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Modi’s ‘Great Demonetisation Plan’ is decidedly a gutsy, risky decision taken with the intention of forcing Black Money into the ‘system’. Whether it has yielded results or not, it has definitely created a lot of hype and noise and has exposed the shallowness of thought among those who claim to represent us. I do not find much of the analysis — praise, or criticism of the move — particularly meaningful.
It definitely isn’t a ‘surgical strike’. Nor is it the bravest decision in Indian Politics since 1991. I find myself questioning the costs, the risks and the benefits which would justify this adventure. Boldness and decisiveness are wonderful leadership traits, but they need to be balanced by prudence and judgement too.
We are used to hearing phrases like this: ‘If all black money is brought into the system, India will be an economic superpower’. With all due respect, that is utter nonsense.
I found much of the criticism of the PM’s move strange. There were those who said that the move would “dramatically affect the lives of poor traders”, because “banks were closed and cash was restricted for a few days”. But this is hardly cataclysmic or life-threatening.
We are told that black money is bad for the nation. Leaving all morality aside, and in purely economic terms, it isn’t. It is bad for the Treasury. The Treasury & the Nation aren’t one and the same. Governments should be primarily concerned with making their people richer, and not with embellishing the exchequer. If you think about this in purely economic terms, taxation adds inefficiency to pure economics. If all money is ‘White’ then the economic inefficiency of taxation is all-pervading. Some scholars of theoretical economics actually make a strong case for abolishing taxes. But we aren’t discussing theory or purely theoretical models here. So lets look at this in more practical terms.
Taxes make things more expensive. When products are more expensive, the broad rule (and this is borne out in practice as well) is that consumption drops. So we can expect some drop in consumption, if black money does, in fact, reduce. Those goods and services which have traditionally operated through ‘black’ channels will suffer. The official figures and statistics may show an increase because some of the consumption from the ‘black’ economy, whose figures are unknown will have moved over to the ‘white’ economy, but make no mistake, there will be a drop in real consumption. This drop in consumption could be compensated for by an increase in consumption if the government decides to lower taxes of other goods they have been earning tax on which have until now been operating in ‘black’ channels.
The greater the amount of black money floating around, the greater will be the tax burden on those who pay taxes. Eradication of black money lessens the burden on those who pay taxes. Of course, the underlying assumption here is that the government would use the additional revenue from the bad guys to bring down tax rates for everyone, or spend the additional revenue on something beneficial for everyone — in this best-case scenario, the bad guys fund benefits and tax-cuts.
The good guys either pay less than they were paying before or get more benefits for the same amount of tax that they were paying before, while the bad guys, who were earlier paying no taxes and enjoying government-provided benefits, now have to start paying. The nation consists of both good guys and bad guys. While it gives us immense moral satisfaction when the good guys get a break and the bad guys have to pay their share, we must remember that the nation truly ‘develops’ only when everyone gets richer, not when wealth is more fairly distributed (and therein, in a nutshell, is the reason for the collapse of pure communism).
Thus, if the good guys enjoy benefits/tax cuts funded by the bad guys, it is, to borrow an often-misunderstood phrase, a zero-sum game of wealth-redistribution. That is, the existing wealth just gets redistributed, but actual wealth-generation is not augmented.
That may or may not actually happen. The government could just decide to use the extra money from this exercise to build more airports that no one uses (to cite just one example of wasteful expenditure). In which case, the bad guys pay more than they used to, the good guys pay just as much as they used to, and we now have airports that we’re never going to use. In fact, unless we know for a fact that the government will spend the money more productively and usefully than individuals would, it can be argued that increased revenue for the government would only be wasted on stuff we don’t need, executed with kickbacks all the way.
No government can claim an impeccable record here, although some governments have better records than others. (Under the UPA government for example, 25 such ‘ghost’ airports were developed at considerable cost and with no real benefit to anyone). So, giving more money to the nation’s most inefficient spender (the government itself), may actually not benefit anyone. Figuring out a smart way to get more money for the treasury is only half the battle; the real trick is in figuring out how best to spend the extra money raised.
There are some real benefits in reducing the levels of ‘black money’. Reduction in ‘black money’ also reduces the fiscal pressure on the exchequer. The deficit is narrower. The mint prints fewer notes. There are already reports of bags and bags of currency notes being burned, dumped or set afloat in the Ganges. When there are only a finite number of notes, and some notes are destroyed, then the value or purchasing power of each note goes up. Prices come down. Inflation is more under control. Controlled inflation is good for everyone. India’s credit rating improves as a result ( achche din or happy days) and consequently, it makes India a more favourable destination for investment (even happier days). All of these factors point to long-term prosperity, and can potentially make India richer as a whole. While it does help to reduce the levels of black money floating around, all of these happy developments don’t depend on the eradication of unaccounted-for cash alone.
Another potential benefit of mopping up unaccounted-for cash is that it dries up much of the financing of crime. Most criminal activity is funded through black money. Reduction in black money makes it technically easier to trace terrorist activity because it makes the money trail more visible. I’m sure the more organised criminal organisations will find a way around it, but anything that makes life harder for criminals to conduct business is good for law-abiding folk.
I found much of the criticism of the PM’s move strange. There were those who said that the move would “dramatically affect the lives of poor traders”, because “banks were closed and cash was restricted for a few days”. There is some merit to the argument because while most consumption can be deferred, some consumption cannot. So, on a larger scale, a day of no-business or less business cannot be made up entirely — albeit to some extent. But this is hardly cataclysmic or life-threatening. Indeed, every holiday or bandh of any sort represents some loss of consumption, because there are lost opportunities to transact business. We’ve been shut down for far sillier reasons in the past, and no one has whispered anything about losses in business.
Another bizarrely-constructed criticism made by a few opposition politicians was in questioning the logic behind the denomination of the proposed notes. I cannot fathom why the denomination of the proposed notes should be an issue at all. You could introduce notes for Rs.750/-, or if the RBI so wished, Rs.1,374/-. It would not make a difference to the principle involved here.
There are those who have criticised the move on the grounds that ‘the crooked will find a way’. I’m sure the smarter crooks will. However, an endeavour to make crooked transactions harder to accomplish is not wasteful activity. It reduces the ease of committing the crime and hence reduces the number of crimes. Security-checks in airports make it harder to hijack a plane. It does not completely eradicate hijackings but reduces them significantly. Firewalls can be hacked. But that is no reason not to design and program strong firewalls for your data. The objective is to make it harder for the crime to be committed or hidden.
There are those who argue that the move doesn’t guarantee that ‘black money’ will not get generated again, over time. They are right. It doesn’t. It does, however, levy a massive one-time penalty on those who have accumulated significant ill-gotten gains. The fact that the government has already done something this drastic once, with such secrecy and suddenness — and can do so again — may prove to be a deterrent for many. Further, if the tax-rates are reduced, compliance will be cheaper and pain-free. A combination of the carrot and the stick could persuade many black-money operators to reform. Whether this reformation will make everyone’s lives better or not is another question.
Whether the economy really comes out ahead or not, or there is a loss of consumption or not, inconvenience or not, Narendra Modi will forever be remembered as the ‘first PM who really attacked black money’. In the mind of the voter, the moral high-ground belongs to Modi.
There are other snide suggestions that the ruling party has already hidden / spent / stashed away its own black money before calling for this ban. In the absence of facts, baseless immature innuendo is good enough for our neta s. Also, equally mystifying is the demand for something to be done about Swiss Bank accounts. Indeed, some Swiss bank accounts do contain wealth acquired by dubious means. And it is a problem. However, it is a different problem. It isn’t as all-pervading or omnipresent as unaccounted-for cash, which I believe deserves more immediate attention.
There is also the suggestion that this move was designed to disarm rival political parties’ black money stash before crucial State elections. If indeed there is merit to that argument, it follows with logical simplicity that these rival parties had less black money than the Bharatiya Janata Party. If the BJP had the most black money and could outspend everyone anyway, why go through all this trouble, and run the risk of losing your competitive advantage? I, for one, am convinced that disarming their rivals’ black money stash wasnt the primary motive behind this move by the government.
The nation as a whole may not really get the fillip that the optimists expect. It is possible that the cost of ‘victory’ over black money and its hoarders may not be worth the prize — a Pyrrhic victory in every sense of the word. There is undeniably a feel-good-factor for educated, salaried, honest people here. For years we’ve been made to feel foolish as tax-evaders, politicians and criminals have grown rich by bending, twisting and breaking the law. For years, we’ve convinced ourselves with promises of a better afterlife and with many mythological story parallels, that the evil cannot truly escape scot-free. There are even those who console themselves by roping in divine surveilance, saying to themselves that the bad guys may have evaded the law “but God is always watching”. There is a sense of satisfaction now, as we watch the bad guys scurry around, trying to protect their ill-gotten gains, trying to escape the closing net of the government. Some of them may manage to find a way. But in the larger scheme of things, that doesn’t matter. We enjoyed watching them scurry.
It feeds our sense of virtuous piety that we stand in long queues to show proof of our own honesty. It appeals to the martyr in every one of us that we are willing to inconvenience ourselves (and it is a serious inconvenience) for ‘the greater good’. And because we are genuinely inconvenienced, we are almost convinced that some good will come of all this. And because of that, the middle-class cheers and hails our PM as someone who champions middle-class morality. Whether the economy really comes out ahead or not, whether there is a loss of consumption or not, inconvenience or not, he will forever be remembered as the ‘first PM who really attacked black money’. In the mind of the voter, the moral high-ground belongs to Modi. Which is why I think that demonetising the economy may be the smartest political decision he’s ever made.
