Savings and investment are still dipping. The flight of capital abroad continues unabated.
I listened to Prime Minister Narendra Modi’s New Year’s Eve speech keenly trying to catch a sentence of contrition or assumption of responsibility. There was none. But there was a change of tone. There also was none of his characteristic sneering, distortions of historical record and half-truths. It was as if he had got a new speechwriter, as well as a new speech coach. I have no complaints with that and I hope this style will stay, and the Modi we have been seeing for the past half a decade is gone forever. India now needs a healing touch.
I have no issues with the schemes Modi outlined during his speech. It is necessary that after inflicting such grievous hurt to the economy that he apply not just a palliative balm but effective medicine. But he must ask himself if all this pain was needed at all. All that the government had to do to get money back into banks was to organise a simple and unobtrusive currency exchange. However, I hope the makeover is real and he is more open to consultation and will tell less lies.
A matter of trust
Most of us accept that politicians are often required to tell us half-truths and outright lies. But it is important that the cup does not run over and the trust is not spilled. I hope Modi is not so consumed by hubris to mistake the faith of blind followers for trust of the people? With the Uttar Pradesh Assembly elections around the corner, 2017 will be the year of reckoning for him. The Bharatiya Janata Party has 72 seats in the Lok Sabha from this state now, and if they lose badly here in the state elections, it can say goodbye to 2019.
India has lost about Rs 3 lakh crores of its Gross Domestic Product due to an act of incredible stupidity – demonetisation. The nation has to recover from this self-inflicted injury and make up for lost time and the gigantic financial loss. Millions of lives were disrupted by the loss of jobs and business. It will take some doing to restore the normal flow of everyday life.
The ruling party must start looking anew at the Indians largely ignored so far, particularly the Dalits and Muslims who occupy the bottom rungs of economic classification. The distribution of Automated Teller Machines and Point of Sale machines between regions and within towns and cities tells its own tale of exclusion in this digital age when financial inclusion is a key goal. For instance, only 19% of India’s 215,000 Automated Teller Machines are in rural areas. There are huge inter-regional disparities also. Bihar just has one for every 13,500 persons, while Tamil Nadu has one for every 3,000 persons.
The poor hurt the most
The last two months have showed who actually gets hurt when the government indulges in stupid policy making. The poor and silent majority stood in lines while the wealthy and vocal went about life as usual. The majority just either went hungry or got deeper into debt. To deal with our real problems we require the government to face facts and realities as they are, and not be obsessed with the facts it manufactures. The real challenge for the Modi government is to recover the pre-demonetisation Gross Domestic Product growth trajectory by getting into a faster near-term growth trend.
The essential truth is that what drives our growth is a passing favourable demographic phase. But our rulers since 2000, like the legendary King Canute, think they are ordering the waves. The facts remain as before. Savings and investment are still dipping. The flight of capital abroad continues unabated. More than half of all Indians admit to paying bribes to get even the smallest entitled services and promised benefits. Tax evasion at points of sale and unrecorded transactions are as before.
But the lies have begun again. Finance Minister Arun Jaitely, who can never keep away from the rolling cameras, has proclaimed his version of Mission Accomplished and has announced the beginning of a new age. According to him here is no black money anymore as everything is now locked tight in bank vaults.
Jaitely said that the flow of new cash has largely replaced what was extinguished by the demonetisation exercise. The truth is that the Reserve Bank of India has just about replaced half of the currency taken out in terms of value. The problem is that the vast majority of these new notes are of Rs 2,000 denomination, which only partially mitigates the cashlessness in the economy for the last two months.
This new high-value note is of little use in the market where the quantity of the smaller notes has remained just about as before. The small notes have now acquired a value higher than what is stated on them and the Rs 2,000 note has a much lower preference. What we need is many more Rs 500, Rs 100, Rs 50 and Rs 10 notes.
Jaitley probably doesn’t know that 98% of transactions representing about 68% of value transacted are in cash. If there isn’t enough cash there are other improvised IOUs or more informal credit now filling the gaps.
An enforced cashlessness
People who know better state that it will be many months before the cash gap is bridged. Cashless transactions can reach meaningful levels only when the network grows exponentially and not by forced cashlessness. Change cannot happen without change. It seems like small minds cannot contemplate the centrality of chillar (small change).
After the great cash grab, the government indicates that next on its agenda are benami properties. The fact is that there are relatively few benami properties. Individuals own most properties, buying them with their hard-earned money. But in the frenzied search for true ownership real owners will suffer.
Except for politicians like those who invested in Mumbai’s scam-tainted Adarsh building, wise people with money to hide are loath to invest in properties in the names of others. Such properties seldom go back to the people who paid for them. Owning assets abroad also involves trust. Politicians usually lose much of their untaxed incomes to people entrusted with managing their money. Who is flying with the late Bharatiya Janata Party leader Pramod Mahajan’s money now?
According to the non-profit Global Financial Integrity, India has exported an average of $46 billion each year for the past decade. The important takeaway here is that money gone abroad is money gone away and the only way you get it to return is by investment. This can be best done by speedily improving the ease of doing business in India. But this week’s news is that the government is contemplating shutting down the Mauritius and Singapore routes. In this case the money will just go elsewhere.
Like the concept behind weight-loss inducing bariatric surgery, Jaitely probably believes the national economy can also be forcibly habituated to less cash by stitching up its gut. It does not work that way. There is more to governance than just cash, lies and sound bytes.