Friday, December 9, 2016

In defence of demonetization

Ramachandra Guha says that history can be written only after at least 30 years have gone by since the event. A 30-year gap is required to digest the impacts of events and acquire the maturity to view the events with the objectivity of a historian. On a similar note, I have been waiting for a 30-day gap before writing on the demonetization move announced by our PM Mr. Narendra Modi. Either that or one of the world's leading proponents of the Art of Procrastination was at it again. Depending on which version you believe, I may or may not have an Oil well to sell to you.

I do not have the burden of being a salary-earning analyst here who has to plan where exactly to sit on the fence. So, let me get straight to the point - I am a fan. I did not vote for Mr. Narendra Modi. I have been underwhelmed by the governance thus far. I have railed against Mr. Jaitley's Economics and been critical of the government's incessant desire to spin everything. But on this move, I am completely with Mr. Narendra Modi and his team. Hell, if they pull off this battle against Corruption I will campaign for them in the next election.

I have spoken to quite a few people on this and not one has faced any serious personal hardship because of demonetization. My sample space is limited to Chennai (although it was across socio-economic strata). Some of the criticism has been absurd and so I have taken it upon myself to rebut them.

Absurd point number 1: Cash is only a small part of the black money problem. So this wont solve the problem
Of course this demonetization will not completely solve the problem. The corruption problem in India is pervasive, it exists in every pore of the Economy. It is so bad in some parts of the system that we have come to internalize it. No single measure can tackle corruption or black money completely. To give an analogy, demonetization is similar to a 200-kg man saying that in a bid to become healthy, he will stop eating sweets. We all know that merely sacrificing sweets is not enough to go from 200 kgs to 80 kgs. But it is better than doing nothing and if he pulls this off and goes to even 180 kgs, there is a chance that he might go further down and do something more as well.

On the face of it, it looks like cash forms a small proportion of the black money problem. But cash remains absolutely critical to the black economy. If demonetisation can cause a mild aversion to hoarding money and take all honest citizens to a more heavily-digital financial world, that will have a role in reducing cash pile in the Economy. If real estate magnates and jewelry business owners start worrying even mildly about the cash they are holding, the trickle-down from this could be huge. And even if it were indeed a small part of the problem, what is the downside to tackling it?

India's opposition politicians have been surprised by this and are therefore reflexively criticizing it. The worst offenders have been Mr. Kejriwal and Mamta Bannerjee & Derek O Brien. Apparently, Nitish Kumar said that it was a good move. Hat-tip to Nitish if indeed this is true.

Absurd point number 2: The really rich will get away anyway
So be it. Let the Mukesh Ambanis of the world not be affected by it. If the corrupt Traffic constables, and unethical Tahsildars of the nation get thwacked by this, that is enough good news. This giant rung of petty-corrupt fellows are the ones that feed into the cesspool of large-scale corruption. We kill this little fish or at least do enough to scare them, the big fish will get choked sooner or later. The  big fish desperately need the little fish to be around to survive and to strangle the system.

This could be our broken windows moment
In the 90s, the crime-rate in NewYork was brought down by tough policing introduced by the Mayor.

The most prominent of his policy changes was the aggressive policing of lower-level crimes, a policy which has been dubbed the "broken windows" approach to law enforcement. In this view, small disorders lead to larger ones and perhaps even to crime. As Mr. Guiliani told the press in 1998, "Obviously murder and graffiti are two vastly different crimes. But they are part of the same continuum, and a climate that tolerates one is more likely to tolerate the other." 

The broken windows theory is a criminological theory of the norm-setting and signaling effect of urban disorder and vandalism on additional crime and anti-social behavior. The theory states that maintaining and monitoring urban environments to prevent small crimes such as vandalism, public drinking, and toll-jumping helps to create an atmosphere of order and lawfulness, thereby preventing more serious crimes from happening.

Let the really rich get away now. But if the small fry whom we have all been tacitly endorsing are trampled, the really rich will slowly feel the squeeze as well.

Absurd point 3: The idea is good, the implementation has been poor.
The banking system has collected more than Rs. 10 lakh crores in old notes. They have printed more than Rs. 4 lakh crores in new currency. Take a 20-second break, write down these numbers and count the zeroes. Our banking system has stepped up wonderfully well.

Demonetization could not have been planned through over years. Our system is notoriously, undeniably leaky. And for a measure like this, the elements of shock and surprise are very vital. The government could not have setup a sub-committee to take 6 months and analyze all possible repercussions before launching this scheme. The team took a leap of faith and for large parts we have been alright.

On the implementation front, the tweaks in the digital world have been amazing. I wont bore you with the details ( I do not know most of them), but will leave you with one amazing point. If you want to transfer money to a villager and he and you both do not know the bank account details, you can transfer money with an App if you merely know his Adhaar card number. If he does not have a bank account, his Aadhar card will be used to create his bank account and the money can still be transferred. Most of this can be done with non-smart phones as well.

Personally, I think the government has deliberately made cash transactions inconvenient in order to force people to build digital infrastructure. Over the long-run, this could be immense

Absurd point 4: I am ok with all this. But the poor in the Country are suffering
This peeve is personal and I have very little data to back this. I think that most people who are making the above claim are the ones who probably do not really know poor people. These comments are made by the armchair Economists who probably do not know how many kids their maid has. These are the people who have no clue about how poor people live. The poor stand in the queue for everything. Standing in queue where the rich are also made to stand in queue is empowering, not demeaning. Most of the less well-off that I have spoken to have very little to complain regarding this. They have brushed aside the inconvenience in a way we rich morons have not been able to. They have accepted payments in old Rs. 500 and Rs. 1000 notes and slipped into a trust-based economy with friendly neighbourhood shops.

I am not trivializing the loss of those who have lost jobs/pay. For the poor, loss of pay for a month can mean poverty for a year. That is a serious problem that we all need to do something to offset.

Schadenfreude matters
For all the suffering the less well-off have gone through there is an aspect of this move that promises more suffering for the corrupt that has been gratifying. Merely imagining a the plight of a college vice chancellor who has Rs. 10 crores stashed in his farm house can make the 20 minute wait in the queue fun. The rich has sought the poor to deposit its own cash into the system. This alters the terms of transaction between India's monied class and the 'other' class, at least temporarily. I am hoping like mad that at least some change will be permanent.

So, what should we do now?
What is the joy in writing a long article if it cannot be followed up with Recommendations. We will definitely have a list of Recos. I am just glad that my recommendations do not have the words Buy, Sell or Hold in them. :-)

First up, have some faith

We have been conned by lesser proposals for many years. Not too long ago, we had a central minister coming on national television and saying that the 2G scam loss was 'notional'. We have had scam after scam affecting our daily life. We have often sat up in despair and craved for something, anything to reduce corruption in our Country. We have fantasized about being the real-life 'Indian' or 'Hindustani'. When something real comes along, we immediately start our Doubting Thomas act. Our Prime Minister has asked for our patience for 50 days. Give it to him. Give it to him rather generously.

If you are still a skeptic, act as if you are hopeful for a while.

Act as if ye have faith and faith shall be given to you. Put it another way, fake it till you make it - Leo McGarry, West Wing

Then, be a friend of the new

In many ways, the work of a critic is easy. We risk very little, yet enjoy a position over those who offer up their work and their selves to our judgment. We thrive on negative criticism, which is fun to write and to read. But the bitter truth we critics must face, is that in the grand scheme of things, the average piece of junk is probably more meaningful than our criticism designating it so. But there are times when a critic truly risks something, and that is in the discovery and defense of the *new*. The world is often unkind to new talent, new creations. The new needs friends. Last night, I experienced something new..... (Go on, Google this)

As I said before, the banking system has transacted give or take Rs, 15 lack crores in 4 weeks. Thats a staggering amount. Marvel at that, feel glad that as a Country we dared to go into this brave new territory, cherish the notion that there might be more where this came from and be a friend of this new. For all his bravado, our Prime Minister probably needs this boost from public opinion and approval to take the fight till the end. On corruption-fighting, give him the benefit of doubt. God knows we need all possible measures to combat this beast.

Talk of the next wave

Real Estate is next, immediately after that is Jewelry business post which we will go after Educational institutions and then government services. All in the next 18 months. Let us talk about the possibilities. One massive advantage of having gone for something out-of-the-box and unconventional first up is the fact that every other move now seems mild in comparison. For the team that pulled of demonetization in 7 weeks, ensuring that Jewelry purchases get accompanied by Pancard details seems like a piffling matter. Merely the environment of fear might compel some of our more brazen brethren to dial things down. And before we know it, we might be close to the tipping point. 

So, if you have heard of the move of tracking 2000 rupee notes with nanotechnology that seems patently like cooked up pseudo-science, pass it on :-) I personally think that the Rs. 2000 notes and the Rs. 500 notes have been printed on such poor quality paper only because the government already has put in place a plan to chuck these out and get new currency in 4 years' time. (Wink, wink!)

If we can go even two steps towards believing that the system can be corruption-free, we might scare some of the behemoths off. Once we remove the brazenness from the system, combating the underlying might be far easier. The second biggest problem facing our Country is corruption. (The biggest was, is and will be the quality of our Primary education). Let us give a confidence boost to the measures the government takes to combat this. 


  1. hmmm... I think the implementation is not well thought out. They have not provided a way to deposit money for people living abroad. You either have to physically travel to India and deposit the money or give it to someone who is travelling there. Here in the USA, none of the banks would take the old currency.

  2. I really like and appreciate your article post.Really looking forward to read more. Fantastic.checkout the Countries other than India ever had Demonetization of their currency notes

  3. Loved your article as always! But long time no article !!! Please write soon !