Wednesday, 19 April 2017

Demonetization 2016 and its effetcs

  • There were no immediate gains to be seen from the Demonetisation 2016. The benefits, if any, they are to be had only in the long term. 
  • There was one immediate outcome and this was the colossal amount of hardship experienced by the citizens of India. That most of the affected people did not openly express their unhappiness at having to bear this hardship does not reduce its severity.
  • Indian economy had experienced significant damage from which recovery would be slow. As of mid-February, there was no evidence of any bounce back, but even if that happened, why cause a dislocation in the first place?
  • All the disruption and distress, to what purpose? When assessed in terms of the objectives of Demonetisation 2016, the outcome was unclear.
  • Dealing with counterfeit currency did not require the suddenness and consequent harshness of a design and implementation as contained in Demonetisation 2016.
  • Demonetisation has not, as promised, turned ‘worthless’ the black money held in high denomination notes. By December 2016 most of the currency had already entered the banking system. Very little seemed to have been held back by holders of black money scared to enter the banking system. It can have no effect on the future flow of black money in the form of new currency notes. No strategy can succeed without proper systems in place.
  • The new amnesty scheme, PMGKY, did not yield declarations running into lakhs of crores (trillions) of rupees. Now we are entering an era of tax harassment as government agencies set about trying to prove that Demonetisation 2016 was a major success in unearthing black money and improving tax compliance.
  • An argument is that Demonetisation 2016 was not a good idea.
    (1) Very little of black money is held in the form of cash.
    (2) Even if the government did want to track down unaccounted cash, the best way would have been to collect, analyse and follow up on information on large cash withdrawals from banks and thereby identify possible flows of unaccounted cash.
    (3) In spite of all the risks and limited chances of success, if the government still wanted to go ahead with demonetisation, then the manner in which Demonetisation 2016 was designed and implemented was neither the only option nor the best one. There were other less destructive options available.
  • ‘Formalisation of the informal’ emerged as a new rationale for Demonetisation 2016. Demonetisation and digitalisation might have dragged real estate, retail and wholesale trade, and professional services & economic agents into the formal sector leading to greater tax compliance. But much larger informal sector that ekes out its livelihood on the margins does not avoid paying taxes, it just earns too little to fall into the tax bracket. Formalisation of tiny enterprises in industry, road-side service establishments, and by small- and medium-sized farmers would not lead to any gain to society. It would, in fact, put an additional burden on these producers who are already struggling by earning low incomes.
  • It was said that Demonetisation 2016 was war on wealthy & criminals hoarding black money. But wealthy & criminals did not experience any pain. It was those who had least capacity to cope who bore the entire burden. The colossal distress that Demonetisation 2016 caused will make it impossible for any future government to embark on a more serious war on black money. No society will be able to go through this suffering once again. The black money will remain in place.
  • Some weeks after demonetisation was announced, its failure was confirmed and goal posts shited to digitalisation and cashless transactions. The focus now is on how to accelerate the adoption of electronic payments at all levels, from households upwards despite infrastructural and economic constraints. The main issue is, did the economy have to be put through the demonetisation wringer in order to drive it towards digitalisation?
  • Digitalisation of payments is not a new invention by Modi boys. It has been underway in India for more than a decade and made considerable progress in transactions in the organised sector and among those comfortable with electronic/on-line forms of payment. The larger population is, however, right now outside the scope of digital payments. Major constraints in infrastructure and also issues relating to a lack of familiarity and unaffordability tell us that digitalisation cannot be hurried without running the risk of exclusion. Yet, the one major agenda that the government has been driving since Demonetisation 2016 has been digitalisation.
  • The holders of black money will have experienced such a major shock but almost the entire stock of demonetised currency had entered the banking system showed the ease with which such individuals and organisations could get the better of the system. It also reflects the confidence they have of subsequently managing the system, in case there are to be investigations in the future.
  • The psychological shock was a harmful one. The upheaval caused by the removal of 86% of the currency in circulation had unnerved ordinary people, the honest citizens. The trust they had reposed in the currency issued by the central bank and the government had been shaken. This is an unhealthy development in a modern economy.
  • Soon after demonetisation had been announced, it was pointed out by many that this action by itself would do little to destroy black money and do even less to end the future generation of black money. The government in response said that demonetisation was neither the first nor the last measure to be taken to destroy black money. More steps were to follow in what was promised would be a larger war. 
  • With out removing systemic pain that causes creation of black money by hiding legitimate transactions to avoid high taxes, attempts to eliminate black money by harassment of people would be futile.
  • There was little of that kind to be seen in the next three months, save the limited measures on political party finance announced in the Union Budget for 2017–18. It appeared as if the promised action was not to follow. 
  • The government is left with no option but to ensure an increasing supply of cash to quell the retail corruption while keeping a check on the discretionary power of tax and banks bureaucracy to avoid further damage to its credibility.
          The government solution to a problem 
          is usually as bad as the problem ... Milton Friedman

          My View:
          Even though everyone knows demonetization doesn't solve any problems and its results are unpredictable, Modi, advised by some quacks, resorted wildest gamble only to win forthcoming elections in UP, Punjab etc, followed by Rajya Sabha, President & Vice President elections. Giving undue importance to secrecy and without any preparation for this gargantuan task, he announced demonetization like a dictator keeping aside all democratic processes, he shot in his foot and instantly landed in a ditch. What Modi has done is commit a massive theft of people's property without even the pretense of due process of law, a shocking move for a democratically elected government. One man is trying to deliver on something that is undeliverable, against the advice of everybody else. This demonetization will go down as one of the most naïve, least thought through policy decisions ever, a massive man-made disaster. It is time to withdraw massive executive powers with one man replace them with robust processes, except during situation of war & emergencies. Executive should not be allowed to incur expenses or impose taxes without prior legislature approval.

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