Saturday, November 26, 2016

Why MMS could not give a fraction of what Chetan Bhagat could on Demonetisation?

As I was planning to write on Manmohan Singh’s admonition of the Demonetisation process (Full text here ) in the Rajya Sabha, I happened to come across a brilliant piece by Chetan Bhagat which is reproduced at the end of the article.
Though at the outset MMS seemed to be critical of the demonetisation drive of the Modi Government, he actually did not find fault with the motive of this drive. He did say that “Prime Minister has been arguing that this is the way to curb black money, to prevent growth of forfeiture currency notes and also to help in control of terrorist finance activities. I do not disagree with these objectives.” What he found faulty was the execution plan which he characterised as ‘monumental mismanagement’. It is unfortunate he did not and could not come up with any one suggestion of how to make the execution process better. As an economist and a banker, he must have given some better suggestions in the nature of corrective steps which however were found in the simple ‘take’ of Chetan Bhagat! After reading his, it looks obvious that it does not need an economist’s brain to give those suggestions. It is all common sense and some clarity in thinking that tells what is lacking in the execution process and where. It is a pity that MMS could not demonstrate that clarity or was not allowed to display it.  
Perhaps the party he belongs to must be held responsible for it. For, there is on record a quotable quote of his party under the leadership of the mother in law of his leader forfeiting the responsibility of wiping out black money in the country for narrow political reasons. In a brilliant article titled “Demonetisation Demythified” the economist Bibek Debroy recalls the conversation Y.B.Chavan, the then Finance Minister had with Prime Minister Indira Gandhi.
So, political considerations came in the way of economic reforms for the so-called Iron lady of India. While everyone knew that something must be done to check black money and that something is going to be more painful for the politician in terms of risks and political costs, isn’t it laudable that we have at least in our times a iron- willed politician who thinks above politics?
Looking at the hue and cry made only by the political parties – for obvious reasons of having lost their unaccounted wealth at one stroke – which is what MMS perhaps referred to when he said that demonetisation is a “case of organised loot, legalised plunder” (of politician’s wealth), we need intellectuals come forward – with Manmohan Singh on the lead - with ideas to better the process and reduce the inconvenience to the honest people.
I make a specific reference to honest people because going by the figures quoted it seems that a vast majority of those coming under non-salaried class are not honest by having unaccounted money that forms a substantial part of the black money. They have to fall in line and become law abiding. They are the losers in this demonetisation drive and they are the ones who are actually affected by the so-called ‘inconvenience’ and ‘sufferings’. This reform is meant to reform them.
But it appears the desired results have started setting in. The following tweets by Rahul Kanwal say a lot about them.
This drive followed by a series of measures in sequences make it difficult for people to make shady dealings. This is not a medium or long term effect but an immediate effect which is set to continue as long as vigilant and control systems are in place and working. In that sense Economics of Modi which I wish to call as Modinomics is a new revolutionary theory of economics of modern times aimed at curbing black money and cleaning the economy and people’s mind as well.

There was a time when economy was totally free of State control. But State interference was advocated – particularly by Keynes (who was quoted by MMS “in the long run all of us are dead”) to uplift the sagging economy from Depression. Since then all the countries are doing what he had said (Keynesian Economics). But times are such that social behaviour also plays a part in economics. 

Greed, cheating, currency terrorism (floating fake currencies done by Pakistan), aiding terrorism by fake and unaccounted money and even winning polls by unaccounted money have become the order of the day. Preaching and teaching good behaviour are obsolete in this situation. Some master strokes with a volley of measures and counter measures to check the newly coming up challenges to derail the process have to be innovated to tackle the situation. This is what Modinomics is doing in the current Demonetisation drive. To put it more exactly, a concept of Modinomics is evolving now which would be written as a theory in about a decade or two’s time.

The whole world is watching as this is the problem in many countries. The success or otherwise of this drive would tell the theorists how well this can be codified as a solution to the socio-economic ill-behaviour of the present and future world.

In this context the quote by MMS from Keynes that “in the long run all of us are dead” looks like a mis-quote. The actual context of this statement by Keynes is to dismiss the criticism of his detractors on the long term implication of his theories. His take was that none of them would live that long to see the expected negative implications of his theories. But in the case of Modinomics, we had started seeing the so-called long term effects in the immediate short term which is what is revealed in Rahul’s tweet above.

With digitalisation getting ushered in and continuous monitoring-cum- corrective steps being taken to check black transactions and the proposed Benami transaction reforms as a follow-up of the current drive on demonetisation, a new situation is arising where Long term is short term and Future is not far away!

- Jayasree


My Take on Demonetization
Many have asked me to give my views on demonetization, suggest any positive ideas and explain the benefits and issues in simple terms. Since it is not possible to do it all in a few tweets. Here is my take on it., both the MOVE itself as well as the EXECUTION of it.


1) It shows government’s seriousness to tackle black money. This signaling effect alone is a huge benefit to the nation where many evade taxes.
2) It will ensure a significant part of the black money gets back to the government. It's not true that nobody gains from the money burnt/thrown away. (See next point)
3) The old money not swapped in banks is effectively the government's Profit. Say 17 lakh crs of total money existed in old notes, and only 13 lakh crores comes back. For remaining 4 lakh crores, the government can print new notes, and keep it themselves. Hence, the government does stand to make a lot of money in this (which can be then used for people)
4) It's nice to see a PM who works, has innovative ideas and wants to make a change. We have had leaders who sat quietly and did little. It is good to see a man of action.
At the same time, like any policy, there are some issues.


1) Execution of such an exercise in India is no joke. We just aren't technically ready to do this in a smooth manner. (That is why we are facing some execution issues, which I get into later.)

2) There are some tricks still people can use to swap black money into new money. It will reduce the amount of black money recovered.

3) There is a huge cash economy in India. It isn't 'black'. It's just cash. To suck up so much liquidity will lead to a slowdown and losses for a lot of people, for no fault of their own. The slowdown in economic activity will cause lower profits, and in turn lower taxes for the government.

4) A potential crash in real estate prices. While some want property prices to fall, a huge drop can cause an economic shock, reduction in bank collateral values etc., again leading to a recession.

5) The exercise by definition involves everyone swapping their money after showing their 
credentials. In effect, everyone has to prove they are innocent and have clean money. This is somewhat invasive to citizens, and while there is no other way, it remains an issue.

6) The exercise would be expensive, and that cost needs to be taken into account.

7) It's a jolt to our stable monetary system. Doing it again and again will cause people to lose confidence in our currency. It's really a one-off, and even that destabliizes things.

8) The tax department may use it as an excuse to harass people later, with endless questioning about the extra bank entries.

Net Effect:

Overall, demonetization is a good move. Given the extent of black money in the country, and the tiny taxpayer base, something had to be done. It had to be drastic. It has been done now. We should now do what it takes to make it succeed.


As important as an idea is it's execution. There clearly have been execution issues, causing pain to a lot of Indians who have wasted a lot of productive time in queues. While doing things for the nation is good, one need not have to suffer because of bad planning or someone not thinking things through. The good and bad of the execution are:


1. It's happening, and still the country is chugging along. Banks across the country are slow, but doing their bit. There is no mass hunger, or calamity so far. Thank God.

2. Government is taking steps to ease the pain. The change in limits helps. The banks are also devising ways to manage the crowds.

3. People in India are on the whole, taking it well.


1. Someone didn't plan the logistics well - it is one thing to make an excel spreadsheet of number of bank branches and the people involved. It is quite another to when you deal with India's reality on the ground. There are bottlenecks galore in this exercise - whether printing of notes, uncaliberated ATMs, or limits to the number of cash vans. One can say whatever about the secrecy required, but it seems that while finance professionals sat and spoke up in the meetings, industrial engineers and operations research experts probably did not to the extent required. We are seeing the fallout now.

2. Citizens do not have to take so much pain. Inconvenience is one thing, suffering quite another. To say bear it in the name of patriotism is not listening to the issue - the execution is not efficient. It is the same as how people say - "Oh, the temple is dirty, bear it in the name of God." Sorry, God had nothing to do with it. The temple management didn't keep the temple clean. Same ways, patriotism has nothing to do with the fact that someone didn't plan the ATMs better or didn't make the new 500-Rs note available early.


In final analysis, we should support demonetization, but keep reminding the government to iron out the execution issues. Some ideas:

1. Online appointment booking for banks.
2. Easy forms, which can be pre-filled. Faster check-outs at banks.
3. Hiring interns at banks for short term, supervised by existing employees.
4. Opening banks 24 X 7 after new hires come in.
5. Supplying enough notes to banks as fast as possible.
6. Fixing the ATMs
7. Declaring one or two holidays (not for banks!) for people to get their finances in order
8. Removing withdrawal limits as fast as possible.
9. Having empathy for people in lines, from the highest levels of government.
10. Giving an incentive to people to come to the bank. A meal coupon would go a long way too.

I hope the above helps you understand demonetization better. I also hope you focus on the making the exercise work, which means supporting the idea and yet demanding better execution. It also means not to get sucked into any propaganda or political drama.

Do share with others if you think this will help people get some clarity on what is going on and what needs to be done.

God bless.
Thanks, love and Jai Hind,
Chetan Bhagat