Friday, December 30, 2016

Aseem Shrivastava: Weapon of Mass Digitization - Part II // Ajaz Ashraf: How demonetisation made this small business owner a Modi supporter, but not for long

As the deflationary spiral deepens rapidly across vast swathes of India's cash-dependent informal economy, ultimately impacting the formal sector too, what was seductively sold to the public as a "surgical strike" on black money may turn out to become the worst-ever carpet-bombing the country's economy has ever experienced at the hands of its own government. In any case, a militarised imagination is the last thing India needs to face its real problems today.
ASEEM SHRIVASTAVA - Weapon of mass digitisation Part 1
We are in the hands of a digital-romancing political fantasist of extraordinary unrealism, gambling with the real lives of unsuspecting millions across the country. He makes the adventurous Tughlaq seem sane by comparison.

The currency is the centrepiece of a modern economy, the trust and credibility reposed in it being one of the most precious of national assets. It is not to be trifled with by ignorant tyrants. And this is why fiscal and monetary powers are separated in any modern economy, and the autonomy of the central bank is sacrosanct. This separation of powers is analogous to the political separation of powers between the executive, the legislature and the judiciary.

So, for the government to supersede the RBI and take direct charge of the currency is almost like the executive branch assuming, in addition, legislative and judicial powers. Many economists, otherwise as divergent in their views as Larry Summers and Amartya Sen, have noted that there may be few parallels in the modern world to the sheer temerity with which the executive branch of the Indian state arrogated monetary authority to itself on 8 November.

It made a mockery of time-honoured norms of public trust and central bank autonomy, responsible in no small measure for the reputation for financial wisdom that the RBI had hitherto assiduously earned over the course of its eight decades of existence.

RAISING DOUBTS: Now everybody will doubt the Reserve Bank and the reliability of the Rupee. (Over $6 billion in foreign funds have already left the country since 8 November, at least in some measure due to demonetisation). Many are rightly asking questions of the legality of this extraordinary act of monetary default on the part of the State. Others have questioned the 'sanity' of the move.

Any competent undergraduate student of Economics from the University of Delhi could have forewarned the PM that a monetary contraction of 86% in liquid cash was bound to paralyse the economy for an indefinite period of time. It is like an RBI announcement of a sudden, unsuspected hike in the rate of interest of 100-200 basis points. The business press would have been enraged.

WHAT IS REALLY THE END GAME?: To cleanse the only village well of pollutants, you cannot possibly think of draining it out completely and then reintroducing the water (especially when you live in a dry area without rain, lakes or rivers to replenish the water in the well). If the pollutants become such a nuisance, you have to find intelligent ways of reducing them, without removing the water.

This wisdom deserted the PM, especially since the political temptation of busting the treasure-chests of political opponents (while pre-emptively guarding their own) in upcoming elections in UP, Punjab and Gujarat appears to have prevailed. In the event, as the deflationary spiral deepens rapidly across vast swathes of India's cash-dependent informal economy, ultimately impacting the formal sector too, what was seductively sold to the public as a "surgical strike" on black money may turn out to become the worst-ever carpet-bombing the country's economy has ever experienced at the hands of its own government. In any case, a militarised imagination is the last thing India needs to face its real problems today.

AN EXERCISE IN DESTRUCTIVE FUTILITY: The government's hope has been that about Rs 3 to 4 lakh crore of the demonetised cash will not return to the banking system, implying that this would be the sum of isolated black money. The RBI's liabilities would go down by the same amount, yielding the government an equivalent dividend. The government could then deposit Rs 10,000 into each of the 250 million Jan Dhan accounts, yielding people an election year bonanza (the mopped up black money), while still leaving a substantial sum for infrastructural spending to revive a sagging economy.

But what if it turns out by 30 December that all the Rs 15.5 lakh crore of demonetised currency has returned to the banking system? If so, Modi's gamble would have boomeranged. The government's black money narrative would have failed altogether. In order to somehow redeem demonetisation, the government has of late also been heard saying that new bank deposits may not necessarily be 'white'.
Any unaccounted money that has been deposited into bank accounts during the last month will be taxed at 50%. At least some of the people who voted for Modi should also prepare for income tax raids - for the government's moves on black money cannot be seen to have been an outright failure.

WHERE IS THE MONEY?: Meanwhile, given the massive gap between the daily volume of cash needed at the bank branches and each of the 2,00,000-odd ATMs across the country and the rate at which new currency is actually being produced at the country's four mints (despite extra shifts), the queues in front of the ATMs are not vanishing any time soon.

Scores of people have died directly on account of the cash crunch and the marriage season has been rudely interrupted across the country. The country's vast informal economy is living from hand to mouth and facing the bitter winter cold. Given the terrible timing of demonetisation - in the cusp between the Kharif harvest and the planting of the Rabi crop - agriculture has been thrown into complete disarray.

Sowing in large parts of rural India stands severely interrupted, because cash-dependent farmers have often not been able to sell the produce from the last harvest. Migrant workers in areas like Punjab and Gujarat have returned to their home states, for the want of work. Prices of all perishable produce have fallen dismally low because of demand having vanished from the market.

At the next harvest, at the beginning of summer, the overall agricultural output is likely to be well below normal. Ironically, this will happen at a time when the days of cash rationing would be close to getting over and the greater access to cash will expectedly lead to a spurt in public demand. Given the recent persistent context of uncertainty, there is likely to be plenty of hoarding on all sides. It is thus a safe bet that food prices will rise sharply over next summer.

COLLAPSING MARKETS: Cash-driven urban wholesale markets for agricultural products, poultry and fisheries have all but collapsed. Small traders are in deep water. The millions engaged in the wholesale trade are out of work. Porters and cart-pullers at such markets are losing their daily wages. Other areas of the informal economy are suffering badly as well. Micro, small and medium enterprises in the manufacturing sector - involved in textiles, leather goods, brassware, glass, and a whole range of other products - have all but collapsed.

Employers are unable to pay their workers, often on a daily wage contract. They are also not able to procure raw materials in many cases and sell their output. Towns like Coimbatore and Tirupur in the South and Surat, Agra, Moradabad and Ludhiana in the North have ground to a virtual standstill because of the cash crunch.

The cascading effects on the formal sector are also beginning to show, as the data comes in from the construction, automobile and two-wheeler industries. The outlook for at least the next two quarters looks utterly bleak. It is still very early to estimate in monetary terms the damage to the economy over the medium term. However, even the RBI has scaled down the GDP forecast for next year from 7.6% to 7.1%. Others expect a greater impact.

ANYTHING GOOD?: The only areas of the economy doing well at the moment are those directly involved in the vainglorious project to make India cashless. Paytm's fortunes have touched a new high of over 5 million transactions a day, yielding it a record Rs 400 crores of revenue in a month. Appropriately, Modi himself appears in one of the recent promotional ads for the company.

The overall picture at the moment appears to be that while demonetisation has had very high short-term costs, its putative long-term gains, if any, are utterly dubious. Most of black money - much of it hiding in digital space - has remained outside its reach. The part of the black money circuit which uses the high denomination notes to grease its transactions is likely to resume once this fever settles down. The new Rs 2000 currency note does not help matters. If it has quartered or halved the speed of replacement of the old notes of Rs 500 and Rs 1000 it has been replacing, it has also quartered or halved the storage space that large wads of vagrant cash consume.

Among other things, demonetisation is also being defended as a necessary step towards the formalisation of the economy. The argument that the formalisation of the informal economy will necessarily be in the country's long-term interest itself needs to be given a close scrutiny.

Elites typically misread their societies. Indian metropolitan elites have never had a very good recognition and understanding of the unmeasured/mismeasured wealth of rural India. It is sobering to keep in view the fact that this is a country that routinely rewards its food critics on scale orders of magnitude above how it values its food producers - who is ever keen to sell down the river so that global agribusinesses can carve out their markets here.

It is often heard that formalisation will draw a greater volume of savings into the mainstream economy. This is touted as one of the merits of going cashless. However, it is worth inquiring as to whether investment is being inhibited by a shortfall in savings, or whether the real cause lies in the growing inequality of incomes, which adversely affects effective demand in the macroeconomy.

In closing, one may recall the obvious and reflect upon the wisdom of seeking to eradicate cash from a country where most people have barely begun to learn how to operate a bank account and a smart phone, let alone acquire the requisite financial literacy and digital comfort with handling money in non-physical, abstract terms. It is also important for an awakened citizenry of a democratic country to consider if good governance is equivalent to totalitarian control of the country's currency by an ignorant leader who has exercised an ambition out of all proportion to legitimate, even practical, force.

We are in the hands of a digital-romancing political fantasist of extraordinary unrealism, gambling with the real lives of unsuspecting millions across the country. He makes the adventurous Tughlaq seem sane by comparison. Will he survive the electoral test? Only coming months will tell.

Ajaz Ashraf: How demonetisation made this small business owner a Modi supporter, but not for long
Neither the Ambanis nor the Adanis would be bothered, but I and others in the small sector have started to breathe harder. It is as if the prime minister has deep hatred for all businessmen other than big corporate giants. It is as if we are being strangulated, ever so slowly, all because Modi wants to win a few of the Assembly elections..
...Honest suffer, dishonest smile: In the last week of November, the virus of panic has afflicted the industry. But the virus, ironically, has debilitated those in the organised sector, that is, those who follow legitimate business practices and pay taxes. They are people like me whose business is above board. I discern a trend – those gripped by the panic-fever in the immediate aftermath of demonetisation have been cured of their malaise. They look relieved, they have converted their old notes into new. More significantly, they have orders for the next season. How?

What distributors have done, I am told, is to parcel out their cash reserves in old currency notes to different players. So, for instance, distributor X pays Rs 1 lakh to producer Y. It is an order for electric fans totalling Rs 70,000 – the Rs 30,000 deducted as Y will have to take a 30% hair-cut for converting the old notes into new.

It is for Y to decide whether to begin production. As I pointed out earlier, he might not soon, preferring to wait to see which way the war on black money will go, whether he needs to place his business operations above board. My sense is that we have such a large unorganised sector that it is impossible for the government to go around cracking the whip all over India. Nevertheless, whatever Y’s decision, he has the orders and money to undertake production at a time of his choosing.

I barely have orders. I don’t have cash. Worse, I can withdraw from my current account just Rs 50,000 a week, peanuts for the range of my business operations. I can see the failings of demonetisation – it hasn’t flushed out black money from the economy, and the dishonest have stolen a head-start over me.

December, the cruelest month: Salary day has arrived. We generate a fair volume of scrap, which we sell every year and utilise the money for productive purposes. But not this year. The money from the sale of scrap is distributed as salary to employees. Mind you, I can’t retrench workers, not necessarily because they have been with me for years, but I would be squeezing my resources to pay them gratuity and termination benefits.

It serves no purpose to now provide a weekly account to you, because nothing has changed other than the depth of my desperation. I call our few distributors. They say they haven’t received money from dealers, who claim retailers haven’t paid them yet. Everybody has pushed their payment schedule farther into the future.

Worse, everybody has chosen to postpone expenditure. I went to a restaurant with my family and found it deserted. Better to eat dal-roti at home than splurge money on dishes you don’t cook at home. I figure out the implications for my business while tucking into kababs. Boss, let’s face it, fans are not a necessity, you don’t die because of perspiration.

Distributors and dealers know this mundane truth. They can’t predict for how long consumers will persist with their parsimonious ways. Why should they then risk advances to order fans when they can’t predict the demand for it next March-April? Some statistics now: I have received just 15% of orders that I had in November-December last year. The poet TS Eliot wrote, “April is the cruelest month…” In India, it is December in 2016, it will be recorded in business history, when cash simply refused to flow.

No threats, Mr Prime Minster: In December, raids to unearth undisclosed income have increased. They have been shown on TV to prove to the nation that the government intends to root out black money. The salaried class cheers Modi, as also those in the low-income category, unaware that they are next in line to be hit hard. How, you wonder.

Let me tell you straight: these raids, and the prime minister’s daily warnings that demonetisation is the first step to root out corruption, have businessmen playing statue-statue. Remember that game we played as kids. You uttered statue to someone and he was supposed to freeze, until you called out over. Modi’s threats are having the same effect on businessmen engaged in industrial production. And it will throw people out of jobs.

Don’t think I am against targeting the corrupt. But, really, it is a cruel irony to see tax authorities raiding businessmen. I mean, come on, who doesn’t know they are among the most corrupt in India – they extort money from businessmen by adopting menacing tactics, for instance, by accusing us of concealing excise or sales tax in case we refuse to grease their palms.

These tax authorities must be licking their lips in anticipation. Because of the palpable economic slowdown, the government income through taxes must have reduced drastically. Assume I had to file value-added tax in October and I didn’t. They will issue notices to me saying pay the dues. Ordinarily, such notices have us request the authorities for an extension. The pressure on them to report higher revenue will goad them into squeezing us hard. “Please sir,” we will moan and offer them bribes. After all, I wouldn’t want to pay lakhs when the business mood is palpably downbeat. Better to pay the tax guy an infinitely smaller amount.

As December 30 draws near and all inconveniences are supposed to miraculously end by then, I am not too hopeful about the economy. I hope the limit on cash withdrawals will end. I hope I can withdraw as much as I need for my business. The pain, otherwise, will shatter our endurance. I can’t access my deposits but big corporations will take recourse to loans transferred to them digitally.

I don’t know what intentions the prime minister had, whether noble or ignoble. But, right now, all the big talk about rooting out corruption and the spectre of more raids and heightened surveillance seems to have thrown India’s economy into disarray.

Neither the Ambanis nor the Adanis would be bothered, but I and others in the small sector have started to breathe harder. It is as if the prime minister has deep hatred for all businessmen other than big corporate giants. It is as if we are being strangulated, ever so slowly, all because Modi wants to win a few of the Assembly elections... read the full story:
https://scroll.in/article/825191/how-demonetisation-made-this-small-business-owner-a-modi-supporter-but-not-for-long

see also
Did Amit Shah's bank in Gujarat receive Rs 500 crore soon after note ban?
More posts on demonetisation
Nation-wide public tragedy unreported in India's mainstream media - click to see glimpses of ordinary Indians' reactions to note-ban crisis and please circulate - Scroll down the contents of the link above for clips of mass unrest in Indian society from shopkeepers & artisans to workers & peasants. Information about this assault on the lives of millions is being withheld by the mass media