PM Modi, Your Team Erred in Separating Demonetisation From VDIS

The old timers on advising PM Modi on Raisina Hill are jaded and simply fail to make the cut!

Horror stories about the Government’s “Demon”-etisation are piling up relentlessly. A child died because the doctor would not treat him in exchange for Rs 500 notes. A lady jumped off the Howrah bridge because she could not get any cash at her ATM. Two elderly people died while standing in long queues in Kerala. Unscrupulous traders dumped Rs 500 and Rs 1,000 notes on clueless customers in Kishanganj. An 80-year-old woman refused to part with her lifetime’s savings of Rs 80,000 because she was paranoid that her family members were trying to defraud her by inventing stories.

Brutally Archaic Bureaucracy

What a pity! Prime Minister Modi’s government simply need not have heaped such misery on ordinary citizens. All it needed to do was think a little more creatively, rather than get trapped in utterly outdated, brutally archaic bureaucratic tactics.

In an earlier piece, I have proved how there was simply no need to ban everyday transactions within four hours on 8 November.

It would have been perfectly practical, and enormously beneficial, to announce that Rs 500 and Rs 1,000 notes would get de-legalised on the midnight of 31 December 2016, without banning their use in everyday transactions in the 50-day interregnum.

Instead of gumming up the economy and compelling the weak-hearted to commit suicide, this simple tweak would have kick-started a consumption boom.

And the end-point would have been exactly as intended in the current brutal scheme, viz either the destruction or legitimisation of the cache of “black currency” in the economy. It would have been a WIN-WIN move.

And now here is an even more practical, easily executable and marvelously simple plan. I am amazed that all the “beautiful people” in government – bright civil servants, internationally renowned economists, brilliant lawyers, street savvy politicians – could not figure it out! Truth truly is stranger than fiction.

Also Read: PM Modi, Demonetisation ‘Brahmastra’ Could’ve Avoided Hurting Poor

Modi’s ‘Demon’-etisation

• It would have been perfectly practical to announce that Rs 500 and Rs 1,000 notes would get de-legalised on the midnight of 31 December 2016
  
• PM Modi’s government shut down a Voluntary Disclosure of Income Scheme (VDIS) in September
  
• The scheme allowed anybody to declare any amount of concealed income, anywhere in the world provided they paid a 45 percent penalty/tax
  
• Imagine if the government had come up with a single demonetisation-cum-VDIS Scheme, instead of splitting it over two half-measures
  
• Instead of scrambling to buy gold at 50 paise, for each tainted rupee, people would simply have turned in all their de-legalised Rs 500 and Rs 1,000 notes
  

Here’s the WIN-WIN-WIN Plan

Prime Minister Modi’s government closed a Voluntary Disclosure of Income Scheme (VDIS) in September. It allowed anybody to declare any amount of concealed income, anywhere in the world, held in any kind of asset, provided it paid a 45 percent penalty or tax. Simple.

It collected Rs 65,000 crore in gross cash, out of which Rs 30,000 crore was scooped up as tax revenue by the government.

While a loud, chest-thumping government proclaimed “unparalleled success”, the fact is that once you adjusted for the size of the economy and extant tax base, the 1997 scheme was much more effective, in a relative sense. But that story is not our focus here.

Less than two months later, on 8 November, Prime Minister Modi, with a sensational flourish in an 8 pm specially televised address, de-legalised 86 percent of his country’s currency by declaring Rs 500 and Rs 1,000 notes illegal.

Such a surgical extraction of cash from a $2 trillion, 1.2-billion people-strong economy was unprecedented in its scope (and perhaps also unprecedented in its “unthinking-ness”).

Look what happened! Gold shot up by nearly 60 percent, to Rs 55,000 per 10 grams. The rupee lost over 100 percent of its value in the hawala market, as a US dollar began trading for Rs 180 (against the Rs 67-68 on official exchanges).

And people were willing to forego 50 percent of their currency’s value – ie, they were happy to give a “de-legalised” Rs 1,000 note to buy an article worth Rs 500.

In economic terms, the market has established the discount that an Indian citizen is willing to suffer on his “de-legalised” cash. The higher the discount, the more the value he is ascribing to that asset.

So it’s clear that conversions into hawala US dollars are the most sought after, since he is willing to salvage only 30 paise for every tainted rupee, followed by gold and articles of consumption.

Also Read: Before PM’s Announcement, Rumours of Demonetisation Abounded

Whichever way you look at it, the Indian citizen is signaling that he is willing and able to “take a haircut” of up to 50 percent on his “black currency”. This is his clearing price, his threshold, his critical tolerance level.

Now just imagine if Prime Minister Modi’s advisers had given him this option:

Sir, all past data seems to suggest that people with tainted cash are willing to voluntarily give up 50 percent of their holding, provided they are assured of peacefully retaining the other 50 percent. So Sir, what if we announce the demonetisation deadline along with a VDIS deadline? Both together, simultaneous, expiring on the same day? We are bound to achieve nearly 100 percent success.

Demonetisation-Cum-VDIS, The Real “Brahmastra”

Yes! Just imagine if Prime Minister Modi’s government had come up with a single Demonetisation-cum-VDIS Scheme, instead of splitting it over two half-measures about two months apart from each other. Imagine if this was the announcement:

* Simultaneous Demonetisation-cum-VDIS to end on the midnight of 31 December 2016

* All Rs 500 and Rs 1,000 notes to cease being legal currency from that hour onwards

* Up to that hour, every citizen is allowed to declare any concealed income or assets; no questions will be asked; a 50 percent penalty/tax will be extracted; indemnity from all future prosecution shall be given.

Just imagine the impact of this “twin Brahmastra”!

Instead of scrambling to buy gold at 50 paise, or hawala dollars at 30 paise, for each tainted rupee, people would simply have turned in all their de-legalised Rs 500 and Rs 1,000 notes in one swift, surgical action, happily paying 50 paise to the rupee in penalties/taxes.

And comfortably enjoying the balance 50 percent lying legally in their bank accounts, instead of fretting about the continuing headache or illegality of hiding gold biscuits under the mattress or collecting hawala dollars in Geneva.

Also Read: Demonetisation: Modi Does a Kejriwal With His ‘Gareeb Aadmi’ Pitch

What a terrible miss, my dear Prime Minister Modi. If you had just combined these two schemes, I can bet you would have mopped up the entire estimated horde of Rs 4 lakh crore of “black currency”.

Rs 2 lakh crore would have swelled your tax revenues, and the other Rs 2 lakh crore would have strengthened Indian banks’ balance sheets. And everybody would have lived happily ever after, provided, of course, that you would follow through with massive tax reform to remove all the incentives to recreate another black economy.

Gosh Prime Minister Modi, you need to get a few independent, external, modern-minded, private sector and market-oriented thinkers on your team. The old timers on Raisina Hill are jaded, simply failing to make the cut!