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.
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
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-longsee 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
