Are obstacles important on the way to our primary goal? Do they shape the goal we finally achieve? For me, both the questions have affirmative answers.

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November 8, 2016, was as normal a day can be for the Indians; except, the following evening was about to redefine the future political & economic course of the nation. If someone had followed the news from the capital, he would have been nothing but anxiously curious after hearing that the most powerful Indian was unexpectedly about to address the nation. That morning PM Modi had met the security leadership and had a Cabinet meeting. One precise guess after such developments would be that the nation is declaring a full-scale war on its enemies. The guess was technically true, though- a war on ‘black money’ had been declared by terming two highest denomination notes in circulation as illegal tender, effective by that midnight. Indian media and political circles were sprung in ‘orgasm’ which lead to interesting debates everywhere; along with many unanswered questions.

Let’s see what exactly was done to the economy that night. PM Modi in that emergency address to the nation declared the INR 500 and INR 1000 notes in circulation as illegal tender. As informed to the Parliament by the Minister of State (MoS) for Finance, the worth of the tenders been declared illegal was a whopping amount of almost 15 lakh crore (USD 210 Billion). As informed by the minister, around 1,716.5 crore notes of 500 and 685.8 crore notes of 1000 were pulled out of the system.

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According to the RBI Annual Report of 15-16 [1], this amount is as huge as 86.4% of the money by value and almost 24% by volume of the money in circulation. For a heavily cash-inclined consuming nation like India, this was a more of a shock than a jerk. A chaos was in the coming.

This wasn’t the first of a kind move in the world and also, it wasn’t the first time for India; so were the reasons given. The reasons given, then, by the Modi Sarkar- which were in line with the demonetizations in 1946, 1978- were more inclined towards curbing terrorism and exposing black money. Mentioning the heavy increase in circulation of 500, 1000 notes the Economic Affairs Secretary stated that these notes were used to fund the terrorist activities. Also, the emphasis was on exposing the untaxed or black money that was hoarded by corrupt people- an election promise. The government then demanded a 50 days timespan to ‘normalize’ the situation of expected chaos. But, were the reasons given the intended ones? Here, the story gets interesting.

Let us go by numbers now. The volume of currency that was demonetized was around 2400 crore units. So in layman terms, by ‘normalize’ he expects this whole volume to be back, legally. As according to the analysis done by Civil Servant from Kerala, James Wilson, the whole volume returning into circulation under rational conditions- if all the four national printing presses were working up to their max capacities- isn’t possible. Secondly, the terrorist activities would surely stop for a while, until they begin working at low rates using lower denomination notes. PM Modi isn’t that illogical to put the working middle class and the rural economy into chaos for a short term solution. So what was the real intention?

 

Let’s discuss the possible medium & long term goals that are packaged in this move. Medium term deliverables can be best guessed by the Arthakranti Proposal.

 

The Arthakranti Proposal

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An economic think-tank based in Pune (Maharashtra), Arthakranti came in the limelight after Nov 8 as the WhatsApp army started mentioning them as the real curator of this move. Their proposal adds much sense to the move. They have proposed India to be a less-cash, tax-less economy, meaning that the least possible amount of cash be in circulation and there should be no taxes in the country whatsoever. This tax-less part can be traced back to the Chanakya’s proposal of a political economy.

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According to the think-tank, the fundamental reason behind the high tax, high inflation, and high-interest rate Indian economy is that the money generated in the economy is hoarded and doesn’t get absorbed down to the poorest of the poor. This proposal tries to eliminate black money with an intention to increase capital accessibility to the poor, generate maximum tax revenue with a secondary intention to eliminate criminal activities, which would logically follow. What they had proposed was that create an Income Declaration Window where everyone would declare and submit their black money in the bank, not to penalize them for that and then, gradually remove all taxes, replacing them by a lateral bank transaction charge. PM Modi redrew this order of implementation. He made India first less-cash or, it wouldn’t be wrong to say cashless in the literal sense for a while. Another solid reason provided by Arthakranti for demonetization was, the needs satisfied by the notes. Gross National Income per capita of India (nominal) is around USD 1500 which is close to INR 300/day per capita. So if an average Indian is earning less than 500 per day who really needs the notes? Is it logical for a nation to make 86% of its money in circulation usable for less than 30% of its population?

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Apart from these notes finding unforgettable sightings in financial trends of criminal funding, this reason is much more plausible than all others.

The goals that this proposal expects to achieve are quite heartwarming. They expect that the windfall in the banks would increase the lending capacity of the banks and the Micro, Small and Medium Enterprises (MSME) sector- which is mostly served by the rural economy- would flourish with the capital funding. The windfall and the increase in lending capacity would decrease the bank interest rates & cheaper funding opportunities would arise in the economy. This is the unexecuted part of the proposal- a complete overhaul of the tax system by replacing the tax system by a GST-style one and only ‘Bank Transaction Tax (BTT)’ to be paid by the parties at the point of transaction. This would drastically increase the ease of doing business, as the tax system would then be simplified. The government revenue would then be directly linked to GDP fluctuations without any intervention or manipulation. Also, according to Dr. Raghuram Rajan, if the complexity of the tax system is generating the black money, this transaction tax would eliminate black money at its roots.

Major takeaways from this proposal are:

  • Less-cash, more bank money economy
  • Removal of all taxes (hence, I-T department).
  • A single bank transaction tax
  • Higher Government Revenue, hence better spending on social issues
  • Decrease in bank lending rates and interest rates
  • Drastic reduction in inflation.

 

Long term Deliverables:

Now let’s get back to the example importance of obstacles as I had stated earlier. Now I would link these obstacles to consumer behavior- behavioral economics. India is a very conservative & restrictive consumer. It is often said that if you can sell in India then you can sell anywhere. Initially painted as an anti-black-money & anti-terrorism move, demonetization now, on a large, is seen as a digital push by the Government. The ‘blitzkrieg’ launched by the digital payments companies after Nov 8, and with now Government’s BHIM app (Bharat Interface for Money) in the field, it’s going undoubtedly that the course of seeing the move has shifted from black money to digitalization. Even the rural market is forced to go digital or cashless in the literal sense due to less availability of cash. What does this mean to the Indian mindset and consumer behavior?

Let us consider this example. I had INR 600 in cash and I wanted to buy a T-shirt worth INR 1000. Before Nov 8, I would have had to go to the bank and remove some extra cash. To underline my laziness, I avoided removing the cash and didn’t buy that shirt. After Nov 8, I would just have to enter some numbers, get the cash in the mobile-wallet and bam- I press the pay button; I now have bought the T-shirt. Simply said- India’s consumption is about to grow multiple folds. Here, the Nov 8 move removed all the obstacles on my path in purchasing the T-shirt. I might have invested it somewhere else, if not for that Tee. In the coming 3-4 generations, India possibly would be a credit-dependent, highly indebted country with high domestic demands.

Another prospect of this move is the rural economy being rejuvenated by the fresh capital influx by the government through its various schemes as announced on Dec 31. This will re-activate & flourish the rural economy, as the country turns into a high-velocity circulation economy with cheaper and more accessible capital.

 

Surely, the Arthakranti Proposal gave a raw outline to the Govt in going less-cash, tax-less but PM Modi loves to mend his own ways– so a politician he is. But national aims of PM Modi and Arthakranti are quite similar- making the poor happier in his own homeland. I think that he’s successfully doing, although the Lutyens is quite against it.

 

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Sigh

 

 

Same post on www.adityaykulkarni.wordpress.com

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