Demonetisation demystified: Greater the drivel against its success, better the prospects of a demonetised India

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Published: December 14, 2016 6:30:14 AM

The greater the drivel against its likely success, the better the prospects of a demonetised India

There has been much political noise, both inside and outside Parliament, about the likely success or failure of demonetisation (hereafter DM). (PTI)There has been much political noise, both inside and outside Parliament, about the likely success or failure of demonetisation (hereafter DM). (PTI)

There has been much political noise, both inside and outside Parliament, about the likely success or failure of demonetisation (hereafter DM). We analyse some of the burning questions related to the prospects of success of DM.

Economists don’t support DM: Several economists, including Nobel laureates, have opined that large-scale demonetisation for a “normal” economy like India was an idea they would not recommend. Indeed, I have not met a single economist (including self) who would have ex-ante approved. This should not come as a surprise to anybody since economists are trained to never, ever think out-of-the-box. This training, and this practice, is the determinant of an economist’s success.

The first thing that a good economist does is that she begins to look at the data; where has this been done before, what happened, what were the determinants of success or failure, and then she makes a policy brief to the “decision-maker”. If she cannot defend herself with evidence, she shouldn’t make the recommendation for an action for which there is no precedence.

Soon after November 8, many wannabe economists pointed out that demonetisation had indeed been “practised” before, and then with the help of Google, pointed out that Russia had done it, and so had Ghana, and so had North Korea. Voila—there was plenty of evidence that demonetisation had not worked (how they got to that conclusion is the mark of a BWE—bad wannabe economist), and therefore doomed to failure in India. What the BWE failed to note was that there was no example of large scale demonetisation in a “normal” country like India.

The fact that no good economist would approve of DM ex-ante, does not necessarily mean that the same economists would not approve of it ex-post, like self. Thinking out of the box is not demanded of economists, but is certainly demanded of courageous political leaders. There are very few, and indeed I can think of only two, leaders in the last 150 years, who boldly went against their core political base while formulating policies—Lyndon Johnson in 1964 (the Civil Rights Act) and Nelson Mandela (Truth and Reconciliation policy, 1995). So while passing pre-mature judgements on Modi’s demonetisation policy, let us give him some credit for boldly going against his own core political support base—a path where very few political leaders have gone before.

Changing DM goalposts: There has been a lot of good discussion about the definition of what constitutes black money. But the politicians have twisted the “tail” to conform to their own irrational prejudices. For example, Rahul Gandhi made the extraordinary statement that “All cash is not black money and all black money is not cash”. This was picked up by both former PM Manmohan Singh and Ashis Nandy “Who says that all unaccounted money is black? Farmers keep cash, their life savings in jute bags, because they may not trust banks. All this shows Modi’s distance from social realities.” This sounds like the beginning of a well planned attack on the attack on DM.

But whoever said that all cash is black? Or that all unaccounted money was black? Search far and wide, no one has stated this extraordinary lie. What some have stated (like self in “Black cash in India”, FE, December 6) is that a significant fraction of high valued currency notes might be black—in my case, that estimate was around R8 lakh crore (trillion). I recognised that even the critics of demonetisation believed that this number was at least R2 trillion. Given that anywhere between 13% and 51% of cash might be black does not translate, in any language (except that of an unsuccessful politician), as saying that all cash is black.

The courageous step in the project “Transforming India” has been taken, all cash is not white, yet the important question remains: will the DM project be successful? The naysayers said the project will fail if all the R15.4 trillion of DM notes came back into the system. When pointed out that there should be decent tax gains of unaccounted income newly entering the tax stream (my estimate was an additional R2.5 trillion this year, and around R1.5 trillion onwards from next year).

But we are reminded that the IT department is woefully short of staff—there are about 20,000 staff members missing in action (vacancies) against a sanctioned staff strength of 75,000. Several questions arise. First, how come there were so many vacancies before D-day, November 8? One very good explanation is that because of the IT revolution (information technology, or I-Tnew) not Income Tax (I-Told), the government does not need the original sanctioned strength. One I-Tnew person can do the work of a 1,000 I-Told individuals. For this good reason, the UPA government did not fill these I-Told vacancies; why should the BJP go centuries backward to hire new I-Told staff?

But how will good governance identify the possibly millions of individuals who have deposited tons of cash and not declared it as unaccounted income? With just 50,000 I-Told individuals (many of them traditionally suspected of being black themselves), how will the system catch the smarter bribers in the system? Because this question has been asked so many times on TV and social media, let me make the following suggestion (and I don’t mean to be rude or condescending).

It is suggested that the following simple procedure be followed by the I-Told department (I am not assuming that this simple procedure is not being followed). First, no need to recruit new I-Told officers, though some reason to recruit

I-Tnew officials, and trained statisticians. Second, provide short-term employment to people who will log into the computer system of every bank four pieces of information for every old-cash deposit: Name, date of deposit, identity number (Aadhaar or PAN or whatever) and amount of deposit. This computer list is then sent to RBI, who then sends it to the I-Tnew office in Delhi. A few computer codes later, the history of income, and income-tax, and cash deposits, of each individual will be available.

Anybody with cash deposits above 25% or 50 % of last year’s income is then flagged for scrutiny. This list is sent to the district staff of I-Told to investigate and send the report back to the Delhi head office. Note that the local tax official knows that the head office has all the information and so will be hard-pressed to reach a deal with the local income tax evader. There will be some cases of very legitimate hoarding of cash (especially by women distrustful of their husbands) and these can easily be allowed by the I-Tnew system. The tax evader is then given an option to come clean or face prosecution and penalties.

Tell me—how difficult is this enterprise likely to be and how likely that it will not work? It will work—which is why the “bad” politicians are already shouting “tax terrorism”. Let me see—to hoard black money, cheat the system, bribe willing tax officials is okay because that is individual freedom sanctioned by the Constitution, but if an honest, computer-driven tax officer asks for details as to how you have amassed so much wealth, that is encroaching on your freedom via terrorism? That is so, so much like the I-Told; welcome to the brave new world of I-Tnew.

The shrillness of the politicians objecting to some home truths about the likely success of demonetisation is very reassuring—the greater the nonsense contained in the shouting, the better the prospects of a new demonetised India.

The author is contributing editor, The Financial Express, and senior

India analyst, Observatory Group, a New York-based macro policy advisory group. Views are personal.

Twitter: @surjitbhalla

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