Dear PM Modi, Demonetisation Worked But Could Have Spared the Poor

PM Modi’s audacious move to demonetise could have easily avoided causing hassle to the poor, writes Raghav Bahl.

(This column was originally published on November 11 2016. It has been republished from The Quint’s archives after RBI’s annual report showed nearly 99 percent of demonetised currency has made its way into the banking system.)

All Sound, Little Impact?

• A four-hour notice period led to unnecessary hurdles for citizens
  
• A longer ‘notice period’could have boosted India’s GDP
  
• Black money hoarders always find new ‘ínnovative’ ways to convert the money into white
  
• Conversion of black money into white will only lead to more corruption

I am utterly, totally confused and frustrated. Why would a prime minister take an audacious gamble to de-legalise 86 percent of his own currency, but then convert a potential brahmastra into a cruel, sputtering half-measure?

Why would he heap incalculable hardship on marginal/middle income earners, who should have been the biggest beneficiaries of his surgical strike on illegal cash hoarders? Think of the maid who had saved Rs 5,000 in five currency notes to send to her ailing parents. She has a Jan Dhan account which she has never operated. She is panicking because she believes rumours that this pinkish red paper is worthless. Her shopkeeper ‘friend’ comes to her ‘rescue’ by giving her Rs 500 in five currency notes as a ‘favour’.

Also Read: 99% of Demonetised Notes Back in Banking System: RBI Annual Report

And off the shopkeeper goes to the bank with his windfall gain of Rs 4,500 captured in her “tainted” notes. Now think of the milk-seller who could not pay his principal supplier and had to go without his daily wage. Or the poor farmer who carried his wife for a life-saving Caesarean to Chennai, but could not pay for her admission?

Let me now save you a million such horror stories.

Cruel Four-Hour Ultimatum

My real point is simple – the demonetisation was bold, surgical, audacious (I am just repeating my adjectives for impact!). But why were simple, ordinary folk in India's sprawling informal economy given only four hours before their cash savings were wiped out? What was the need to give them this ultimatum? Couldn't we have just said that:

* Effective the midnight of 31 December 2016, Rs 500 and Rs 1,000 notes will cease to be legal tender.

* Beginning today, banks/ATMs will stop issuing these notes, although you will be free to deposit them in a bank account with full supporting documentation.

* You can continue to do normal transactions with these Rs 500/1,000 notes until the last day. On 1 January 2017, new notes in several other denominations will be issued by banks/ATMs.

That’s it. Simple. All objectives achieved. No wretched, destitute people created by a government firman.

I guess by now I have set the proverbial cat among bureaucratic pigeons. “How stupid, Mr Bahl, what a hare-brained plan! If we give a 50-day notice to people whose mattresses are stuffed with black currency notes, they will find a million different ways to whisk them away into other assets. You private sectorwallahs have no clue about how to run government schemes. Leave it to us, the seasoned IAS and IRS types. We know how to skin these fat cats.”

Also Read: Demonetisation Was Not Designed Only To Fight Black Money: Jaitley

Really? Would Black Currency Notes Have Gotten ‘Whisked Away’?

Where, my dear IAS friends, where? Remember, this demonetisation attacks only one part of India’s black economy, i.e. only unaccounted cash stashed away by scamsters. Every other element of the black economy – real estate, undeclared gold, overseas assets, etc., etc. – is totally impervious to this plan.

So let’s see, what would Rambhai have done if he had Rs 1 crore in pinkish red notes lying in newspaper-wrapped bundles in a blue suitcase under his bed?

At 8 pm on 8 November, Rambhai would have finished a greasy vegetarian meal and settled down to listen to his hero, Prime Minister Modi’s specially televised address. By 8:30 pm, he would have begun sweating, palpitating, cursing.

At 8:45 pm, he would have called Shyambhai, his jeweller, to buy gold worth Rs 50 lakh in cash. Shyambhai would have said “sure, but if the payment is going to be in pinkish red notes I will charge a 30 percent premium, i.e., I will give you Rs 40 lakh of gold biscuits, but take Rs 60 lakh.” Rambhai would have instantly agreed.

Now Rambhai is left with Rs 40 lakh, some gold biscuits and a loss of Rs 20 lakh. Since Rambhai had been eyeing a Jaguar XF for several days, he decides “what the heck, these pinkish red notes will become worthless in 50 days, why not buy a sparkling red car for the Mrs.” There you go – the local auto dealer does the usual jugaad, takes the cash and sells the car. Lo and behold, Rs 40 lakh of black money has made its way into the Tata Motors’ balance sheet. And India’s GDP growth rate has gone up because an extra car has been sold.

Now look at what Shyambhai does. He calls his regular hawala operator to buy dollars. The Dubai-based gentleman politely declines, saying “what will I do with plasticky pinkish red toilet paper?”. A dejected Shyambhai runs to his family, all of whom are eagerly waiting in the living room. His son has been baying for a new Harley, his daughter for an iPhone7, and the Mrs for a new “Italian jacuzzi”. He splurges Rs 60 lakh on all these goodies. Done! Another Rs 60 lakh added to India’s spiking GDP growth.

Also Read: War on Cash a Troubling Sign of Things That Await the Nation

Once a Currency Note Is Killed, You Either Lose It or Convert It Into an Asset

I could go on and on, but the point has been made and it’s graphic: whichever way you look at it, whatever route it takes, however many hands it goes through, once a currency note is destined to die 50 days out, it can only result in two outcomes – it either becomes a loss for its owner, or enters the legitimate or “white” economy via an exchange of assets. In either case, Prime Minister Modi would have achieved exactly the same end point, but without heaping that monstrous four-hour death sentence on the wretched and the destitute.

Also Read: Modi’s Big Cash Withdrawal: Too Much Strain With Very Little Gain

And in the bargain, he would have kick-started a massive consumption boom, added over 2 percent to our GDP growth rate, got private enterprise whirring, soaked up excess industrial capacity, created thousands of jobs, and spread excitement and prosperity. Modi would have converted an unthinking, brutish WIN-LOSE plan into an unqualified WIN-WIN initiative. All he needed to have done was thought a little out of the box, taken a little more risk, backed his entrepreneurial instinct and shut out the bureaucratic naysayers.

Don’t Worry About the Moral Hazard

But these naysayers are stubborn and will strike back with the demon of ‘moral hazard’. “By giving such an escape route to congenital criminals, you are creating an incentive for wrong doing,” they will protest. And honestly, they have a point. But have you thought about the moral hazard embedded in the current exercise? No, I bet you haven't, so let me take you through that fiendish simulation.

We pick up the story from where Rambhai is sweating, palpitating and cursing at 8:45pm on 8 November, after Prime Minister Modi has concluded his sensational address. Rambhai is one among a million other minds, which are dizzily trying to figure out a way to save the Rs 4 lakh crore lying in more than a million basements, mattresses, suitcases, lockers and even in household utensils. Do you think they will just roll over and die, quietly giving up their lifelong “earnings” to a “rapacious taxman”? No sir, they won't. They will try every jugaad, any manoeuvre – good, bad, ugly, clever, criminal – to salvage their cash.

Slowly, the enormous computing power of a million crooked minds – the terabytes powering the Internet of Thugs – will devise a plan. They will round up 1 crore poor, unemployed people all over the country, especially in small towns and far-flung villages. For 50 mornings, these 1 crore people will throng banks and post offices, depositing cash in small quantities in their hitherto unused Jan Dhan accounts. Each will deposit an average of Rs 3 lakh, until Rs 3 lakh crore is in the bank. But what about the balance Rs 1 lakh crore of the total estimate of Rs 4 lakh crore in “black currency”?

Here's where the story gets really ironical. This Rs 1 lakh crore will be the good old “speed money” paid to complicit remote/upcountry bank branch managers, postmasters, touts, couriers, sundry middlemen and body contractors, who will make this whole operation possible, just as they do today when you want to get a passport, or register your property, or reduce your electricity bill.

Welcome to Swachh New Bharat, which by now should have been rid of black money and corruption – but heck, it’s got these lakhs of new benami bank accounts and assets. And what's more, come 1 January, these very accounts will spew out spanking new purple coloured Rs 2,000 notes, vigorously restarting the black money spiral, with one vital difference – the size of Rambhai's blue suitcase would have halved. Because its newspaper-wrapped bundles would now contain Rs 2,000, not Rs 1,000, notes!

Also Read: Bye-Bye Rs 500 & 1,000 Notes: Modi’s ‘Achhe Din’ Are Finally Here

A Diabolical Status Quo

Finally, a diabolical status quo will get entrenched. Because my Dear Prime Minister’s wise advisers have trapped him in a blind alley. What could have been a brahmastra has sputtered into a phus pataka (dead cracker), creating more sound than light, adding to the deadly haze of corruption that hangs over the country. What a pity!

Also Read: Modiji, Kudos But Why the Rush to Scrap Rs 500 & 1,000 Overnight?