Demonetisation and it’s after”math”!!!

Ever since the RBI released its Annual report 2 weeks ago, Demonitisation (DeMo) is back in the news. And with its eminent Ex-Governor Raghuram Rajan now in India to promote his book, DeMo continues to hog the headlines and Op-Ed pages. The analysis of DeMo swing from scathing criticism of being a “big mistake” by the likes of Ex-Economic Advisor Kaushik Basu to calling it a “huge success and a course correction” by the likes of Gurumurthy, the veteran commentator on public affairs. So, as it happens in most issues these days, “for every spin there is an equally effective and opposite counter spin”! And where you stand on an issue depends on where you stand on the ideological divide.  On social media, it was a hashtag war between #DeMomenisationsuccess and #DeMonetisationfailure!

Ten months on, based on all the data available (99% of DeMo notes coming back to the banks) it seems that DeMo has not helped in sucking out the black money. In retrospection, I wonder how the government expected anybody in India to give up their prized possession (currency notes in this context) at all in the first place. In my own experience, when coming out with marketing promotion programs for the trade, we usually take twice the time for foolproofing the program compared to conceiving the program itself. This is from the wisdom of previous programs over the years where, we found that the Indian brain works over time always to find loop holes/gaps in any program announced. So, in a sales promotion program for example the trade will end up earning the incentives while you never achieve the increased sales objectives!

This is what happened in DeMo as well. If you remember, the day DeMo was announced, the chattering class’ verdict on WhatsApp group and dining area discussions was that it was a “Master stroke”! While the middle class and upper middle class folks who didn’t have unaccounted cash had to just find ways of beating the lines to exchange their notes, the ones who had, started cranking their brains. The result was the everyday tweaking of the rules and adding more terms and conditions for currency conversion. The then Economic Affairs Secretary Saktikanda Das became a celebrity overnight, thanks to his daily media briefings on what else – change in rules!

By now, it is clear that notwithstanding the anti-DeMo commentary of economists, there was overarching, tacit support for the DeMo move from common public. Inspite of loss of business for traders, loss of jobs for casual workers and loss of income for farmers the Note Bandi didn’t evoke much unfavourable mood towards the BJP so far. I am not sure if it will, from now on. What explains this paradox?

Many of the commentators have alluded to the human trait of Schadenfreude to explain this. That the poor were happy because this was one move which affected the rich and privileged and that the Prime Minister Modi had the guts to do so. This is a good possibility. But there could be more to this as well.  Within days of the DeMo announcement, the initial despair among people who were caught unawares with a lot of unaccounted cash turned into a relief, when they found ways and means to deposit the same into the bank. Among many ingenious ways, one was to tap into their own staff and workers to distribute the cash and get them deposited into their bank accounts. A report said that by Dec, the deposits in Jan Dhan Accounts peaked to Rs.74,609 crore! As of Sep, it was just 4,273 crore! The number of Jan Dhan accounts itself went up 5 times in this period!  My guess is that, in this process of conversion through the conduit of using others’ accounts, there must have been a cost.  The government must have lost an opportunity to earn taxes on the unaccounted income but those who had a lot of unaccounted cash ended up incurring a “conversion tax”! And I am certain that those who were witness to the rich incurring this tax felt certainly happy that DeMo was an equalizer of sorts. And not just being a witness, there would have been many who would have benefited from the sudden largesse of their masters as well and got their share of the “conversion tax”. So, instead of the government collecting taxes from the haves and distributing to have-nots by way of welfare measures did DeMo make it as a Direct Benefit transfer from the rich to the poor without the government in between?  Probably.

It’s evident now that the DeMo move has been a rocking political success for the government. On the economic front, though the objective of sucking up the black money has not been achieved directly, certain fringe benefits have accrued. Like reduction in cash circulation, increase in Digital transactions, and increase in bank deposits,…  These may leave the country in good stead in the future.  In the short-term however, the country skipped its GDP beat.

So when one does the after”math” of DeMo, it may well be like the popular “Elephant and the Blind men” story. For some, it’s a failure. For some, it’s a success. For some, it’s a partial success and for some it could be a partial failure. I would like to go with Rajan’s assessment that the short-term economic losses far outweighed the long-term benefits.  In hindsight, one is always wise. Other times – otherwise!


Now running successfully worldwide – “India Sorry”

In the corporate board rooms of many multinational corporations the “India Story” which was weaving itself has now given way to “India Sorry” with accompanying pathos.  The overwhelming feeling is of a wholesale deprivation of the aspirations of the talented Indians by their political masters. “Incredible India” is desperately ‘in’ need of a ‘credible’ script, actors, technicians and the works. Flash back to the 2003-06 time frame, thanks to the easy money flowing in from the developed markets to emerging markets that included India, the markets were on fire. Pundits and others claimed that a GDP growth of 7-8 % is the base line rate of growth, come what may and if Govt. and administration did its bit (and If China gets to host events like Olympics 🙂 ), we could head towards 9 – 10 % growth.  The party was briefly interrupted by “the Lehman shock” the tremors of which shook the world – developed, developing and others. I say briefly because within a year or so markets like India and China not only recovered but were again breathing fire. This time the stimuli announced by developed countries like the US, Germany,… injected funds into the monetary system and once again easy money found its way here.  This was when the “India Story” was running full houses worldwide.

I recall seeing and hearing of many multinational companies having their Board meetings in India that time. Expansion plans for global companies seldom excluded India. Forex reserves were booming whether it was thro FDI or FII money. If you look at it now, that kind of over the top India focus and fuss became detrimental to India’s future. For, the rulers(UPA-I) started imagining and talking of India which is “decoupled” from the world without realizing that if structural reforms are not put in place, the “India Story” will turn apocryphal when the flow of easy money stops. And that’s exactly what happened. This is explained beautifully in Ruchir Sharma’s book –“Breakout Nations – In Pursuit of the Next Economic Miracles”. While he analyses many emerging markets and gives his verdict, as far as India is concerned his verdict is a 50:50 chance for India to breakout. I suspect that his own patriotic “Indian at heart” feeling came in the way of saying that the chances are pretty dim for India to become a breakout nation. Ruchir also says that we will have to get used to the “New Normal” of Pre 2003 GDP Growth which is 5.5-6%.

My own sense is that if India had focused on Governance, the situation would not have been as bad as it is now inspite of the global liquidity party getting over long while ago.  However in India the politics of economics is a deadly game. So instead of focusing on Governance, the Govt. headed by a Cambridge educated Economist was economic in Key decision-making and thereby introduced “policy paralysis” in the lexicon of the opposition/Industry and corporate reviews. Many observers are in unison when they point out that the Union budget presented by the present President of India in the year in the year 2012 as finance minister was the tipping point that led to world relegating India as a foot note in their strategy documents. Pranab Mukherjee amended the Income Tax Act, 1961, to impose a retrospective provision for tax on some types of global mergers, including Vodafone’s 2007 acquisition of Hutchinson’s assets in India. Even for a lay man it is difficult to fathom how somebody in the Govt. can think of passing an amendment with retrospective effect when companies have taken decisions to invest based on prevailing laws of the land.  That this controversial provision passed through the FM, the bureaucracy and even the PM is till today a shocker for me.  From then on it’s been a downward climb with downgrading of ratings, pulling out of money, slowdown in investments, falling off the Rupee,..,..  India got demoted while Pranabda got promoted 😦 😦 To compound to the situation, delay in environmental clearances for new projects, banning of mining, Telecom imbroglio, corruption charges all this made Indian investors to look for avenues outside of the country to invest.

As a rearguard action, Chidambaram was brought in as the Finance Minister to succeed Pranabda and frankly speaking he has been trying his best. The decision-making wheels in the Govt. have started moving. The “Rajan effect” has been just short of magic. From the time Raghuram Rajan was made the Governor of RBI, there has been some great things happening in the economy the most important being the strengthening of Rupee.  But the “Sir Newton effect” has been overpowering. Newton said “For every action there is an equal and opposite reaction”. So the reaction from the world now is of a wait and watch.  With the Government in the December of its term, it makes little sense to investors and others alike to jump into the fray. For them it makes more sense to wait and see if India presents a credible and durable “Change” come 2014.

And it is not just the world which is looking for a change in India but even within India the mood is the same. Though it is still not clear what the opposition’s clear economic agenda is, Narendra Modi the PM candidate for BJP is attracting attention all over.  This can only be due to an overwhelming yearning for change. If that change happens, it will be interesting to see how they tackle the economy differently. Yashwant Sinha an Ex and potential finance minister in his book calls himself a “Swadeshi Reformer”. As oxymoronic as it sounds, except for opposing what the Govt. is doing, even he has not yet spelt out clearly BJP’s stand on key economic reforms.

Shankkar Aiyar a reputed columnist in his book “Accidental India” says and I quote “It would seem that everything the country has achieved has arrived by accident, catalyzed by calamity”. Turning points in the country like the liberalization of 1991,.. as per him “were not the result of foresight or careful planning but were rather the accidental consequences of major crises that had to be resolved at any cost”. For quite some time now I was of the same opinion but dismissed it as a streak of a cynical Indian. But reading this fantastic book has confirmed my worst fears around policy making which is by nature reactive rather than proactive.  As the country is in the throes of another economic crisis if not collapse, we await another “accident” which will bring the “India story” back to the global theatres. Till then it looks like there is no escape (velocity) 🙂 🙂


Also pls. read my earlier post on reforms “The Politics of Reforms” written in Sep 2012 –