Month: December 2016

I tried to apply theory of Economic Order Quantity on the ATM cash limit imposed by the Prime Minister.

1. Q is the 2,500/- that ATM are advised to dole out.
2. D: monthly consumption of cash
3. K: cost to order: Even the poor & unemployed are charging 200/- to stand for 2 hours in the ATM queue. Actual cost should be higher for white-collar professionals but lets go with it.
4. H: holding cost = foregone interest “4%/12”

2,500=√((2*D*200)/(4/12))
2500=√(1200*D)
D = 520/- monthly or 17.3 daily.
All this exercise makes me derive two conclusions:

1. If you are spending 20/- daily in cash, then you are not digitized enough.
2. ATM machine disperses a single 2,000/- note which is 120 days of expenditure. So should I cut it into 120 pieces and use it for the next 120 days?

I am still unable to comprehend why I am facing so much problem in obtaining a single pink slip of paper while politicians have stacks already assembled in their homes?

Let us talk about the latest amnesty scheme, the second one in 2016 which is ratified by the parliament.
A thanedar asks a thief what is he carrying. “Open it and show me.” Chor replies, “huzoor, it is ill gotten gains that I stole.” The police officer smiled and said “Are koi gal nahi. 50% jama kara de. Ja, ab tu imandar ho gaya.”
On a serious note, there are four forms of corruption:

1. Highway robbery: It can be as simple as LPG delivery guy extorting extra money for the cylinder delivery to low level officials asking bribe to perform their designated duties
2. Fraud where management, directors & proprietors collude to steal from shareholders, banks, government and even employees by over-invoicing & cooking up accounts
3. Neglect of duty & fiduciary responsibility: Also called as high level political corruption which involves deliberate tinkering with the laws and policies for personal gain & influence
4. Corruption need not be always monetary. Polarization of the masses and manipulating their emotions is also corruption. Debasing the population can be achieved through deliberate propaganda, false information and misrepresentation.

My question to all of you is “how do you think any one of these four evils will be curtained by demonetisation?”
It is easy to rally the voters to wage the war against corruption & black-money. However the leadership needs to realize that it is not an war against a single individual or region. It requires a planned systematic cleansing of the entire eco-system. If you want to keep corruption under check, here is the five point formulae that is globally accepted:

1. Simple & practical rules: The easier it is to understand, interpret & implement it, the less scope there exists for manipulation & divine intervention by the signing authorities.
2. Social stigma against the corrupt. Today the corrupt are revered for their wealth, influence and willingness to get things sanctioned. While the honest are marginalized as idealist who are not practical. I believe in the 10-80-10 rule. 10% of the people will be moral, no matter what. 10% will be always corrupt. It is the middle 80% who always try to “hitch their wagon to the star” they adapt to the circumstances and take decisions according to the reward & punishment environment that they perceive.
3. Transparency & accountability: tender process even after the reforms & digitization is more complicated and less transparent than most of the world. PWD official is rarely held accountable for a bridge collapsing. Crony capitalism is on the rise as political favors wins contracts & eliminates competition through bending the rules & requirements.
4. Making it difficult to spend & launder ill-gotten gains. The “no questions asked” income tax disclosure & amnesty scheme that are being rolled twice this year is actually a step in the reverse direction. As per economist magazine: Only 5-7% of the seized unaccounted wealth in the last 4 decades has been in form of Indian currency. Rest is in form of property, gold, foreign currency and other high value items.
5. Speedy justice & extemporary punishment in the cases. CBI & CVC are not independent organizations like the election commission of India. Hence have been reduced to toothless tigers who often serve the political agenda of their masters. The court cases last for decades, leaving the accused enjoy the rest of their lives on bail while the witness live in exile for the fear of their lives.

Demonetization is no Sanjeevini booty that can cleanse corruption. Digitization can impact the laundering but we are here to discuss demonetization. You don’t need to purge the country into chaos to promote cashless economy and digital payments.
I am not here for a political debate or even comparing the short comings of one regime against the other. What I am highlighting, is that the system is rigged and demonetization is barking the wrong tree.
Each parliamentary election candidate spends a minimum of 5cr INR for campaigning & canvassing. Additionally, he bears a share of the high command expenditure on TV, social media, national rally and even political campaigns in neighboring states. The MP salary & pension cannot cover these costs. Further-more there is no audit or political funds. No donor discloses how much they contributed and to whom and no political party even records the names. Add to it the vagaries of political uncertainty & even the time till next re-election. How can one possibly stay clean and yet afford the required resources to get re-elected?
In fact, what my friends failed to appreciate, is that hard Indian currency is not the only form of corruption. Gifts, gold, silver, forex & foreign account transfer, shares to the company or property is often considered adequate payment. Harshad Mehta had difficulty in stuffing 1cr in a suitcase. Today’s 2000-rupee note is smaller and has higher value. So one can stack several crore in the same space.
I guess the only achievement is this whole 50 day drive is to raise the base price for any petty bribe from 500/- to 2000/-. In fact, it has open newer streams of corruption. Bank officials & agents helping launder the money. Shops, jewelers, co-operative banks etc. are back dating receipts to accept old currency. While I need to wait for an hour to withdraw a single 2,000/- rupee note from the ATM, hordes of new pink notes are neatly stacked in the houses of corrupt.
 

Year end for me is a time for introspection. This year, I thought of reviewing the validity of the basic principals of Indian constitution. Attached is the picture of Preamble of Indian Constitution.

WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN, SOCIALIST, SECULAR ,DEMOCRATIC, REPUBLIC and to secure to all its citizens:
JUSTICE, social, economic and political;
LIBERTY of thought , expression, belief, faith and worship;
EQUALITY of status and of opportunity; and to promote among them all^[6]
FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation;
IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949, do HEREBY ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION.

Justice: “Justice delayed is justice denied.” While Indian courts are busy ensuring that National Anthem is played in each and every movie theater, thousands of Indians rot in jails awaiting trails. As per Indian express 68% of all prison inmates are under-trials. The rich & politicians always get bails and often die of old age before even appearing in court for the first time.
Liberty: Dare to open your mouth and hindu jihadis, RSS & political leaders will march with an army of minions and lynch you maybe even burn you alive. Most Gau rakshak are members of the ruling political party and will assault you for carrying even a leather handbag.
Equality: Pre-independence the farmers and the laborers used to toil for hours without break and give all their life savings as taxes. The rich used to flaunt their wealth and pay little or no taxes. Have to returned back to the same era? As per supreme court, the kings need not pay any taxes. The capital gains taxes on stocks, real estate & dividend income is also exempt, but the labor is fully tax without any exemption.
I am sure you will have more ideas to share and year end is a good time to reflect upon.

Forty-seven cases of disappearance of gold were reported from (the Custom’s vault at) IGI Airport having a total quantity of 67.40 kg between April and October 2016.. ET
So that like one theft every four days over the six month period totaling to ~200 crore from a single airport.Similar admissions were made in Jan 2014, April 2014, Dec 2014, June 2015 and now every 4th day in 2016. God only knows if we collect the data from all the airports of India how many thousands of crore will the figure add up to. So this is not an isolated incident or period of mayhem, but systematic theft most likely in collusion with the customs authority.
This is when Indian airports have one of the highest concentration of security personnel. Most international airports you can walk from car-parking to security to aircraft seat with a maximum of 1-2 human contact but it will take a dozen security personal interactions (irrespective of your race, religion or ethnic profile).
Firstly at the airport entrance a guy will check your ID & ticket (but has no means to verify the authenticity of your claims) This might be followed by a random baggage check (but I am not counting it as it is alleged to be random)
(2) Then Indian airports don’t accept digital check in on your phone/tablet. Also unlike Frankfurt airport, there is no automated baggage drop off. So you need to visit the check in counter/baggage drop off. Unfortunately the queue will be 30+ min even in Bangalore airport which is one of the newest airport in India and had the luxury of having the state of the art processes.
(3) Then at the security scan there will be one guy at the hand-baggage line. His job is to ensure that you have attached a small tag to every bag and give you token for the bag you deposited
(4) Most airports have an automated process of passing through the metal detectors. Unless the door frame machine detects something or you have not been flagged, you can just walk over and collect your check-in bag. But in India, every passenger & staff has to be physically frisked. Then he will physically stamp your boarding pass and give you blessings to fly.
(5) Wait, your security scan is not over. A guy will personally collect your token (step 3) and hand you your bag back. His job is to stamp the tags on each and every bag. If by chance you miss his blessings, you will be asked to repeat the step 3 to 5 again.
(6) At the immigration, similarly you will a guy whose job is segregate foreign passport holder, Indian passports with ECNR and Indian passports without ECNR. Probably India is the only country in the world where even a citizen with passport still requires emigration checks.
(7) Then a passport officer who will check your passport, visa, return tickets etc. Same to what you have in any international airport.
(8) a guy at the exit of passport office to physically check if your passport was stamped with the flight date or not. Apparently, he cannot observe what happened just 5 meters back in a queue.
(9) then at a boarding gate, an airline official will scan your boarding pass (some airports abroad have automated it but most have not.. so won’t crib)
(10) Another guy just 2m away checking if you have the right ticket. Apparently there is some trust issue between two organizations hence the need of additional manpower. What is more that he will again check the stamp in your bag. I haven’t seen it anywere
(11) Now the icing on the cake. Another guy will check your tickets at the other end of aerobridge. Guys it is a 5m long tube, are they seriously expecting teleportation?
(12) Many domestic airlines do a milkrun. i.e. they fly a big loop dropping/picking up passengers in the meantime. So every halt means somebody will wake you up, ask you to produce your boarding pass and identify your bags. Can’t they check with the passenger manifest and disturb only those guys who are not in their designated seats?
No security can be fool proof, but is Indian solution to create jobs for policemen or to improve the security. What is has achieved is that the boarding & alighting time for India is probably the highest in the world.

Hindu claims that 11 Lakh crore (~80%) of the demonetized currency notes are already deposited over the past 3 weeks and only 3lakh crore of old notes are in circulation with another 4 weeks to go. What further infuriates me is that rather than 80+% tax on unexplained wealth that was declared earlier, the amount has been reduced to 50% (those who keep cash hoard don’t care about interest anyways). Indian tax policy is not only at the whims and fancies of a single man but also subjected to no critical political debate.
When the government claimed that 65,250 was declared as black money in the IDS (previous income tax amnesty scheme), we naturally believed 45% of this was collected as taxes. However, there would be several guys like him, who declared 13.8k crore of black money without any intention to pay even the first installment. The poor man from Gujarat did not even own a car, traveled in auto and was probably declaring this large sum out of his misguided intention to help out Modi with his statistics. Government has not released any data on how much of this 65k crore is genuine.
You may also like these articles from EPW & Economist as well. The gist is:
Of the thousands of IT department raids over the years less than 5% of the assets recovered are in form of Indian currency. (remember the raid at Jayalalithaa’s house in 1996, almost everything was in 28kg of gold, 800kg of silver, 10,500 saris, bangles, footwear etc. but very little cash.)
Second was the parallels with USSR, North Korea and Myanmar and how large scale demonetization was a failure there. However, personally I felt a little offended by comparisons with these three mighty economies. The only reason there is still a popular support for Modi’s demonetization is because of the politicians, agents & crony businessmen flaunting their wealth while the country is robbed. Indians love penance and hardship even to the point of futile labor. They are hoping that government will muster a war-chest through seizures and will be able to improve infrastructure, facilities and develop a new India.
However, one should realize that black money is not the root cause for every evil & misery in India. Also without serious reforms & policy changes there will never be any permanent solution to corruption & black money.

As per 2015-16 statistics total petroleum consumption in India is 183 million metric tonnes. We are talking about 493 million kgs per day. At the density of .745kg/liter which is of diesel (petrol is at 0.719) this is 662 million liters of petroleum products. At the retail price of 55/- per liter (conservative estimate) this is 3,640/- crore per day of sale or 127 thousand crore over the 35 day period.
Assuming that 50% of this sale is through retail channels of Diesel, petrol & LPG. We are still talking of over 63.7 thousand crore of transactions which happens largely in cash and is sizable enough. If all these transactions happen in cash and there is no spike (extra sales) in the volume, we are talking about 4.5% of 14Lakh crore currency being deposited via this route. Through back dated bills, cooperative banks etc. some more money is getting shifted but I am presuming would have already been deposited in the 28^th Nov figures released by government.

The more interesting is the significance of 2.5Lakh in Indian demographics. Attached is the data from Credit Suisse that was recently published in Economist. Rather than taking the earning capacity, they have taken the entire wealth (includes property prices, less loans, cash, bank deposits, securities etc.) The distortion with annual earning as the metric is that it inflates the wealth by the young and the salaried, while under-reporting those not declaring returns or living off interest, dividends or rent.
It is interesting to note that bulk of the people should not be impacted by the 2.5Lakh relaxation. Also a lot of people in the 4 decile that I have highlighted would have wealth in property or already in the bank. Hence no impact.
The two questions that demonetization raises are:

1. Is the amnesty scheme of taxing only 50% under the black money bill (interest free deposits should not be a concern who are used to keep money under the mattress) is too liberal? Having the second voluntary disclosure scheme in the same year is too lenient. A better move would be to impound and de-notify the unexplained funds. This way Government could have mopped up the whole 3Lakh crore that it is aiming for rather than half of it.
2. Will it actually change the habits of Indians? If two years down the line we have the same level of black money, then probably this 50 day of hardship is for nothing.