Month: November 2016

I need to earn 170/- to take home 115.5% (after 32% income tax). Additionally, I need to pay 15.5% service tax before I can purchase services/goods worth 100/-. So I need to work 70% harder than my friends in the black money economy to match their lifestyle. This is a big enough frustration. Not to mention that the ill-gotten black money is often made through extortion, corruption and other illegal activities and not by under-reporting of legitimate business alone.
So while I struggle to make my ends meet, there is a guy who not only extorts money from me, but flaunts it in my face. The rage was always there, but this government has provided a channel for the individuals to get even.
I have a simple metric to gauge to gauge the any public policy:

1. Is it tangible? The benefits/results of the movement can be gauged by individuals themselves.
2. Does it inspire? It primarily involves changes in attitude & behavior and can easily become a self-sustainable engine.
3. Who benefits the most? Rich, Corrupt bureaucrats or bottom of the pyramid?
4. Can it provide some short term low hanging results immediately to sustain the zeal?
5. Does it improve the socioeconomic mobility? (help the poor to overcome adversity that limits their ability to achieve “pursuit of happiness”)
6. Intangible benefits:
7. RoI: Tangible benefits to Investment requirement ratio (after accounting for cost of level of disruption it creates)

Government has repeatedly claimed that their target is 3Lakh crore. (44 billion dollars). It is a drop in the ocean of the trillion dollars’ worth of total black money that held by Indians in property, gold, foreign currency and stashed abroad. However, if we assume that the cost of this move is 1lakh crore (printing of bank notes is a mere 13 thousand crore) then not only the country gains 2Lakh crore, but also would have for the first time, since independence, created a large impact to the hoarders of black money.
I had once argued that the problem with India is not the corruption by the complacency and attitudes of the masses. Rather than ostracizing the corrupt, we adored them for their wealth and gifts. Even elected them back to power. The intangible benefits are also hard to ignore. For the first time rather than flaunting the wealth, people are regretting the choices they have made. (the question is if the culprit will return back to their old methods after 1^st Jan or not). The adoption of bank accounts, digital payments (card/cardless) has improved. There is a better trace ability of one’s spending.
I had earlier argued that 2.5Lakhs (USD ~3,700/-) was too high a concession for a blanket amnesty on undisclosed income. It is more than twice the per capita income of India and more than 20 times the per capital availability of high currency notes. However by Monday 28th of November only 8Lakh crore (60% of cancelled currency notes were returned back to the authorities). The queues in front of tellers are disappearing and it seems most household without any ill-gotten gains to declare have returned back to normalcy. So hopefully the target of finding 3lakh crore can be achieved.
It is amazing that after almost a decade of inaction, Indian government has come up with two policies in a single term that excel on my 7-point metric to evaluate any public policy. The previous one being swachh bharat abhiyaan. If they achieve their 3Lakh crore target, then the policy will not only fund itself, but provide the government a war chest for battle against benami property & personal gold reserves.

I had earlier asserted that the Modi’s demonetization was nothing but an elaborate eyewash. This follow on post is to highlight the cost of the scheme:
Cost of currency printing: Indian currency is printed at two presses Bharatiya Reserve Bank Note Mudran Pvt Ltd (BRBNMPL) and Security Printing and Minting Corporation of India Ltd (SPMCIL). As per Week magazine http://www.theweek.in/news/biz-tech/what-is-cost-printing-our-currency-notes.html the cost at SPMCIL was 3.090 and for 1000 rupee was 3.540
As on 30th Dec 2016, there were 16.5 billion 500/- notes https://en.wikipedia.org/wiki/Indian_500-rupee_note#Discontinuation and 7.03 billion 1000/- note (total value of 500 and 1000 rupee note being 15.28 lakh crore) So the printing cost of these currency notes that are being scrapped is roughly 7,588 crore (5,095 crore for 500/- rupee note alone).
Assuming that when these old currency is replaced by fresh currency, only half of the notes are in 500/- (8.25 billion) and rest are in 2,000/- and due to express printing & added security measures the cost now is 4/- per note. Then the replacement cost is an additional 5,531 crore (total cost is now 13,119 crore)
Distribution & logistics costs: As per RBI ATM machine cost of operation is subsidized at 10/- and the manual teller cost are manifold higher. But taking a conservative value of 10/- and assuming that every Indian makes at least one extra trip for money exchange (bank, atm or special counter) during this 50 day period of chaos, we are looking at a cost of Rs 12,520,000,000 (1,252 crore). Mind you this does not include the cost of Indian AirForce jets which have been redeployed by the government to distribute cash at a war footing.
Economic cost: With one stroke of pen, all the unemployment has virtually been wiped off for 50 days. Agents are paying anybody with an I-card, a couple of hundred bucks for each trip for the money exchange. While one might call it wasteful/futile labor but this is not the economic cost. The acute shortage of currency notes and hoarding mentality has resulted in a standstill in economy. The worst hit are the service industry which are prone to discretionary spending and are not covered by the exemptions given to petrol bunks, hospitals etc. Most Indians do not have a bank account and even those who have realize that cheques are not considered a valid form of payment in India and usage of plastic cards (beyond atm withdrawal is limited)
Human cost: 33 people have died standing in ATM as per Indian Express. Not to mention the countless productive hours lost because of able bodied citizens standing for hours a stretch for the bank queues.
VIDS (voluntary income disclosure scheme) resulted in 9,760 crore of income tax collection. This denomitization has already resulted in 14,370crore of expenses (without counting for indirect costs) and government is yet to publish any result any concrete statistics on the amount of black money it has undisclosed or how much penalty was imposed. I hope bringing the country to its knees for 50 continuous days was worth it.

Burning a house down is not a cure for rodent infestation. Similarly demonetizing is not a cure for black money. Modi has repeatedly and publicly announced that deposits upto 2.5Lakhs per citizen is not going to be questioned. Ever wondered why?
The total money under circulation as per wikipedia is a mere ₹17.77 lakh crore (US$260 billion) which is about 14,000/- per head. If you eliminate coins, small bank notes etc. we are talking about 12,000/- per person. This means that if 20 persons don’t exchange a single penny and one person exchanges the full limit of 2.5L, all the money under circulation will be laundered by RBI without any hassle.
If you assume that everyone exchanges 4,500/- (which is the limit of single exchange over the counter without much scrutiny), then even 3.14% of the population needs to deposit a full 2.5Lakhs is sufficient to legally exchange all the legally circulating Indian currency with Modis’s new currency system. There are 170mn PAN card holders in India, so this is about 1 in every 4.3 PAN card holder
Total currency 17,770,000,000,000 (17.77 lakh crore), USD 262,171,732,074 @ 67.78 INR per USD
Population of India 1,252,000,000
currency per capita 14,193
high demoniations per capita 12,206.23 @86%
4,500x + 2,50,000 = 12,206.23(1+x)
x = (2,50,000-12,206)/(12,206-4,500)
x = 30.85829224 (3.14%)
According to Reuters, already 44 billion dollars of currency is back with the government within the first four days. At this pace, with 46 days to go almost all the ₹17.77 lakh crore (US$260 billion) currency is getting exchanged without any problem. So this demonetizing policy has only resulted in 50 days of hardship with nothing to show for.
It claims for weeding out the counterfeit notes is also without basis. In fact in this mad rush, it is easier to legally exchange a counterfeit note and the bank clerk is too occupied to notice fraud. Most Indians, including me, are not familiar with the new currency note and hence are more likely to be duped because of new currency.
Shadow economy is a strong part of Indian society some say close to 20% of GDP. But elementary economics will tell you that there are two forms of black money: high velocity (money that is unaccounted for but requires to change hands fast usually weeks/month) and low velocity (which the owner does not wish to use in the coming years. The first one week has proven that high velocity can easily be disguised as legitimate transaction and all of it has found its way back. The low velocity is unfortunately in Gold, real estate or in USD currency notes (favorite of African despots) or swiss bank accounts. So this demonetizing scheme has achieved nothing but unnecessarily making life miserable for people.
One’s paycheck is a tiny fraction of one’s wealth the total value of house & properties, car, insurance/pension balance, jewellery etc. So GDP which is like a paycheck is not the best means of estimating the total wealth of the citizens. If you assume that 20% of this total value held by individuals is black? There is not enough currency in the whole world. 17.77Lakh is hardly 11.5% of 2.25 trillion dollar GDP of India. So assuming that 90% of the currency notes are legally exchanged, 5% are lost/damaged and 5% is caught in the net. We are talking of 5% of 11% which is less than 0.5% of GDP and no where close to the figures that RSS keeps harping about.
Fuel stations, hospitals and most avenues used to launder the money are already exempt from these restrictions and without any trace ability being used to exchange old tender with the new tender. Enough loopholes are provided for CA & cash economy agents to help out those in need of money laundry services.
Al Capone was convicted not for smuggling, not for the countless crimes & murders but income tax frauds by US Government. But has Modi with his tall claims and grand plans achieved anything substantial? Well the only way to succeed against black money is by improving the tracabliity of transactions. Swapping a bundle of 500/- note with another bundle of 2000/- rupee will achieve nothing except wiping out the faith of people in indian currency. “I promise to pay the bearer a sum of 500 rupees” is the signed promise by RBI governor and today it means nothing!
At this moment only two pictures come in my mind. One of the famous story of a monkey chasing a fly with a sword and second of Muhammad Bin Tughlaq, one of the wisest ruler of Delhi yet achieving one of the most disastrous results because of his demonetizing policy.