How do you measure the success or failure of demonetisation?
The general issue is how you measure the success of any policy. If that objective is multipronged—remember (Narendra) Modi in that 8 November speech had at least three objectives which are corruption, counterfeit notes and terrorism—simple economics will tell you that you may not kill three birds with the same stone. Modi himself is gradually switching objectives. Now he talks more about the cashless economy. He should know that other poor countries, for example, Kenya, have progressed more toward digital payments without causing any large suffering. Secondly, the success on some of the objectives cannot be easily measured. Even conceptually, your idea of corruption may be different from mine. It is thus very difficult to prove, though we can roughly guess.
Some people have termed it as a one-time tax on black money?
The usage of the term black money is confusing. There are different types of black money or tax-evaded money—it can either be assets or flow of income. It is a tax on those people, who for whatever reason have some cash with them. But we all know that cash is a minor form of black money. Black money is much more in the form of gold, real estate, commodity stocks and offshore accounts.
People keep money in cash mainly for transaction purposes or funding for elections. It’s thus not a tax on the main form of black money. Most people who keep it under mattresses are not corrupt people but innocent small people like housewives who want to save money from their in-laws or husbands.
Now, if you look at how much money has come back to the banking system, and I am sure some money is still left with those small people, much less than Rs1 trillion has not come back.
Some of the money which has come back could have been black money. People have found a way out by bribing, paying intermediaries. Thus, the tax has gone to the brokers and not the government.
Now I expect, without further policy changes, corruption will go back to normal. In fact, with the Rs2,000 note you need to carry a smaller briefcase.
So you are saying demonetisation is not enough to tackle black money and corruption?
By itself, I don’t think demonetisation is going to change the structural roots of corruption in India. Unless other measures are taken, I don’t expect the long-term effect on corruption to be significant. Some people say that it might act as a deterrent. People think it is being done now, be careful next time. The deterrent effect may work in some cases, but people will soon find out things are back to normal.
Let’s talk about different types of corruption. One that the common people face is petty bureaucratic corruption—small amounts which need to be paid for a certificate or passport or driver’s licence. Why is that petty bureaucrat charging money? Because we have given him some monopoly power. As long as that remains, petty corruption will remain.
Now, in Chhattisgarh and some other states, many certificates like birth, caste, marriage, BPL (below poverty line) card are contracted out. Government keeps a check through centralized computer control. Technology can help break to a large extent the monopoly power of petty clerks.
The second, much bigger, kind of corruption is collusive corruption where the bribe giver and taker collude. One example is a customs officer who looks the other way when an importer does something illegal like smuggling, or a tax officer in the case of under-assessment.
The third kind of corruption is for job transfers. I am told that in state secretariats, half of the day of a minister goes in deciding transfers and postings, which often involve a huge amount of payment. Until there is serious civil service reform, this will continue. Manmohan Singh had promised, but never did it, same with Modi so far.
These kinds of corruption have nothing to do with currency notes.
And then there is electoral funding?
Election funding is the big elephant in the room. As elections become more expensive, corruption will increase, and in recent years Modi’s party has been the biggest spender.
All political parties are guilty of preserving the system. There are 1,900 political parties, out of which 1,500 don’t fight elections. What do these 1,500 parties do? They are laundering machines. In 2013, the information commissioner said political parties should be subject to RTI (right to information). All major political parties said no, stating that they are not public entities. If the Supreme Court decides that RTI doesn’t apply to them, they should at least be subject to regular but independent auditing.
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Increasingly in India, politics and business have become intertwined. Liquor, construction, private colleges, transport, etc.—these are the key businesses where you find politicians heavily involved. When politics and business are intertwined, it is very difficult to keep track of what is black and what is white. I think that in some respects demonetisation may have even encouraged more corruption and weaker governance.
How is that?
First, a lot of corrupt people have laundered their cash through the back door of banks. Many bankers have been corrupted since 8 November. In fact, the people who have gained from demonetisation so far are these corrupt bank officials, apart from a whole array of brokers, gold merchants, hawala operatives, village moneylenders and mobile wallet companies.
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Second are the tax raids. It will take many, many years for tax authorities at their current strength to sort through all cases of disproportionate wealth. Whenever you give tax authorities so much power—for example, to decide how many grams of gold are permissible for the married and the unmarried women in the family—you are creating a big source of corruption. It gives tax raiders so much discretionary power. This is maximum government with messy governance.
Third, I would say, Modi wittingly or unwittingly has weakened the governance structure. It is very sad what he has done to RBI (Reserve Bank of India), which used to have a reputation for relatively independent governance. Modi pushed through his arbitrary decision on a half-empty central board of RBI, which did not have the good sense or the courage to tell him that the banking structure was completely unprepared for such a big change.
What about the impact on the informal sector?
Personally, I think Modi didn’t think through the consequences, and the few people he consulted were either unthinking or callous or prone to saying what he wants to hear. He probably regards the informal sector as the illegal sector. I consider demonetisation to be a major assault on the poor. Modi probably doesn’t appreciate the damage he has done to the incomes and employment of many crores of small farmers, traders, vendors, casual and migrant workers. There has been a severe decline in their already paltry income.
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In order to properly measure that damage you need large-scale sample surveys, which only the government has the resources, but probably not the inclination, to carry out. Some small-scale surveys around Delhi and Ranchi suggest that the decline in average income of the small people on account of demonetisation has been 40-70%. It is a cruel joke on the part of Modi when he says that he did it all for the poor. He did it mainly as a dramatic stunt to divert attention of people from his disappointing performance in many respects so far.
But there seems to be support on the ground. The BJP has won a spate of civic polls after demonetisation?
Modi’s marketing skills are far greater than his economic wisdom. Also, for cities we just think about the inconvenience of long queues in banks and people dying on both sides of the bank counter. But in remote places, rural areas and small towns, people already at the margin of subsistence are suffering a large decline in their livelihoods and incomes. The other important thing to note is that protest is much more difficult to organize in the informal sector. However, I believe the protest will increase over time even inside Modi’s party. It is imperative that Modi thinks about compensating the poor for the damage he has done to them.
What form should this compensation take?
Apart from short-run relief and more money for NREGA (National Rural Employment Guarantee Act), one should think of introducing as a long-run measure some form of basic income which everybody gets. I have written about this for Mint some time ago (bit.ly/2eUwuYN).
Will demonetisation cause long-term structural damage to the informal economy?
The Indian genius for bouncing back is quite significant. But having said that, demonetisation has damaged networks and employer-employee relations. Suppose I am a migrant labourer and go to a particular employer in the lean agricultural season. With non-payment (of wages) and layoffs, that relationship has been damaged, which is difficult to restore.