Friday, January 6, 2017

Modi's Financial Gamble: Did Demonetization Succeed or was it a Failure

A look at the world of politics, statecraft, diplomacy and books

On November 8th 2016, Prime Minister Narendra Modi  announced a slew of measures which amounted to a drastic overhaul of the existing financial structure: The demonetization of the 500 and 1000 rupee notes. The legal basis for this policy is certainly questionable as macro economic policy comes squarely under the jurisdiction of the Reserve Bank of India and the RBI may have been consulted. However, the suddenness of the policy and effective manner in which it was implemented took everyone by surprise. What were the objectives of this measure:

First and foremost the unaccounted wealth, called Black Money in India, was becoming alarming huge. Some estimate that the parallel unaccounted economy was almost as large as the legitimate economy and was getting interfaced with high crime, political crime. Since unaccounted wealth was increasing and the tax paying population of India was extremely small, the Central Government had to find new sources of revenue. The upcoming Seventh Pay Commission would impose a huge financial burden on the economy and the One Rank One Pension introduced by the Modi Government would need a huge outlay. With tax revenue constant and expenditure increasing, the Government had necessarily to widen the tax net. The Finance Ministry under Arun Jaitley had imposed a number of measure, including amnesty for tax dodgers, but very little black money was disgorged. With one fell swoop the parallel economy was laid waste and this is a huge gain for India.

Second, the infrastructure projects needed investments and the flow of investment into India by way of foreign investment is not all that encouraging. A number of important projects like the High Speed Railway projects, the Sagar mala por project, the National Highway Scheme need funds and one way of freeing funds for infrastructural investment is to tap into the huge hordes of illegal wealth trapped within the country. It has been estimated that more than 250 lakh crores has now been freed and has flowed into the banking system. The Government wisely allowed hoarders of black money to deposit their illegal wealth in the banks and many did so thinking that once the banks have received the cash, black money is converted to white. Such financial alchemy was not on Modi's mind. The accounts in which monies have been deposited will now be investigated andit is hoped that with the GST rolling out from April this year, the tax base of the Government will also increase as the Government of India has to compensate the loss incurred by the states for a period of 5 years. Therefore, the objective of identifying potential tax payers has also been met.

There has been some criticism, especially the corrupt and criminal dynastic fascist party, the Congress about the demonetization policy. There was a major disruption in the financial sector in the wake of Modi's demonetization. The cash crunch caused a paralysis in the economy. Banks were restricted to a maximum payment of 2,000 rupees per individual. ATMs ran out of cash and many, nearly 59% of the cash machines have not been calibrated  to handle the new 500 and 2000 notes. Even till today cash withdrawal is restricted to 24,000 per account per week. This restriction was sold as an incentive to migrate to a digital economy with e payments and non material payments through credit/debit cards ect. However, the migration to a cashless economy is proving very difficult as internet access and literacy is limited.

The long queues at the banks did lead to needless suffering and at least 140 persons died while standing in bank queues. The opposition raised a hue and cry over this as though the corrupt dynastic fascists have ever been interested in the welfare of people. However, the situation ahs eased and now the queues in the banks is almost nonexistent.

Will this policy yield the desired political benefits. Though there was considerable difficulties, the ordinary India who is tired of the corruption and the venality have applauded the policy of Modi. It is no exaggeration to say that demonetization, though of limited economic success is a resounding political victory