Demonetisation : Beyond the noise
Prabal Basu Roy
Sloan Fellow-London Business School, PE Investor,Board member,Advisor to Board Chairpersons; former Group CFO; media commentator
The country wanted a decisive PM post the UPA regime :it has got one ! And how ! John F Kennedy had famously said : "There are risks and costs to action : But they are far less than the long range risks of comfortable inaction". In all the noise of the past two weeks, I believe the present move has not been viewed in this perspective.
There have been implementation issues, questions on timing this move during the rabi crop season and a credit freeze type of situation affecting trade in general : but in a measure of such magnitude, with a trade off between secrecy and pain alleviation, there will be a degree of collateral damage. In a war we all have to make some sacrifices.....unless we again want to gain independence on the shoulders of a few or prefer the status quo to continue ! The politicians who are crying themselves hoarse over the plight of the poor are precisely those who have been responsible for the poor remaining poor over the past 70 years whilst they have seen untold riches bestowed on them due to their exemplary work in public life ! As far as economists' views are concerned, Dr. Subba Rao's latest essay on this subject is perhaps as balanced a debate we will see and is the last word for me on this current move.
What must be clear to most by now, PM Modi is passionately committed to tackle the menace of black money and corruption in our highly corrupt and "Juggad" society.And this is being done in organised manner (read my article written few hours after Modi's Surgical Strike on Black Money), though concerns on implementation this time around are not entirely unfounded. If the framework is contextualised, one can reasonably estimate what is going to come next. The architecture of moving from a cash economy to a digital economy has been steadily built over the last few years ( Jan Dhan, Aadhaar, UPI ) and demonstrates his carefully crafted strategy to weed out black money from India. The Govt. should also be credited for being flexible and responding rapidly to the emerging situations by providing relief on many fronts on a daily basis....I have not seen an administration which has been so prompt in the past. What is now needed to ensure that the costs of this move are well worth the pain are as follows :
1. The cash crunch due to inadequacy of Rs. 100/- and Rs. 500/- notes currently being handled on an emergency footing must be brought to a definitive closure soon
2. Given all the dubious means being employed to convert their black money ( 13 methods at last count) the success of this scheme will be in the hands of the enforcement agencies like Income Tax, Excise, ED, etc and the steps they take to scrutinize honestly the accounts of depositors, agents, businesses ( like real estate, jewellery, construction, transportation, etc) and temple trusts now and post the exercise being over in December : the govt will need to either bolster resources within these departments either by recalling retired ITD officials or outsourcing or extend the normal assessment schedules.
3. Agricultural income in specific pockets will almost certainly be huge this year irrespective of the actual profitability on the ground : since this income is outside the tax net, the Govt will be well advised to make use of some framework to investigate such income this year
4. An immediate reduction in interest rates ; though with a stronger dollar following Trump's victory this will be a challenge
5. Use the unexpected bonanza to the fisc- owing to the potential transfer from the RBI due to extinguishment of the liability of unreturned currency- to embark on an investment led stimulus
6. Some policy decisions with respect to liquidity norms for easing the NPL recognition in micro finance organisations, interest subvention for small loans, availability of a subsidised loan scheme for farmers, small traders, etc.due to banks being now better placed to lend
7. Reduction in tax rates in the next budget and signal a transition to a new taxation system possibly in line with the Arthakranti proposals
8. Concrete roadmap to control the source of black money : corruption, bribery, under invoicing, under reporting of sales and many other dubious innovations people have engaged in : If it starts with the sector with institutionalized black money generation potential, ie, real estate, jewellery it would be a great confidence booster. Move towards an electronic registry for land documents and possibly a demat type of system for jewellery will be a huge move forward. Many of this may need legislative enactments and will depend on support in the parliament from the opposition.
9. Regain the political narrative by explaining the four long term benefits : transfer of wealth to the poor, reduced cost of capital, liquidity and stimulus driven initiatives to kick start the investment cycle. It must clearly demolish the confusion being perpetrated by underlining that this move is only one of the steps and targeted specifically towards the cash component of the entire black money cycle.
It is imperative for the Govt. to accomplish these steps to restore its reputation amongst the majority of the population who have borne the brunt of this move so far. Furthermore, economic history must prove at a later stage that this was just one more cog in the wheel being used to demolish the scourge of institutionalized corruption in our society....only then all the negativity of today will be washed away.
After such a major disruption, the PM owes this to his countrymen to follow it through to its logical conclusion.... and help restore the long lost ability of honest tax payer and citizen to live with pride.
I hope this is not an Utopian thought... at least not this time.
(PRABAL BASU ROY)
Prabal Basu Roy is a Sloan Fellow from the London Business School and a Chartered Accountant: the writer presently manages a PE fund and has formerly been a Director and Group CFO in various companies.
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Mechanical Engineer, EV enthusiast, Business Consultant
8 年Its not the idea, the implementation which often backfires
Independent Information Technology and Services Professional
8 年Demonetisation: Biggest Failed Economic Experiment in Indian History? (condesed) ? PM Modi's Digital ambitions could well be a nightmare for common man ? Italy votes 'No': Why should we worry? Soon (3 days to go), it will be a month since we heard the term demonetization after a long gap. The intent was to target black money, and to check terrorist funding. So far so good. But the planning and execution has certainly left a lot to be desired. Of the Rs 15.4 trillion of black money in circulation before the move, Rs 15 trillion is likely to return to the banking system. The much-hyped revolution could at last turn out to be much ado about nothing... How I wish I'm proved wrong! Would you mind taking note of the casualties? : Money, Time, and Resources · Printing new currency... · People in queues rather than at work... · Loss of lives and livelihoods... · Abandoned projects – A lot has been sacrificed for the failing experiment. The biggest ever blow is to the rural economy and the small players in the unorganised sector. The informal sector, accounting for 48% of India's total output and 80% of employment runs, mostly on cash. The GDP growth rate comes next. And it’s believed that the pain will be worse and more prolonged than predicted. The move could even delay the implementation of GST. Low deposit rates for savers are already a reality. One can gauge the government's confidence by the turn the narrative has taken in last one month - from demonetisation to a cashless economy. Parts of India have indeed been rendered cashless, and helpless. The elephant in the room is political funding that happens mostly in cash and is unaccounted. Meanwhile, a new twist emerges... Thanks to the latest amnesty scheme, the crooked will be allowed to come clean if they declare their unaccounted income and pay a penalty of 50%...and then keep the other 50%. "Achche Din.."
J9 at NOKIA
8 年we can't completly remove block money but yes we can reduce it. And create fear in the corrupt people.
J9 at NOKIA
8 年this should happen frequently as we do after Dipavali. I agree with Narendra Rath.
Associate Professor (Mechanical Engineering) at Echelon Institute of Engineering, Faridabad (haryana)
8 年UN-biased pragmatism by Prabal Basu Roy