Demonetization and the Black Economy

Title: Demonetization and the Black Economy

Author: Arun Kumar

Publisher: Penguin, 2017 (First)

ISBN: 9780670090075

Pages: 300

The demonetization of high-denomination currency notes announced by Prime Minister Modi on 8 November 2016 was a landmark event in Indian economy. Currency worth 86 per cent by value of the total was forced out of the system all on a sudden. Naturally, this led to difficulties in industry and economy, particularly in the unorganized sector. Even though the government claimed fifty days for restoring money supply, it took nearly three months to bring the situation back to normal. The government took this drastic step to curb the growth of black money and there has been a great debate ever since about the usefulness of the measure. Demonetization had only a limited success as a great majority of the banned notes came back. However, it introduced the concept of financial discipline and initiated the drive to a cashless economy. Financial experts analyzed the initiative with their preconceived political and economic notions guiding them. Arun Kumar is a retired professor of JNU, New Delhi, who has written, studied and lectured extensively on the subject of black money. He was a postgraduate in physics who later switched over to economics with a PhD from JNU. The university is thought to be a hotbed of ultra-leftists and the author’s opinion on Indian economy and demonetization are on expected lines. The book was published in 2017 and the author has offered some predictions on the future of India's economy. If the book is to be believed, the economy would have come crashing down by now in 2019 due to the structural damages inflicted by demonetization.

Arun Kumar’s primer on the nature of Indian economy is very informative. The unorganized sector provides 45 per cent of the country's output and employs 93 per cent of its workforce. But, this sector is opaque to estimation of any kind as its deals are not through banks, and are carried out through cash transactions. Obviously, this sector was the most affected by demonetization. The book claims that production in non-farm sector was completely stalled, rate of economic growth turned negative, investment fell and this led to a recessionary situation. This fall is not reflected in the official figures by the fact that data for the unorganized sector comes with a lag of one to three years.

In his all-out tirade against demonetization and Modi, Arun Kumar is extraordinarily accommodative of some of the ‘lesser’ evils. He supports the use of very high denomination notes as that will facilitate ease of cash transactions, in a predominantly cash economy like India. He opposes cashless modes of transactions and claims that these will be slow to take off because of frauds taking place online from time to time! Both the black economy and the unorganized sector lead to a higher proportionate demand for cash in the Indian economy.

This book presents reasons why an extreme step like demonetization will not score against black money. The author argues that only a small part of the black money would be in the form of cash. The rest would be invested in assets so that a return can be obtained. Black money is only one component of the black economy which is guessed to equal a size equivalent to 62 per cent of GDP. Also, black income generation would remain unaffected. This is not just bureaucratic corruption. A doctor under-reporting the number of patients in his private practice is an example of how black income is generated. There are some confusing aspects in the argument. Transfer income such as those generated by sale of land is not counted as black money because no income is actually generated in the deal. This was just a gain on capital invested earlier. This may be true if both the buyer and seller used black money for finalizing the deal. If the buyer used white money, or at least a part of it, it suddenly turns black and would this not be fit for a case of black money generation?

Some of Arun Kumar’s arguments are irrational and forced. One such case is his visceral hatred to the use of new technologies for dispensing subsidies direct to users’ bank accounts. This has proved to be an effective way to stop corruption. However, the author counters this argument with a stodgy remark that if the people operating the computer are corrupt, they will use the technology to propagate more illegality. Then again, his estimate of when the printing of new notes would be completed goes totally off the mark. He assumes this to take two years even if the presses are operated round the clock. His predictions are apocalyptic in nature and looking back after a gap of two years, we find them laughably facile. He warns that the credibility of the currency and banks would be dented over time and this will result in a shift towards the holding of gold and foreign currency which will be used to circulate black money. There will be flight of capital from India, leading to decline in foreign exchange reserves. Needless to say, nothing of the sort actually happened. Arun Kumar’s criticism of the digitization movement in the economy is stinging. They are said to be undemocratic and he recoils in horror at the prospect of linking his Aadhaar unique identity number to his income tax account.

However hard he flays the administration, there is a grudging admission that the Modi government has indeed been making attempts to tackle the black economy (p.73). Only 3 per cent of the population controls the black economy. At present, the tax to GDP ratio is only 16 per cent and if the entire black money is brought under tax net, this would skyrocket to 40 per cent, which will be one of the highest ratios in the world. On the narration of how black money originated in India, the author leaves out a few aspects probably owing to his ideological commitment. At the time of independence, the Southeast Asian countries were at the same level of development as India. Then they grew at 6 to 8 per cent annually while we faltered. Why did we falter? This question is left unanswered, when the real reason was the socialist bent shown by Indira Gandhi in the 1960-70s. This bred corruption through a labyrinthine network of licenses, quotas and permits. As a result, black money grew by leaps and bounds, which is sustained by the triad of businessmen, politicians and a corrupt executive. There is need for political change which requires new parties and political reform. So, that is the author’s valuable advice to defeat black money – create new political parties and reform. He is silent on the reform measures as well as on action needed against the other two members of the triad, namely, businessmen and bureaucracy.

This book’s political bias erodes its credibility. Its accusations on the Indian government and its democratic credentials, Modi's dictatorial tendencies, rise of fear in society and weakening of democratic institutions are an exact copy of the allegations made by the communist parties against Modi. Arun Kumar’s attack on automation in industry and agriculture due to the feared loss of jobs certify his intellectual servility to petty politics and outdated theories of manual labour. His admonition to Modi to correct the anti-poor and pro-business image of his government before the 2019 elections provides comic relief in view of the ruling party’s thumping win recently at the hustings. This shows the true colours of such ivory tower academicians who have lost all touch with the masses. They dream that Lutyens’ Delhi is India and that if cash is temporary unavailable, the rural businessmen would sit idle like these people who take leave from work occasionally. His intolerance of the private sector is unbelievably anachronistic. He accuses them of dealing with high levels of malpractices in the education sector and being highly rapacious and corrupt in the health sector (p.72). Equally strange are his assertions that there is not much counterfeit currency in the system, not much black money is held in Swiss banks and real estate is not the biggest generator of black money.

There are hundred pages of annexures accompanying the text which runs to 178 pages. A lot of charts and graphs are included but these are mostly irrelevant to the argument. 30 pages are reserved for listing government notifications regarding changes in the re-monetization drive. A chronological list is followed by a detailed thematic list. The outlook is disgustingly pessimistic which is tinged with political partisanship.

The book is not recommended.

Rating: 2 Star

Of Counsel

Title: Of Counsel - The Challenges of the Modi-Jaitley Economy

Author: Arvind Subramanian

Publisher: Penguin Viking, 2018 (First)

ISBN: 9780670092093

Pages: 347

Arvind Subramanian was in the news recently when he exploded a bombshell in knowledgeable circles when he claimed that Indian governments from 2011 onwards regularly massage the GDP figures to quote a value which is almost 2-3 per cent higher than the actual. Coming from a former chief economic advisor (CEA) to the government from 2014 to 2018, this comment struck on the very credibility of the financial establishment. However news clips now appear which negate Subramanian’s contentions and deride him for producing an erroneous report without the rigour of a serious academic paper. Whatever may be the truth in this set of claims and counterclaims, one thing that is incontestable is that our former CEA is not averse to courting controversy. He had a dream career spanning four years at the helm of economic decision making in India which was full of challenges and opportunities. Demonetisation and implementation of GST were two major hurdles of the government which assumed epic proportions. Memoirs of such a person who contributed his part in driving the country to safety is of great significance to readers. That is how this book becomes worthwhile for the reader – before he actually gets hold of it.

If I can say it without disrespect to the wisdom of a financial guru of the stature of Arvind Subramanian, I would straightaway conclude that the book is a deep disappointment to laymen who are not much conversant with the finer nuances of economic theory. Instead of a memoir, what we get is a series of opinions on the problems facing the country, some of which are formed three or even four years ago. In short, it is not a record of how it was done, but rather how it should be done. On the other hand, his primer on the uniqueness of India is appealing. India is claimed to be a complete outlier among the comity of nations in that it sustains a fully functional democracy at very low levels of income, low level of literacy, with deep social fissures and with a highly agrarian economy. In short, it is an exception rather than the rule that democracies are rich, industrialized Western nations having small populations. Subramanian points out that we had committed two great economic sins when we went for heavy licensing in industrial policy and the nationalisation of banks in 1969. In all the other cases, we tried to protect Indian industry against competition through import substitution and public sector. But in this case, we taxed and expropriated domestic investors. This was a very costly mistake.

Though India is undeniably capitalist, the system doesn't find many backers among mass media or the public. The author identifies India's economic system as stigmatised capitalism. It assumed the stigma from its troubled experience in the country’s failed socialist experiment. The private sector was midwifed the in the pre-1990 licence raj which was marked by widespread corruption and collusion between industrialists and politicians. The stigmatized capitalism thus grew through crony socialism. The slur associated with capital in the public mind prevents the officials from deciding in its favour even though circumstances demand it. The decision is thence left to the courts. Capitalism in India is still unwieldy as there are no exit routes for failed enterprises other than simply dragging along. Earlier, we had socialism with limited entry that led to capitalism with no exit. Even with this dichotomy, India is more integrated than we think. Language – which are so many in India – is not a barrier to the flow of goods, services and people. Ratio of internal trade to GDP is 54%, which is quite high. Indian trade is more focused on products requiring higher skill to manufacture. This leads to outflow of human resources from states where living conditions have not improved much.

Subramanian suggests many solutions for India's economic woes. The point of listing all such options after demitting one’s office is anybody's guess. His plan for tackling the nonperforming assets of banks is ingenuous. Banks as well as private enterprises are involved in bad loans. The author proposes an asset rehabilitation agency in the public sector to take over bad loans and resolve the issues, possibly by selling the company itself. Capital demanded by this exercise may be obtained by diverting the surplus capital owned by the Reserve Bank of India. This amounts to a whopping 4.5-7 lakh crores of rupees and Subramanian calls this forced transfer rationalisation of capital.

Demonetisation was a bold initiative of Narendra Modi. There are arguments on its rate of success, but there is no denying the great audacity on the part of the government. Instead of relating in first person the undercurrents of the decision, Subramanian calmly presents a few analytical details that are not much exciting than the Op-Ed page of a conventional newspaper. Demonetisation is said to have engendered two puzzles. It was exceedingly popular politically even at great economic cost as attested by BJP’s sweep in the 2017 Assembly elections in Uttar Pradesh which was the first major election that followed this initiative. The breadth of its impact could have been a credibility-enhancing device. If-it-hurts-me-so-much-it-must-have-hurt-the-rich-immeasurably-more must have been the reasoning of the poor. The second puzzle is that it didn't have bigger effects on overall economic growth in spite of the draconian 86% reduction in cash supply. He suggests a possible mechanism for this. There are no timely measures on informal sector activity that gets reflected in GDP calculation. GDP figures are tied only to the formal sector. After demonetisation, the informal sector declined, but was not displayed by the numbers. This is just a hypothesis of the author.

What is uncharacteristic of a scholar with strong links to the West is the author’s less than forthright approach to the continued use of coal discounting its effect on global warming. This book argues for clean and green technologies that can improve the way coal is used in India. The social cost of coal is still higher. The chapter titled ‘Renewables May be the Future, But Are They the Present?’ is an excellent technical argument with lots of charts and diagrams. Readers would however find this tedious. Subramanian is not much enthusiastic about renewable power as subsidy for renewables eventually lead to stranded power assets in the traditional sector. Profitability and efficiency would decline for thermal power, and public sector banks which liberally lent to them would find their assets nonperforming.

The author’s resentment against fertilizer subsidy is partially powered by irrational fears of the incidence of cancer due to supposedly high use of fertilizers. This is totally baseless and pseudoscientific. The book is burdened with a lengthy introductory chapter which practically sums up the entire argument. Each chapter is further provided with the long preface, repeating the structure in a somewhat fractal way. An issue is discussed briefly, followed by a number of possible reasons listed with ordinal numbers. This becomes taxing further into the text. Some of the arguments in the book stray into flights of fancy such as this one: “One lesson we could draw is that we should go back to restricted franchise, which, of course, is a decision no one in this day and age would make”. What should one expect from a high government official who waxes nostalgic about a thoroughly undemocratic construct?

Many chapters were written in 2015 or 2016 and don't represent insightful opinion made with hindsight. The author concedes that the first seven chapters are turgid and provides a diversion by dwelling on tennis, which itself is cumbersome to follow. The economist’s terse style is visible here also.

The book is recommended

Rating: 2 Star

Curry

Title: Curry - A Tale of Cooks and Conquerors

Author: Lizzie Collingham

Publisher: Vintage Books, 2006 (First published 2005)

ISBN: 9780099437864

Pages: 318

When I was in college, there was an old witticism which ran something like this: “Heaven is when you have a German car, American salary, Chinese food and Indian wife. Hell is when the car is Chinese, food German, wife American and salary Indian”. However, with the 2015 pollution scandal concerning the German Volkswagen brand and twenty years with an Indian wife, I am not so sure of its authenticity anymore! But Indian food, especially its curry, deserves a better deal as attested by its increased acceptance in various parts of the world. As can be expected, the food in the Indian subcontinent is very much varied in style and substance with the ubiquitous rice in Tamil country, sickly sweetness of Gujarat, mustard oil in Bengal and the unbearable hotness of the Telugu cuisine. The subcontinent was partitioned into three countries in the last century – India, Pakistan and Bangladesh – but the cuisine unites them still. Indian curry was popularized in other countries with the growth of imperialism. Colonial British administrators who had retired to a peaceful life in the home country and the Indians studying or working in England craved for Indian food. This steady demand spawned a string of affordable restaurants, from which the fad spread to other parts of the British Empire. Another wave of Indian migration occurred after the Second World War and the oil boom of the 1980s. The curry is hence finding more and more adoring patrons in all the places it had visited. This book presents the story of how it was transformed into something like a home-grown dish for the British and the immense changes which took place in the ingredients and preparation of it. Lizzie Collingham is a historian interested in linking the minutiae of daily life to the broad sweep of historical processes. She has also written another book which examines the Second World War from the perspective of food as a weapon of war.

The traditional Hindu society was very particular with what you eat, how you eat, whom you eat with and who cooked it. The author presents a clear observation on the taboos associated with this simple act of eating. The social status of the cook was especially important for kaccha foods which are not properly cooked and just prepared with water. Water softens the food and opens it up for (ritual) contamination. The pakka foods were prepared in ghee or oil, a product of the sacred cow. This saving grace allows high-caste people to sometimes eat them even if they are prepared by lower castes. Such extensive rules were made irrelevant and impractical with the growth of railways. During long journeys, the travellers prudently chose to do away with caste rules rather than starving. Food taboo was another concern. Muslims won't eat pork and caste Hindus won’t eat beef. As far as other non-vegetarian food is concerned, attitudes were malleable. Kashmiri Brahmins would eat mutton while Bengali Brahmins would happily gulp down fish. Generally, the author observes that caste rules and regulations on food were far more flexible than they looked on paper. Some Ayurvedic textbooks recommend a beef-rich diet to people with active occupations. The Mahabharata mentions Brahmins enjoying good beef dinners (p.23) while it also includes a passage where a cow complains about the wanton carnage committed on her relatives. Outlook towards the consumption of beef began to alter as the country became increasingly agrarian and Indians relied more heavily on cows as draught animals and to produce milk. A ban on cow slaughter was then not long in coming.

A great infusion of external tastes to Indian taste buds came about during the Mughal period. Mughal cuisine was a synthesis of Indian, Persian and Central Asian foods and recipes. Humayun was exiled to Persia for a few years under the reign of Sher Shah Suri. He brought with him Persian cooks when he regained the throne. In Akbar's time, the delicately flavoured Persian pilau met the pungent and spicy rice dishes of India to create the classic Mughlai dish, the Biryani.

India came under the influence of Europeans from the sixteenth century onwards, who introduced many varieties of American eatables like pineapple, chilli, tomato, potato and maize which found quick acceptance in Indian cuisine. The British food didn't enthuse Indians, but their eclectic approach to Indian cookery created a repertoire of dishes which brought together in one kitchen influences ranging from all over the subcontinent. That is, North Indian food came to the south through British hands. Mughlai cuisine was employed only by the Muslims, but when the British co-opted it into their dining tables, it found wide reception among Indians. However, British dining habits underwent a subtle change in the latter half of nineteenth century. With the introduction of steamships and the opening of the Suez Canal, more British women came to India and the British began to get more insulated from Indians. Officials educated in public schools were promoted as colonial rulers who wanted to demonstrate the superiority of the British race. Around this time, they became aware of the White man’s burden and the priority of the rulers shifted to bring the benefits of civilization to the ‘backward and impoverished people’ of India. As a consequence, curry and rice were demoted from evening dinners but they continued in the menu during camping in the countryside and long voyages.

The final part of the book tells the story of how Indian food reached and conquered British minds in their homeland. Today, there are 8000 Indian restaurants in Britain and the majority of them are run by Bangladeshis. More than any other ethnic food, the British have made curry an integral part of British culture. They spend at least GBP 2 billion in Indian restaurants every year. However, Collingham makes a friendly warning that consumption of large quantities of curry has not necessarily made the British any less racist.

Reading the accounts of enthusiasts writing their experiences in the past, we can't help notice the poor quality of available food even to the rich and influential. One Englishwoman, new to India, was horrified to discover that her breakfast was full of little cooked worms. After sometime in India, she gave up trying to eradicate worms from flour and came to the conclusion that ‘it is better to come to reasonable terms with nature in the East’. We have come a long way from the point when even the society’s elite had to be content with contaminated food.

The book exhibits surprising historical propriety for a volume of its kind. It also lists a mindboggling collection of very old books pertaining to the Raj period in its bibliography. The author has taken great pains to collect recipes of major Indian dishes and to mix it dexterously with the text and also at the end of each chapter.

The book is recommended

Rating: 3 Star