Tuesday, November 22, 2016

Of Shock & Awes, Surgical Strikes And Kadak Chai - Reality Check

PS: Do take off your spectacles of being on either side of the fence and replace them with a brand new pair of specs called ‘Objectivity’ so that things sink in and start making sense.


Now that you have your new pair of specs, read on…


It is done now. Instead of the panacea of all ills of my country, it has been termed as the ‘kadak chai’ which wakes one up from a deep slumber, a slumber of 60 odd years that the country had. It, some people argue, is said to be the best and the boldest step that any person with a 36” chest could have ever done. They said, it will be alright, just a few hiccups but a master stroke, a thunderbolt on the people who were eating off of the economy like rodents for the past 70 years. Abet with all the support and connivance of ‘the family’. Then there were others, vocal, senseless, ‘chance pe dance’ kind of people who were speaking of doom. I was told that they have lost it all and they were doing what they always were best at – holding a dharna, a march, and some sound bites (very high pitched ones at that). Fortunately for me, being a salaried person who runs the economy of this country and who is the only class that diligently pays taxes at source which runs almost everything of the country – from the largesse of the politicians, netas, babus, their families and chamchas et al; to the subsidies for the needy and the not so needy; to oiling and running the black money system on which this so called fight is, I am told, all about. I was reading through everything that was coming out – the sound bites right from ‘that’ 8PM speech; to the appeal in the chocking voice talking of sacrifices; to the gibberish that the muffler man has been talking; to the shrillest sounding ones; to the archives of a certain ‘spokesperson’ which came to haunt her; to every politician and every celebrity worth their salt; and more importantly, to the common man – the lower middle class and the middle classed ones and of course, the salaried class person. They were all split right in the middle. I was also introduced to two great terms – ‘Bhakt’ (which of course was the title given to the gang which look up to the PM as God sent to cleanse the country and the world and who can never do any wrong) and then the ‘AAP-tard’ (which I was told was an amalgamation of AAP and retard). The baba, didi, bhayya, neta, babu, amma, sahib have already existed always. I know that most of the people have been taken so much by this ‘aye sayers’ and the ‘nay sayers’ that based on which side of the spectrum my reader belongs to, I stand a bright chance of being labeled as an ‘AAP-tard’ or a khadiwala or a ‘organic aalo eating, mineral water drinking ‘high classer’ who doesn’t like to see the greater good of the county or worse, an ‘anti-national’. I knew I could not shut my mouth for a long time and I knew I would eventually come out and speak. People who know me know this for fact. I was trying to ‘test waters’ and re-posted something which was very sarcastic and a frustrated person’s venting out and I was promptly told ‘if you cannot help this country then don’t lecture please!’ I smiled at it and did a bit of research before I put forth my points.
-          The ‘surgical strike’ was on black money. Ok. So what is black money? My understanding, and I am sure the understanding of most people is that this is unaccounted money garnered by and nurtured through illegal means. But please do take a moment (and probably a deep breath to hear out a different point of view) to understand that it is not just a single instance – black money but it is a recurring perpetual phenomenon which I like to refer as black wealth. There were few categories that were the target of the ‘master stroke’ and I want to mention each of them and my understanding of the impact on it.
  • Counterfeit currency – the assumption that anyone who is minting fake currency will go for highest denominations and not lower denominations just based on sheer ‘economies of scale’. It will be totally eliminated, at least for now. This falls under the category of black money – a single instance of enemy nations trying to pump in fake money to create havoc on our economy. You score ten on ten for this Mr. PM.

  • Money earned from criminal activities – these include drug trafficking, hawala, any kind of smuggling. This includes the money that all the anti-national groups worth their salt – be it the naxals or the various groups of the North East, etc. or the big and small drug traffickers or hawala operators who predominantly work out of the Western states and cities of the country (with links to the ‘bosses’ sitting in the Gulf or Karachi) live on. All the cash that lives in this part of the system will also be ‘killed’. And please underline the word ‘in cash’ and which has not been converted to fund anymore supplies or which has not been pumped to convert to ‘white’ will not get caught. Based on this premise, Mr. PM, you get a five on ten.

  • Money earned from corruption. This is not a single instance. This is perpetuity. This is black wealth and not black money. If a babu seeks a bribe, he would continue doing it until taking that bribe is disincentivised. Taking and giving bribe has gotten so deep rooted that everyone have, from the smallest poorest person to the most influential to the great Indian middle class – all of them have bribed or taken a bribe at least once. This includes all the ‘bhakt’ and the ‘AAPtards’ and everyone in between. It also includes the salaried class, no one excluded. So, the bribe taker, the corrupt one, might have created a pile of ‘tissue paper’ with the wealth s/he might have created in the past month, or maybe two to the max. I am pretty sure that most of them would come back with a vengeance to ‘make up’ for the ‘deficit’ that they made as a result of this ‘shock’ and now they would need comparatively less space to stack em – after all the ‘pink back’ is now there for them. Also, do not overlook the fact that this money from corruption that will be sucked out of the system will not be over a couple of months old. After all, these corrupt babus or middlemen or politicians might have already turned the cash earned prior to the last couple of months either into buying real estate or in buying some other form of ‘legal’ practice or in buying gold or might have gotten it flown out of our economic system, either to add on to the money bags that are already sitting in the Swiss Alps or gotten them converted into the ‘green backs’. Also, don’t forget that until now, if one had to give/take a bribe of a lakh, they either used to give 200 bills of Rs. 500 notes or 100 bills of Rs. 1000. But going forward, the preferred mode will be just 50 bills of the new Rs. 2000. That definitely saves a lot of space and now, one can use the same amount of space to stack up double the money. Or worse, if people lose confidence on the rupee (as happened at multiple instances in the human history), they might stack up gold by seeking gold as bribe or might frequently swap the bills with blings. That would save much more space for the bribe taker and s/he stacks up multi fold of the safest currency since human evolution. I know that this point will be countered almost instantly with the fact that the PM’s next guns will be aimed at corruption and their sources. If that is the case I totally welcome those blazing guns on corruption. But, for the problem of black wealth, this move of demonetization is akin to bringing the cart before the horse. For this section my dear PM, you get an ‘anda’ for not looking through things especially with the best and brightest minds at your disposal. My bad! You have a team of advisors who made you let go of RR from the mint street. I take back the best and brightest mind part of my post.

  • The last and final way of black wealth creation is through tax evasion. It is not incorrect to say that the government taxes everything and everyone right from birth to death. In fact, the government is more or less like mafia – just that one of these two is more organized. In other words, one cannot live (or die) untaxed in one way or the other. But if the taxes are too high or perceived to be high or if there is too much of greed all around everyone tries evading taxes. They find most innovative ways of doing them. Though greed is a psychological aspect, the other two reasons – high or perceived high taxes lead to tax evasion. Tax evasion need not be done by the Roy’s or the Mallya’s or some big shots but it is also called tax evasion if an individual bargains with the service/good provider of not writing a ‘bill’ in order to avoid the 14% VAT and the ST and SBC and KKS and what not. So, here too, everyone irrespective of their position on the political spectrum or social stature is collectively responsible to provide the much needed oxygen to this form of black wealth. This also is not a single instance but an on-going process. Unless tax evaders are penalized or the evaded money brought back into the system, just demonetizing will be of zero help. So, here too you have earned yourself a zero.
So net net, of the four major aspects that had to be targeted, you have totally missed two, got just half of the third one and hit the bulls eye for the remainder. That still gives you more than the elusive ‘border pass - 36’ that every Indian student looks forward to.

But the story is incomplete and it will not be fair to say that the issue has been nailed to perfection unless a ‘Cost Benefit’ analysis is made. So, here is an objective cost benefit analysis of the ‘kadak chai’:

  • As of end of last FY, the proportion of 500 and 1000 rupee notes was 86.4% of the total money in circulation as per RBI. This translates to more than Rs. 15 lakh crores. Economists that I have read about (in the newspapers and media of course), estimate that about 20% of this money is ‘black’. That translates to Rs. 3 lakh crores. This means the remainder – Rs. 12 lakh crores that have become the new tissue paper became so for no reason. So is that ‘collateral damage’ or ‘collateral inconvenience’ for no reason? You might argue that if it is not black, you can always go and get that exchanged. But, spare a thought. Is it not a huge inconvenience? Now the argument that is put across in my face is that if people can wait in Tirupati queue, or Jio queue, or movie queue, why not here? Absolutely! But Tirupati queue is purportedly to ‘wash the sins’ or ‘attain nirvana’; Jio queue is to attain ‘free voice calling for life (not sure whatever it means); and a movie queue is to go relax and enjoy. All these are to get something that one does not have already. But the notes queue? It is to attain something that one has already earned, to get it into their hands, in most of the cases to run their life as they used to pre Nov 9. Maybe I am a bit ignorant to understand the similarities. My bad!
Remember that when the last round of demonetization happened, in 1978, the value/volume of notes that went the ‘tissue paper route’ were, I was told, about 1% of the total currency bills in circulation. 86% Vs. 1%. And remember that the last round of demonetization did not eradicate black money from the system. Reason? The ‘black wealth’ concept that I tried explaining in the previous paragraphs.
In that case the impact of demonetization is not just a ‘surgical strike’ on the wrong doers but it is akin the ‘little boy’ which did not just kill the Japanese Imperial Army but the ordinary folks like you and I living in Hiroshima. Yes, there are people who argue that the bombing on Hiroshima led to the JIA’s surrender faster and thereby bringing curtains on the WW-II, but what about the impact on the citizens of Hiroshima? ‘Collateral damage’ I was told.
  • What is the cost of minting this new money and the cost of destroying the old, now defunct bills? All the withdrawn bills are shredded and then compressed to brick shapes and these are then buried. Contracts will be called for this exercise and this involves cost to RBI. Then, there is the cost of minting new bills. One estimate puts minting new 500 and 2000 bills to cost Rs. 12,000 crores.

  • Not sure how many have noticed any bill issued by the RBI. It has a note of promise which is signed by the Governor of RBI and it reads “I promise to pay the bearer the sum of XXX rupees”. The day when this announcement was made, it was told that the 500 and 1000 rupee bills cease to exist and they can be exchanged/deposited by December 30, 2016. Beyond that if there are any left; they can be exchanged with the RBI branches by March 31, 2017 along with a declaration. Nice political statement. But, RBI and its Governor are legally bound under the note of promise on the bill to pay for the face value of the bill and there is no end date for it. Until the time that the GoI passes a law on this, RBI cannot shy away from this ‘liability’ in its balance sheets. So, if a major chunk of the Rs. 12 lakh crores worth of these 500 and 1000 rupee bills do not come back into the RBI chests, will the GoI write these amounts of money off instead of minting fresh money of equal or higher denomination? Any student of economics will know that it is the right of the government and the central bank to mint any amount of money. But, if the minting is done without proper measures and standards being followed, it leads to devaluation of that country’s currency and also create a huge inflationary pressure along with a huge current account deficit (as people would rather stock in $ than in rupees).

  • Every decision has to be timed in order to create maximum desired impact and to create minimum negative impact. India runs on a huge agrarian economy. India’s agriculture sector runs mostly on hard cash and nothing else. There are two major crop seasons in the entire Indian subcontinent – Kharif or the monsoon crop; and Rabi or the winter crop. Kharif starts with the onset of monsoon and the crop comes to the market yards starting October until beginning of December. Kharif crops include paddy and rice along with others. Sowing season for the Rabi crop starts in the beginning of November. Rabi crops include wheat. Indians, just like most others in the world, either have rice or wheat as their staple food. The demonetization could not have come at a worse period for the farming community. Their Kharif crops are sitting in the market yards where the buyers do not have huge amounts of 100 bills. The farmers will either have to sell their crops for the now funny monies of 500 and 1000’s because the buyers won’t have much liquid cash in the right denominations to buy. The other alternative will be to hold the yield in market yards until situation becomes right. If they choose the former option, they end up selling their crop for tissue papers which if they cannot exchange, they end up defaulting on their debts and the whole cycle of farmer suicides increases. If they choose the later, their money gets blocked. Assuming that the crop doesn't get rotten though there is no great storage facilities, their money still stands blocked and debt defaulting and suicides. Also, let’s not forget the fact that most of these farmers do not have access to organized or institutional debt as the Mallya’s or the Roy’s or even for that matter the Ambani’s or the Adani’s have. They depend on their money lenders, on the chit funds and hundi’s for farming loans. With the demonetization, this unorganized money lending business got a death blow. There is no denying that the lenders or chits or the hundis are amongst the worst form of black money generators and in fact run a parallel economy of their own. But, with the pressure mounting on them, they would fleece the poor farmer for their money, and in tenable currency. It will lead to more farmer suicides if this happens. The government has, in my view, totally overlooked at this aspect.
Now the bigger nightmare – delay in Rabi sowing. To sow for Rabi season, the farmer needs seeds. How would he get the money for it? He might or might not have 500 or 1000 bills. If he has, it is a nightmare to exchange them to buy seeds. If not, he has to go for a loan. I give a benefit of doubt to the GoI and I do not question their intentions on helping with Rabi crops. The GoI has, after the demonetization notified that the amount of money available to withdraw using a ‘Kisan Credit’ card is increased. Also, it has come out and said that the farmers can buy seeds from government agencies using the ‘funny money’. Now here is the catch. The share of these government seed agencies is around 20%. The rest of the seeds that go into agriculture are from private players. Will this suffice? I don’t think so.
If the Kharif crop or rice coming into the economy gets delayed, it will be a smaller impact on the economy because the government can procure that from the farmers at a later date. This delay might lead to lowering of inflation in the shorter term because liquidity gets squeezed out of the system. However, if the Rabi crop or wheat does not get sown at all, it will lead to a domino effect in terms of loss of income generation to job creation and also will spike up the prices of these commodities. This leads to higher inflation in the medium to long run. If anyone suspects of increase in prices (which leads to inflation), it will lead to hoarding of those commodities right now so that they can make a profit later (if they are in that business) or so that they can insulate themselves from price rise (predominantly in the case of households) thereby increasing inflationary pressures. This will again lead to black marketeering and will eventually work against the intent of this move.

You might have the greatest of intentions. But, wrong steps, that too of this magnitude where the impact of it might turn your growth rate by half a percentage point, contract your economy, and reduce GDP for at least a year are uncalled for. I only hope that no one comes out and comments in response that ‘as a nationalistic and true Indian, I am supposed to bite this bullet, take this ‘kadwaa and kadak chai’ for the greater good of the country’. If you had to pluck black money out of the system, here is my idea of what should have been done:


  1. Make the proposition of bribing – both giving and taking, not worth it. If a babu demands a bribe and gets it, it is because he has the power to give a permit here or an approval there. Why can’t there be an ‘auto approval’ system for anything where if I need some kind of permit or approval, I go to the office, give an undertaking, pay a fee and wait for an objective scrutiny period. If there are no objections to my application, it should become my right to go ahead with my proposition – be it a house permit, an industry permit, a license, anything! That will take the fizz out of the high headed babus and politicians who are the biggest creators of the ‘black wealth’.
  2. Make taking a criminal offence as a stick. At the same time, dangle a carrot for efficient babus in terms of perks which will be determined based only on merit and nothing else. This incentivizing and dis-incentivizing if done hand in hand will eliminate most of the ‘black wealth’.
  3. Make the organized banking and credit system accessible not just to the Mallays, Adanis or Roys or Ambanis but also to the ‘less among equals’ based on credit worthiness. Let the banking institutions – PSU or otherwise, run as businesses instead of political fiefdoms.
These three steps will address the creating of black wealth and help blow a death knell to it. That leaves us with the counterfeiting and smuggling aspects of fight against black money. These two aspects have to be addressed on a different level. I am sure, the whirlwind visits and the foreign trips should show some results. Else, I don’t see a reason for spending tax payer’s money for it. All in all, the ‘surgical strike’ would have been better if it used some of the ‘guided missiles’ (like the ones who were shown the door of the mint street just a few months ago) instead of chest thumping on chopping the hand off to deal with a mosquito bite.

Until then, as an average apolitical Indian man who is being constantly scrutinized as ‘with us or against us’, ‘nationalist bhakt or an AAP-tard or a family follower’, where the only concept is a binary concept of politics, I shall go back to my daily routine and stand in the ATM queue to take out my own hard earned money. Especially now that I have tried putting my thoughts and hope at least one person might read this and change his stance.

Hindustan Zindabad.