Politicization of economic issues is an accepted rule of the game in Indian polity. But no government ever tried to politicize an economic policy measure to create mass hysteria as it is being done by the Prime Minister in the present case of demonetization of high value notes in India, says Amit Dasgupta.
From the evening of November 8, 2016, the nation has been moving on its way to become a dynamic and vibrant economy free of black money. For the next seventeen months (this period was not mentioned in the PM’s speech on the 8th but added later in other version) this heroic struggle will be on to rejuvenate the Indian economy. So, people of the country have to withstand some difficulty for the next 50 days, up to 30th December, 2016 (It is not known what will be the role of the common man between that day and 17 months mentioned by our revered PM). That is what was stated by our Prime Minister Narendrabhai Damodarbhai Modi.
Black economy or parallel economy is a subject matter of discussion since long. Articles and books were written and deliberated, commissions or committees were formed to counter the menace of black economy. Measures were taken to curb black money. But those failed to deter black economy which usually thrives on the triad of industrialists-politicians-bureaucrats. Whatsoever may be the impact of black economy in India, it has often been appropriated as a political weapon by the opposition party during elections. The BJP, and its leader Mr Modi brought in the context of black economy in his flamboyant speeches and stated that by unearthing black economy each citizen of India would be credited Rs 15 lakh each in their bank accounts. Even if we consider 200 million households in India, it would have required 30 trillion rupees which was almost two and a half times of the GDP of the Country. One-fourth of the electorate who voted for BJP did not even ask their messiah about the volume. Such politicization of economic issues is an accepted rule of the game in Indian polity. But no government ever tried to politicize an economic policy measure to create mass hysteria as it is being done by the Prime Minister in the present case of demonetization of high value notes in India.
Black money or parallel economy is obviously an economic concept and the measure against it would obviously be an economic one. Different economic policy measures are initiated across countries to counter unemployment, reducing or eradicating poverty, industrial development, development of agriculture, reducing inflation, maintaining balance between exports and imports, inviting foreign investments so on and so forth. These measures are called macroeconomic policy measures. Impact of these policy measures is usually complex and cannot be easily termed as good or bad. Similarly, it is not that even real action against black money or black economy would hit only the hoarders of black money or black economy. As it may have far reaching impact, there cannot be any logic in the survey of popular opinion on the effectiveness of such a policy measure. No economic policy measure should be placed as gimmick before the people. But that is what has been done in the present case of demonetization of high value currency. The Prime Minister bypassed all norms and conventions in announcing the cessation of legal tender status of 500 and 1000 rupee notes from the midnight of November 8, 2016. Since that announcement, the followers of Modi and RSS have started cheering up the move. If the Government wants to garner support of a large section of the population in favour of an economic policy measure through gimmick, the policy loses its character and becomes a politically motivated policy measure. Present demonitisation is an example of such politically motivated measure. So, cancellation of high value currencies should be looked into much more from its political impact than from an economic angle.Whatsoever may be the impact of black economy in India, it has often been appropriated as a political weapon by the opposition party during elections. The BJP, and its leader Mr Modi brought in the context of black economy in his flamboyant speeches and stated that by unearthing black economy each citizen of India would be credited Rs 15 lakh each in their bank accounts.
Gross Domestic Product (GDP) of our country is around 140 lakh crore rupees. There cannot be an exact estimate of the volume of black economy in the country as those are not reported income. It is estimated that black economy may be anywhere between 25 to 50 percent of the GDP. Thus black economy is valued between 35 lakh crore and 70 crore rupees. On an average, we may take it as 50 lakh crore rupees. It needs to be noted that black economy or black money does not a stock of currency notes- it is income undisclosed to tax authority, continuously accumulating. Therefore, eradication of black economy needs not only cancellation of high value currencies, but also rooting out the source of black economy-the parallel economic activities. Moreover, a small portion of black economy exists in the form of currency notes. It may exist in 4 broad forms: currency notes, in foreign assets, in foreign exchange within the country and in land, gold etc in the country. Among these four forms, as inflation reduces the value of domestic currency, a small portion of the black money takes the form of currency notes. It is estimated that 4- 6 percent of black money is in currency notes. Thus black money in the form of currency notes is estimated about two and a half lakh crore rupees. Before demonetization value 500 and 1000 rupees notes in circulation formed approximately fourteen and a half lakh crore rupees. Therefore, because of demonetization, currency notes worth two and a half lakh crore rupees may be cancelled. Prime Minister has been continuously referring to fake notes, which would be destroyed as a result of demonetization and insisting that terrorist activities are based on fake notes. But it is estimated that the fake notes may amount to four hundred crore rupees, which is only .02% of the total currency notes in circulation. So, fake notes can only be a very marginal fraction of cancelled notes.
Parallel economy exists in almost every economy. Parallel economy depends on the volume of unorganized sector of a country. More the volume of unorganized sector is, more will be the volume of the parallel economy. For example, as a large portion of the construction activities are in the unorganized sector, whatever a labour contractor may earn, only a small portion will be disclosed as different taxes and statutory liabilities like PF etc would be tried to be avoided. This will occur even in the case of a Tata housing project. Unorganised sector in India is so extensive that 93% of the work force constitutes that sector. Not only that, though parallel in nature, it provides the economy a flexible firmness. Street food beside new secretariat in Kolkata is healthy and cheap and if those be brought under the tax umbrella, the price of such food would cease to be affordable for consumers.. Thus, such food vendors, though unlicensed, have been providing a support to the economic activities in Kolkata. If the business of hawkers in the railway compartments be brought under the purview of tax by bringing in Meals on Wheels of IRCTC, though there may be a reduction in parallel economic activities, the economic structure of the country would be destroyed. That is being pursued in the name of fight against black money.It needs to be noted that black economy or black money does not a stock of currency notes- it is income undisclosed to tax authority, continuously accumulating. Therefore, eradication of black economy needs not only cancellation of high value currencies, but also rooting out the source of black economy-the parallel economic activities.
If the business of hawkers in the railway compartments be brought under the purview of tax by bringing in Meals on Wheels of IRCTC, though there may be a reduction in parallel economic activities, the economic structure of the country would be destroyed.
The other portion of the black economy, where most of the wealth and income are accumulated, consists of black economic activities of the riches, which is a process of making riches further rich. It has been the prerogative of the riches to increase their assets by domestic or foreign economic transactions and not to pay taxes on income. If some assets get involved in parallel economy, it is difficult to bring those out in the open economy. So, it continually got engrossed into the black economy. As stated earlier, a small portion of it is retained in cash, rest takes the form of Share, Jewelry, Real Estate, Paintings, Antics etc. As black economy stands at 30 to 50 percent of GDP, 30 to 50 percent of the disclosed income and assets of the riches are in black money. But it is very difficult to locate those black income from among the huge assets of theirs. Not only that, the triad of Industrialists, Politicians and Bureaucrats formed the base of black economy. As a result, small promoters, traders, lawyers, doctors, coaching centre operators become vulnerable due to demonetization. As the neighbours saw them groomed in terms of money, they felt that they are ignored because of their richness-so they felt happy about their trouble for money holdings. And here comes the political objective of the ruler. BJP and the Government know that it is not beneficial for them to destroy the parallel black economy. They know that for election funding, such black money is essential. Otherwise, who will pay for that thousands of crores of the election funds? It is an opportune moment now to remind that the ruling party spent an estimated amount of more than ten thousand crore during the last parliamentary election. And BJP is also aware that if the jealousy of people towards the accumulated black wealth of the neighbours be indulged, then the BJP may garner huge support in the ensuing election. None of the supporters of demonetisation affirmed that this move would reduce corruption, poverty, unemployment, prices of commodities, etc. But they were favouring this ‘brave, step as they think that this will reduce the false pride of the neighbour. Modi has been trying to convert this jealousy based popularity in to electoral capital. Also Modi tried to divert attention of the masses from the real life problems like unemployment, inflation etc for which no solution is available to the ruling party. UP election has also been round the corner, where BJP created fund problem for Samajwadi Party, Bahujan Samaj Party and Congress by the sudden announcement of demonetisation while keeping themselves prepared through insider knowledge. Whatever may be the campaign on confidentiality, it is gradually revealed how the ruling party and its compatriots were aware of demonetisation days back. Apart from UP, in Punjab election Aam Aadmi Party has been breathing on the neck of Akali-BJP combine on the issue of corruption. This mock fight against black economy is supposed to weaken the poll prospect of AAP. Modi has also added the issue of water scarcity in the state by raising his voice against water treaty with Pakistan.
It is an opportune moment now to remind that the ruling party spent an estimated amount of more than ten thousand crore during the last parliamentary election. And BJP is also aware that if the jealousy of people towards the accumulated black wealth of the neighbours be indulged, then the BJP may garner huge support in the ensuing election.
If the parallel economy of India can be entirely got rid of, the lives of low income people of the country, which consists the majority of the population, will be adversely affected. Thus, any effort to change this fabric of the system of the country is obviously anti people. This Government has been trying this time and again. This ruling party is utterly lire. In almost all aspects of social or economic consequences like GST, AADHAR, DBTL, FDI in Retails, Demonetisation, it has lost face. Now it has been trying to reduce the volume of unorganized retail by bringing in PayTM, electronic wallet, debit card, credit card, online banking, online shopping etc. They had such an intention behind demonetization by forcing people to resort to e-shopping by reducing the supply of cash. It is not only that people are harassed by long queues outside banks and ATM-s, they have been forced to get into the habit of electronic transaction. If a large section be included in e transactions by using this opportunity, a considerable portion of the market may get out of the small retailers. Though it may increase tax mobilization and may bring in fiscal advantage, but the lives of people working there will be endangered.
At the time of the announcement of demonetization, there were around 17.5 lakh crore rupees in circulation. Of which, it is understood that 84-86% was in high value (Rs 500 and Rs 1000) notes. The number of high value notes in circulation was around 2250 crore. Suddenly, in an economy, where almost 65%-70% transactions were made in cash, 86% cash went out of circulation. Before demonetization, the ratio among Rs 100, Rs 500 and Rs 100 notes was about 1:2:3. Even if enough Rs 2000 notes be put into circulation, the ratio between Rs 2000 notes and Rs 100 notes would become 1:4. No one knows what the government policy of circulation of notes is. Even if all efforts are combined together, it will require at least another 6 months replenishing the stock of cash in the economy up to 80 percent of what it was there before demonetization. Assuming that two and a half lakh crore rupees would permanently go out of circulation and need not be replaced, an economy having active cash worth Rs 15 lakh crore was left with legal notes worth Rs 3 lakh crore only. It was impossible to support the same value of cash transaction by 20 percent available notes. As a result, entire cash based transactions which are mainly small economic transactions have been heavily affected. Not only that, as new notes of 2000 rupees were introduced, apparently cash supply increased, but in reality it was almost of no use as exchangeable 100 rupee notes were scarce. All these together created huge chaos in the cash based economy, which in turn got carried over to the non cash sector. No one knows when normalcy will be restored. The predicament of an entire nation has been aggravating as days pass.This Government has been trying this time and again. This ruling party is utterly lire. In almost all aspects of social or economic consequences like GST, AADHAR, DBTL, FDI in Retails, Demonetisation, it had lost face. Now it has been trying to reduce the volume of unorganized retail by bringing in PayTM, electronic wallet, debit card, credit card, online banking, online shopping etc.
Even if all efforts are combined together, it will require at least another 6 months replenishing the stock of cash in the economy up to 80 percent of what it was there before demonetization.
Because of demonetisation, and reduction in supply of cash, deposit in the banking sector would increase, maybe by 5-7 lakh crore rupees. Again, one must keep in mind that these deposits are forcibly taken out from the people, which is obviously undemocratic. As NPAs of banks have been continuously on the rise, the Indian Banks have been facing liquidity crisis. Banks could come out of such crisis through huge difficulties inflicted upon the masses. Industrialists like Ambani, Adani or Mallya’s liabilities have been shouldered by the common people and the banks have been bailed out. State Bank of India reported 35% profit reduction in the 2nd quarter of the current financial. RBI’s liability would be reduced if cancelled currencies do not enter the banking system. As estimated earlier, around 2.5 lakh crore rupees may go out of circulation. So , profit of RBI would increase. Government would get a higher dividend. Non tax revenue would increase. Government’s fiscal position improves. But this is a one time affair. On the other hand, as the banks are flush of fund, they would be eager to lend. Interest rates would be reduced. So, senior citizens and retirees would get lower interest on their savings and would be asked to bear the burden for the growth of the nation. As rate of interest decreases, Share price would start increasing. Speculators would earn money from speculating on shares. Share Price will shoot up. Speculators would start adding to their black money. As money supply is reduced, the rate of inflation may decrease. But there won’t be any reduction in the prices of food grain and other necessities as their demand is inelastic.
As availability of cash has been reduced, and as people have been facing severe cash crunch to sustain their daily living, the PM and his associates have come up with the prescription of using plastic money and digital money in the forms of debit/credit cards, e-wallet (like PayTM which uses PM as its advertisement model). As the government became clueless how to deal with the situation, it has started trying to utilize the chaotic situation to promote the interest of the digital money companies. It started campaigning that by bringing every citizen in the digital transaction mode, transparency of financial transaction would be ensured. Thus, black economy would cease to exist. It has forgotten that a large portion of rural economy is outside the ambit of the banking system as banks are nor accessible to such villagers. And commercial logic goes against opening up of a bank branch in such localities. Thus, inclusion of people in the banking system is a distant dream. Secondly, doing away with cash economy does not necessarily means getting rid of black economy or corruption. For example, despite the existence of non cash transaction at a very high level, Somalia is one of the most lawless countries in the world. Thirdly, such a huge population, one third of which are illiterate, cannot be overnight transformed into a tech savvy mass. Thus, making Indian people digital is another gimmick spread by our PM. But there is method in his madness. He has been taking measures to make his client comfortably rich. Cash scarcity will push quite a substantial portion of the population, who was otherwise reluctant to join the system, into digital transaction. So, the business interest of the client is served.Banks could come out of such crisis through huge difficulties inflicted upon the masses. Industrialists like Ambani, Adani or Mallya’s liabilities have been shouldered by the common people and the banks have been bailed out.
Doing away with cash economy does not necessarily means getting rid of black economy or corruption. For example, despite the existence of non cash transaction at a very high level, Somalia is one of the most lawless countries in the world.
Last, but the most important point is that ruling BJP has been trying to gain popularity by this measure. The initial euphoria of the people suggests that ruling Party has been successful in motivating electorate in the first round. If it succeeds ultimately and wins UP and Punjab elections, it would gain majority in the Upper House of the Parliament in turn and would possess the power to amend constitution. RSS’s objective of converting India into a Hindu Rashtra will not be as unrealistic as it sounds now. Since, it is impossible to throw away 18 crore plus Muslims to some other territory, either there will be another partition, or a permanent rift with its one sixth citizens. For ensuring such a win, communal riots will be planned, so that Dalits vote against Muslims Then attack on Dalits, women, democracy, minority and rationality.
If it ultimately succeeds and wins the UP and Punjab elections, it would gain majority in the Upper House of the Parliament in turn and would possess the power to amend constitution.
Image via http://blogs.wsj.com/
