their intellectual credibility and political prejudices. It is a stupid assessment. Demonetisation was a multidimensional project. Prior to demonetisation  announcement in November 2016 there was an unprecedented rise in the high value notes - from 1.5 lakh crores in 2004 to almost 15.5 lakhs crores in 2016. The RBI informed the government that a thirdz of this amount, about 6z lakh crores had moved out of banking system and never came back into the system. Obviously, this huge unmonitored cash was financing and building a massive black economy.  The results were so terrible for you to have missed: steep rise in gold, stock and land prices by almost 10 times in 6 years since 2004.  This asset price rise was not matching with real growth. This hyper GDP growth was just wealth-led growth that yielded “neither jobs nor gave external or internal comfort to the economy” as an expert opined.  The reason for this spurious growth clearly was the high asset prices, which were fuelled only by an unprecedented rise in high denomination notes.

Unfortunately, the debates do not consider these critical facts and are more of political, in nature, casting economics aside. Demonetisation was indeed India-specific issue without any parallel to draw (I read somewhere that in 1969, the US had demonetised all notes above $100 producing good results!), which led to certain foreign "experts", to borrow from our former "economist" PM's political outbursts. Some Indian experts and politicians parroted these opinions. Modi and his government couldn't have explained the matters to convince such experts and their sponsors in politics who didn't want to be convinced! The common man would understand only simpler explanation such as that Demonetization was to detect and eliminate black money. The situation was very dangerous for the future of the economy. In the given situation in the country, there was no way out for the Government to introduce a correction mechanism in resorting to demonetisation.

The demonetisation of high-denomination currencies was intended as a multi-dimensional correction mechanism with several primary objectives as one of our eminent economic analysts has listed:

(1) to get black money out in the open (2) to prevent the growth of unaccounted money (3) to expand taxpayer base (4) to arrest and deflate cash-stoked asset prices (5) to bring down the main culprit, the high-denomination notes (6) to suck excess cash with people which was building a parallel economy to the banking system; (7) to enable banks to increase deposits manifold as lendable deposits; (8) to bring down the interest rates; (9) to increase the financial savings in households; (10) to crash the land prices to make housing affordable; (11) to organise unorganised sector; (12) to facilitate growth of real economy - growth with jobs; and (13) to eliminate fake currency and curb terror funding.  The number 13 is not inauspicious I suppose!                                                                       

Considering the above objectives, it can be asserted that Modi's “notebandi” has been a huge success.  Those who oppose the view know it was a success. But acknowledging it would show the previous regime in poor light. The Opposition politicians are in no position to concede another Narendra Modi victory. It appears politically suicidal and therefore they have to TomTom that demonetisation is a failure.

That 99% of de-legalised notes have come into banking system does not in any way mean that there was no black money or that black cash deposited in the banks go undetected. The cash outside the system has come back into the system. And the tax authorities will scrutinise the deposits with modern data analytics and collect taxes in due time through due process. Already about 3 lakh crores is under scrutiny.

Three categories of black money: (1) undisclosed income in de-legalised notes of 29000 crores (2) old notes not deposited-16000 crores and (3) deposits of 2.90 lakh crores under tax probe - together they constitute, rupees 3.35 lakh crores. Demonetisation was a “surgical strike” against these. Even if only half the potential black cash is eventually taxed, that would mean detection of some 1.5 lakh crores of black money, most of which would be recovered as tax and penalty. None of the voluntary disclosure schemes attempted earlier was such a success.

The other positive aspects of demonetisation are: 1) it expanded the individual income tax base (57 lakh more assessees have filed tax returns); Total direct tax payers have almost doubled in last 3 years from 3.7 crore to 6.4 crore. 2) advance tax collections rose by 42%; and 3) self-assessment tax rose by 34%.

To contextualise the demonetisation with the general economic reforms I point out that 30 crore new bank accounts were opened. 7, crore people have benefited from MUDRA, bank. Transactions of more than 3 lakh “shell companies” are under radar; and one lakh “shell companies” de-registered. 450 companies de-listed, and 800 untraceable companies to be delisted. More than 400 benami transactions identified. Market value of properties attached so far is more than 800Cr. (Karnataka Congress government will have a lot of pent-up fury against the Modi Government and BJP: within 4 days of the DM, Rs.500Cr was deposited in Karnataka Co-operative banks!)

There was a hue and cry over decline in prices of farm produce (which the consumer enjoyed though!) saying it was on account of demonetisation. I remember you had quoted an India Express rural report from interior, Mhaharashtra. It was conveniently ignored that the more important agro-products like sugarcane, milk, poultry and meat for which markets were better organised have not suffered any price, decline in the post,-demonetisation phase. Government had established eNAMs and the “Small Farmers Agro-Consortium” to help out in unfavourable market situations which had not gathered momentum to do anything in the case, of, some F&V prices which declined. But that wasn’t a generalised phenomenon of cash scarcity caused by demonetisation. The proximate cause appeared to be a supply glut. As always happens (the Cobweb theorem in Economics), farmers made the switch to crops for which prices were relatively higher in the previous year. It was however politically ingenious to make the link between F&V price decline and notebandi.

The latest cry is about why GDP grew 5.7% in April-June, the first quarter of the current fiscal year, slower than the previous quarter's 6.1% and much lower than the 7.9% growth registered in the first quarter of 2016-17 and especially below China’s 6.9! Several factors including the global situation were responsible for decline in gross domestic product. The slowdown is most steep in manufacturing, construction and mining sectors while most services post higher growth than last year. Higher growth is largely propelled by government spending in infrastructure and agriculture. All I can say is that Global economy is improving faster than before and the domestic public investment is slated to go quite high because the revenue trend is positive!

To conclude, I may quote the Deloitte India report titled 'Technology, Media and Telecommunications (TMT) Predictions 2017 that says: "Demonetisation may well be the catalyst that sees semi-urban and rural markets in India skip the 'card' era and leapfrog directly to 'mobile payments' era" thanks to it “forcing a behavioural change in the Indian consumer.” While FinTechs used the 'carrot' approach to entice customers to switch behaviour and adopt digital payments, demonetisation employs a more draconian 'stick' approach, which may prove to be more effective, according to the report.

The latest criticism of Demonetisation is that it brought down the GDP rate to 5.7 and has negatively affected job creation! Quoting an unknown ILO analysis Manmohan Singh had claimed in his 10 year report card that India's unemployment rate falling from 8.4% in 2004-05 to 5.6%. Growth gad slipped to a decade-low of 4.96% in 2012-13, with industrial growth touching a two-decade low of 2.1% when he spoke of an employment growth! Currently, the in a worse situation as the Opposition parties would like to see it, a 30-day moving average of the all India unemployment rate remained steady at 4.45 per cent in the last week!

At the time of demonetisation, real wages were rising at 2 per cent per annum. Post demonetisation, in July 2017, the rate of growth had more than doubled to near 5 per cent. This refers to unskilled workers in India, the tillers of soil; and carpenters/masons with some skills, and such like. This wouldn’t have happened if there are jobs being lost in urban areas impact of which would show up in the slowing real wage growth in such sectors. But the incomes of the poorest are rising at a faster pace than any time since January 2015. The Congress/Left dataratti will now move towards questioning the accuracy of the rural wage data! I hope you all will get real, and debate evidence, and debate how to interpret the facts. Let us not slip into ideology, and worse, into pure propaganda. The economy should not be treated like a gossip column!

Now a little mumbo jumbo: “Hiranmayena patrena satya-syapi-hitam mukham, tattvam pusanna-pavrnu satya –dharmaya drstave”says Isha Upanishad whih means, “Truth lies concealed by golden vessel/Do thou O Sun!/Open the entrance of that cover /So as the Truth  you so concealed /be visible to me” may the truth come out and destroy us if we are hiding it! There is no escape from it if Modi Government ditches the people of India!