A Tragedy and A Farce!!

The world today is data driven and most Governments take economic decisions on the basis of detailed data analysis. However, Prime Minister Modi has given short shrift to this principle and has instead embarked on grandstanding actions based on his intuition which he believes served him in good stead during his many years as the Chief Minister of Gujarat earlier and will do so in his present stint also. Whether it is the construction of toilets to rid India of shit or the demonetisation of high value notes to "extinguish" black money, Modi has followed his sixth sense and not the logic of data!!

What, however, is the data available with regard to black money. At the outset one is confronted with the problem that there is no reliable data. Mainly because those who are supposed to track the generation and accumulation of black money, the staff of the direct and indirect taxes and vigilance departments, are least interested in doing so as they too are mostly involved in generating and accumulating Black wealth!! Black money is generated either by fudging by organisations and citizens of their production, trade and income data or by defalcation of Government funds. In all these cases the departments who are tasked with tracking evasion and corruption can fight this evil and also form a reliable estimate of the black money generated and accumulated if they have the will to do so. For various reasons this will is absent.

Nevertheless some rough estimates can be made. The GDP of the country in 2015-16 was Rs 140 Lakh crores at current prices and should be around Rs 150 lakh crores this year. Assuming that the black economy was 50% of this we arrive at the figure of Rs 75 lakh crores. If we further assume that the black economy has the same savings rate of 30% as the mainstream economy, we get an annual accumulation in the black economy of Rs 23 lakh crores. Assuming again that 50% of this gets reinvested in productive economic activity we are left with about Rs 12 lakh crores per year as accumulation and assuming also that due to the effect of inflation the current value of the annual accumulation that has taken place in earlier years is the same as that in the present year, we can roughly estimate the total stock of black wealth accumulated over say the last thirty years or so since the economy began to be opened up from the mid-1980s and thus offered greater opportunities for generating black income, to be around Rs 400 lakh crores, held mostly as real estate, gold and jewellery and financial instruments within the country and abroad. How much of this huge stockpile of black money is held as cash? On the day demonetisation was announced there were about Rs 15 lakh crore in Rs 500 and Rs 1000 notes. Assuming once again that 50% of this was black money we arrive at a figure of about Rs 8 lakh crores. Thus, only 2% of the total black wealth of Rs 400 lakh crores was held in cash.

Therefore, it is indeed farcical that instead of targeting the other 98% held in the form of real estate, gold and jewellery and financial instruments, to rid the country of black wealth, Modi should characterise demonetisation which can at most neutralise 2% of the accumulated black wealth as a great epoch making strike against it. Especially since Rs 500 and Rs 2000 notes are being reintroduced and so there will once again be accumulation of black money since the process of such accumulation has not been rooted out. Instead a much more effective strike and one that would not only root out black money but also yield substantial revenues to the Government would have been to vigorously track real estate and gold and jewellery holdings and trace out bank accounts and financial instruments that have not been declared. The huge human power being deployed in managing the demonetisation could have been better deployed in this tracking operation. 

The need for grandstanding through a sudden dramatic announcement and the maintaining of secrecy to ensure that even this paltry 2% is neutralised, meant that no elaborate preparations could be made to immediately replace the cash that was to be suddenly demonetised. This has subsequently resulted in a tragedy of gargantuan proportions, which is still unfolding, that will set back the economy seriously in the near future. Production and trade have fallen drastically due to the lack of cash and daily wage labourers who constitute a bulk of the labour force have been temporarily laid off. The huge unbanked population is all at sea without cash and have even cut down on their already minimal consumption. Desperate measures are being taken now to salvage the situation, with the latest being an amendment to the Income Tax Act that says that only 50% of the declared black money will be taxed. This is another red herring that will not yield anything. The recent tax declaration scheme resulted in the declaration of only Rs 64,000 crores which is just 0.16% of the total black money and it is unlikely that the proportion will go up now. Simply because tax evaders are habitual offenders and will be loathe to declare their sources of income while coming clean, as it will lead to future black incomes drying up.  Another measure is the urging of people to open bank accounts and use mobile phones to transact business instead of using cash. When the banking system has already been paralysed by the huge work of replacing the demonetised cash, it is nothing short of Quixotic to expect it to engage itself in opening bank accounts for the poor which are anyway an unprofitable exercise. Mobile telephony on the other hand cannot properly provide its basic service of voice and data connectivity and so it is a great leap of faith to think that it will be able to suddenly become able to handle a huge increase in mobile banking transactions. This should have been put in place through trial over a period of a year at least before the demonetisation. Thus this too is yet another red herring. 
Finally there is the huge cost of the whole exercise which is much greater than the benefits in terms of black money and counterfeit currency neutralised. Initial estimates are that the GDP will take a hit of about 2%  due to the decrease in economic activity which is a loss of Rs 3 lakh crores to the economy and the Government will lose revenue to the tune of Rs 50,000 crores as a result of lesser tax collection. Though it is being touted that the Government will get a greater dividend from the Reserve Bank due to the net reduction in currency liability from the demonetisation, this will not be much due to the higher expenses incurred in managing the fallout of the demonetisation which is increasing every day in the form of various concessions having to be offered and the overtime having to be paid to bank staff. The banking system is in complete disarray handling the cash disbursal and not much other work is getting done.

One would have expected an economist of Manmohan Singh's stature who has been both a Governor of the Reserve Bank and a finance minister, to lay out in more detail how the demonetisation exercise is a red herring when he spoke in parliament.  But since he, like Prime Minister Modi, is not interested in really tackling the menace of black wealth, he ended up mouthing meaningless rhetoric and terming the demonetisation process to be legalised plunder and organised loot without elaborating on why it is so.

Marx once wrote, referring to the usurpation of democratic power in a coup and the becoming of emperor by Napoleon Bonaparte in France in 1804 and later his nephew Louis Napoleon in 1852, "history repeats itself first as tragedy, second as farce"!! In the present case of demonetisation, Prime Minster Modi has gone one better than the Napoleons by simultaneously enacting a tragedy and a farce!!!