The Megalomaniac strikes!
Modi's recent move of demonetising Rs. 500 and Rs.1000 notes is a masterstroke. He is a master at creating his own brand, and imprinting himself in the minds of the people. To do this, he can and does bypass everyone including seniors his own party. With this move, he would have antagonised many in his own party, as well as people across the political spectrum, and the trading community which was a strong supporter of BJP and RSS. Rather than count the costs to the party at large, the calculations in his own mind will be more to enhance his own image among the public at large, across the country.
And enhance his own image, he has. Who does not like a deliverer? The knight in shining armour who slays the dragon, and delivers the townspeople. That 'black' money is not a dragon, and that another dragon will in any case soon rise to take its place is forgotten in the euphoria. The knight is forever celebrated in stories and legends after that; the people's lives will anyway not improve by much, but the legends are then all the more important; like waiting for Kalki, the tenth avatar of Vishnu, to deliver us from the evil-doers of the current epoch.
Modi has enhanced his own image and obliterated other politicians from public consciousness, and this move is but one in the series of things he does in order to do that. Attending Sharif's birthday party in Lahore, was, I suspect a calculated velvet glove before the iron fist, planned in advance. Now the world admires him for being a he-man for taking the fight to the enemy, but no one can accuse him of not looking for peace first. I don't think he wanted the peace effort to gather any momentum; his brand only gains by being the he-man who can deliver the nation against the evil enemy.
Look at the justifications trotted out for the demonetisation. Terrorists are pushing in counterfeit notes into the country! This is an admission that notes can be counterfeited easily, but it is being celebrated as a victory over the evil terrorists. The notes have already been pushed into circulation, the people who are going to lose are the citizens. Is it not actually a failure on the part of the government to have allowed it to happen? What makes them think that the new 500 and 2000 rupee notes will not be counterfeited? It is a constant game of cops and robbers that goes on.
What about "we are attacking black money" with the demonetisation? Perhaps we are. But black money is not a dragon sitting there ready to be killed; black money is generated from activities, or flow, that enable people to avoid taxes. Some of this money sits around in the form of high value notes, but a lot of it stashed abroad, held in the form of gold, or held in foreign currencies. Demonetisation is a tool that can be used once in a while to disinherit some people of their money; in fact we have had demonetisation twice before, once in 1978 under Morarji Desai and once under the British in 1946. Has black money generation been curbed because of these moves?
What is needed to curb black money is to bring more and more transactions under electronic payments; it is a process of diffusion starting with the population with access to banking, with those who are higher educated, and with the urbanites, slowly moving to the others. Modern technology is making this possible with the penetration of mobile phones all across India, introduction of fintech solutions, spread of the internet, and biometric validation tools like Aadhaar. That process is underway and slowly we will see everything becoming electronic, and by extension, traceable.
So what is being achieved by this demonetisation? Certainly not an eradication of black money, since that is a process of generation, not accumulation; a flow, rather than a stock. What is being achieved are:
· Modi's personal brand has gone up among the Indian public
· He is being seen as a messiah, a deliverer; certainly not a bad thing for him
· Politicians, and other 'hoarders' across the spectrum are impacted big-time; but temporarily; they will bounce back
· The government is signalling its intent to fight black money very strongly
What is not achieved with demonetisation is:
· Curbing black money needs long term solutions like traceability which is possible by slowly moving to electronic transactions
· Tackling the major sectors which contribute to creation of black money and money laundering:
o Politicians and election funding
o Religious and other tax-free trusts which can accept anonymous donations which are used to launder money
o Real estate transactions
o Agricultural income which is non-taxable; a huge money laundering machine, but this is a holy cow.
What will be the impact on the economy? The impact will be short term. There is about Rs.16,50,000 crores in circulation in 500 and 1000 rupee notes. A lot of it will be deposited and converted to cash through the following means:
· Giving money to people you know to deposit two lakhs at a time
· Over-invoicing 'festival season' sales to the extent possible to show higher revenue
Depositing in excess of ten lakhs in your account is going to attract undue attention, where the tax plus penalty could even be hundred percent, thus forfeiting your money.
Assuming this will suck out about 40 to 50 percent out of the parallel economy, i.e. about 6 to 8 lakh crores, the consequences will be:
· Deflationary in the short term. The biggest impact will be seen in real estate and luxury goods sales
· Scope for the government to push more money into the system; in the form of 'infrastructure' and 'smart cities' etc., since this much money sucked out will leave a vacuum; these expenses in turn will result in creation of fresh black money because they involve political patronage and handing out of contracts
· Black money is like a lubricant in the economy. In the short term there will be some pain, especially in some sectors; even employment could be affected in sectors like real estate
· Real estate will take a beating, for a while. It is likely to bounce back, with higher guidance values, and lower 'cash component' till the new 500 and 2000 rupee notes take over for the cash component.
In all this there is a bigger philosophical issue that is at stake here. In the guise of preventing 'black money' the government will slowly come to know everything that I do. All activities require the lubricant called money; this money is slowly going online and my entire life is traceable through these online transactions. It is not just the money trail and taxes; all my purchases, where I go, what I do, my thoughts, my motivations, the people I keep company with; and with the help of big data and analytics 'Big Brother' will be able to figure out my deepest motivations and driving forces that even I am not aware of. A large part of this data gets trapped into the system by disabling cash payments which are anonymous. Big Brother, or the system, you can call it the Matrix, will soon know all my thoughts even before I think them, and everything about my life that is required to control me. This control is very subtle; without our own knowledge, right now we are all getting sucked into being part of the Matrix. I don't trust too much central control, and I anyway value my independence.
How do I keep transactions away from the prying eyes of the government? It is going to be increasingly difficult but I foresee that there will be parallel movements with people creating parallel currencies, some of them restricted to a specific geography, some of them restricted to specific interest groups, and some of them pretty much universal, like bitcoin. The same technology which enables the government to control more of our lives will come to our assistance in creating parallel economies that are out of the direct oversight of the government. Before you accuse me of being a tax dodger at heart, let me clarify, nothing of this prevents me from declaring and paying my taxes. I am not saying I necessarily will, but I am certainly not saying that I will not.
Amidst all this, do not underestimate the importance of gold. Just like the Rupee is a Fiat Currency, where a Mr. Modi, with a flick of his wand, can make it worthless, any solutions like those outlined in the previous paragraph are also promissory notes, which depend on the willingness of the other party to honour the promise inscribed in every note (which by the way is an empty promise. In those days it used to say "I promise to pay the bearer a quantity of gold"; nowadays it merely says "I promise to pay the bearer the sum of __" which actually means nothing).
Gold biscuits are a good currency. It can be stored away quite easily since it is not voluminous, its value is universal, definitely better than these useless promissory notes that the government can renege on on a whim, and it is not traceable. Think about it!