Sunday, January 1, 2017

Modi 'miscalculated the Indian ability for jugaad': Statistician Pronab Sen on demonetisation fiasco

India’s first chief statistician, Pronab Sen, is now country director of the International Growth Centre, which seeks to build effective growth facilities through engagement between policymakers and researchers. In this interview to, he speaks on the 50 days of demonetisation, its failings, its severe impact on the poor, the loss of credibility of the Reserve Bank of India, the push to make India a cashless or less-cash economy, and suggests measures the government could take to rev up the slowing economy. Excerpts:

Much of the old Rs 500 and Rs 1,000 currency notes seem to have come back to banks, perhaps beyond the government’s expectation. Does this imply a large percentage of black money was converted into new currency notes? Or was it that the government miscalculated the amount of black money in the economy?
The government’s estimate of black money and ours was roughly the same – about Rs 3.5 lakh crores. What they miscalculated was the Indian ability for jugaad [innovation]. You had old notes trading at a discount. What was happening was redistribution among agents. I give you Rs 100, you give me Rs 60 and make a profit of Rs 40. But the Rs 100 note remains intact. It is redistribution from me to you, but not to the government.

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So what you have is a new category – perhaps it is an old category, I don’t know – of people who have black money. If you look at Jan Dhan account holders, they, technically, now have black money. They didn’t have black money earlier because they weren’t liable to pay tax. But now they have. So you have created a new category of black money holders. And this amount is not unsubstantial. We are talking of somewhere between Rs 2.5 lakh crores and Rs 3 lakh crores of such transfers happening. That means a lot of new black money holders are now in the system.

Could such a thing have been predicted?
We are Indians. At the very least, you should understand your own people. If there’s one thing we are good at, it is jugaad. This was predictable, we knew dalals would come up.

Anecdotal accounts suggest bankers played a role in converting old currency notes into new.
Certainly, people in the financial system have played a role in it. It is difficult to tell to what extent. If you take Jan Dhan accounts, it could have happened in two ways. One is that I, as a black money holder, approach you, a Jan Dhan account holder, and say, “Here is Rs 50,000, put it into your account, and once the new notes come in, you will give me, let us say, Rs 40,000.” In other words, Rs 10,000 will be yours.

And you keep my passbook to ensure I return the promised Rs 40,000?
Yes, I keep your passbook. The second way of doing this is to get hold of the friendly neighbourhood banker and say, “I am giving you Rs 2 lakhs and you will deposit Rs 50,000 each into four Jan Dhan accounts.” The account holder doesn’t even know the money has been deposited in his account. At an appropriate time, the money is taken out.

Either of these two models can work. What the proportions are, again, it is hard to tell.

The government failed to comprehend the banker’s psychology, didn’t it? After all, he or she has been taught to be nice to high-value depositors. It would, therefore, have been difficult for the banker to turn down the request of a high-value depositor.
It would have been impossible. Private bankers have been getting kudos from their clientele because high-value customers are protected. The anecdotal account suggests that a high-value customer would give the banker a cheque in the morning and after 5 pm, once the bank closes, the banker would call him to say, “Please take your money.” However, the people in queues would be told that the bank has exhausted its money.

This wasn’t possible in public sector banks, which played a far more positive role during demonetisation than private sector banks.

But when we see on TV, or are told, that lakhs of rupees in Rs 2,000 notes have been found in a person’s house…
That can’t happen at the branch-level bank. It would have happened at the currency-chest level. (Currency chests are select branches of scheduled banks, which are authorised by the Reserve Bank of India to stock notes and coins on its behalf.

Given the limited number of currency chests, which are shared by banks, would it be possible to statistically identify that this amount was ferreted out at bank X and this amount at bank Y?
I don’t think any such record would have been maintained… read more:

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