Tuesday, January 3, 2017

DeMonetization: Pros, Cons, and the way Forward

Note: I consider "Black Money" to be a fuzzy term, a loaded term, and more often than not a term from "Commie/Marxist paradigm". For example, there is back money owing to tax-non-compliance. And then there is "black money" that is used for human trafficking, crime etc. One may need to distinguish these two. Also, while cash facilitates many unlawful activities, all cash is not "black money". On the other hand, corruption has been an endemic problem in India. Bribery, under-quality performance in government projects etc. In some way this also is related to "black money". So things are somewhat convoluted. In some sense, we can safely assume, that a significant fraction of people who kept large amoounts of cash with them, had a sizable amount in terms of money acquired using unlawful means, and also maintained likewise. So we need to keep all this at the back of our minds.

The lightening struck on 8th November. You might be surprised to know that this time almost everyone forgot 6th December. See? Now would you call this too a Narendra Modi master-stroke? Ha.

So let us get back to business. The demonetization has been described, criticized and eulogized in many ways and many fora. I do not understand (and often do not care to) the "genius brigade of economists". Not that I despise them or want to underrate them. After all academic pursuits must remain honorable professions. However, one must always bear in mind that a doctor's prescriptions which do not save lives or restore health, though in principle, can be read as pieces of literature, they surely undermine his reputation as a doctor. Well, I was about to write "... his/her reputation ...", but I have been heavily irritated by Feminism of late. And well, there are so many lady doctors these days that we may even use "he" as a gender neutral term, just as anti-sexists often use "she" to refer in a gender neutral manner. Okay enough digression.

So the question remains, is/was demonetization a success or failure? I will say that it is too early to say; but that does not mean that we should not say what can be said now.

There are certain observations which have been fairly obvious.

1. It inconvenienced a large number of people, including poor, middle class, rich, and all.

2. It almost rattled, nay drove mad, some people at "high places".

3. While the basic announcements of Dec 8, remained fixed, there were frequent announcements in the nature of what the eulogizers called "fine tuning" and the detractors called flip-flopping.

4. A large fraction of the amount that got demonetized (old 1000, 500 notes) got deposited in banks (almost 90-95%?).

5. During salary days of Dec 1-10 there were problems, but they do not seem to be there in Jan. So situation seems easing out. Or do we conjecture that December problems were choreographed?

Before I put forth my "economics" related view, let me present my view regarding general news etc.

The political clan/class got even more polarized into pro-Modi anti-Modi camps. So pro-M kept singing glories, and anti-M kept screaming. I would even hypothesize that anti-M swung into action to pursue by hook or by crook a complete failure of the demonetization scheme (check point 5 above, for example). So from this perspective, what politicians have been saying is not worth much.

The same can be said re' media and the so called public intellectuals etc.

The common people also got polarized. I mean, at least the hardcore supporters of anti-M leaders were venting bile. We can choose to ignore the pro-M as well. However, the large number of commoners, while being inconvenienced and admitting to being inconvenienced, continued to speak positively about the decision. You must bear in mind that media was constantly stoking people into anger against Modi, and yet, many many people remained upbeat about demonetization.

I think there is a very important take away here. I am trying to understand it as follows. People in India know that things had been getting worse and worse as days went past (in terms of corruption etc), and something needed to be done. Demonetization is seen as one such thing, may be, among many other things. I think, people chose to give Modi the benefit of the doubt. Even if they do not trust Modi's intelligence, they did exhibit trust in Modi's integrity and intention. And I think they expressed a feeling like so: Okay, there is this tough problem (say Corruption and all), and this guy wants to do something about it. Okay, let's go along. And I think this led to the underlying theme of cooperation with government. And I read it as a very very good sign. If Modi is serious about doing something, he should consider this as his great capital. In more of his future plans, he could even go a step further and say that we are going to try many things (say these 10 things), and it is not necessary that all will succeed, and that even among the things that succeed, all will not succeed equally. Some may succeed more and some less; and that we need to keep striding forward. If he can deliver the message and take necessary bold steps, he can make significant difference. To me, this has been a very important take away. Even more important than success (or not?) of demonetization.

Most economists kept themselves busy re', what I would term, petty issues. Don't get me wrong. I am not saying that a dip in the growth rate is not an issue, etc. Let me explain it in Cricket-commentary terms. A lateral digression: Some one made a very apt comment during this demonetization. He twitted: India had 1.2 billion Cricket Experts until now, and now we also have 1.2 billion economists. So as one among the 1.2 billion "cricket experts" (BTW I am not a cricket buff in any way, though I am highly opinionated) let me explain what the economists were doing. There has been this Ravi Shastry, who was also team India coach, I guess, for some time. Long time ago I heard him commentate once, he used to fill all his time commentating with a truism like this: What India (batting side) needs are a couple of good overs, and what XYZ (bowling side) need are a couple of wickets. Unfortunately Demonetization needs to be evaluated in terms much more complex compared to a one day match in cricket. However, I felt, many "economists" were doing just the same, ranting truisms. And, yes, let me warn you here, that even if the terms are complex, we must still approach them in simple manner (not necessarily simplistic manner) and not obfuscatory manner (something that economists often do, even when they are ranting truisms).

By the way, in an interview to India Today (here), PM Modi himself has outlined his thoughts very lucidly (though he may still be keeping some trump cards close to is chest).

Coming to the meat of demonetization: Any decision has to be evaluated in terms of the following (among other things): 1. What were its goals. 2. How long was the achievement of the goals to take; and then 3. Does achievement time-line reconcile with intended time-line? 4. What grade will we give to the decision and implementation.

Now, if you look at any one, whether politicians, economists or media persons and media intellectuals, they are all at sea in defining (even in their own framework) these terms. If you read the interview, you can see that Modi has chewed them alive.

About the goal of demonetization I can say this: Modi had a double edged sword. If a significant fraction of demonetized currency notes had not come back, he would have thumped his chest and said "See? I was telling you! So much black money has been neutralized, blah blah". Now that most of it is back, he is comfortably saying "All the money has come into the formal banking system, and we can do, .. blah blah". So is Modi cheating? His political opponents will shout so. But I think Modi is not that foolish. Actually if you read the interview, you can notice that he is very intelligent. I mean he can beat hands down these Manmohan Singhs and PChiddus hollow, playing left hand blindfolded. I think, Modi took the demonetization decision realizing that it would "work" in either of the case (money comes back, does not come back).

Now, while it is true that money not coming back would have (likely) meant a big blow to those who lost it; but I think the money coming back could prove to be worse. It may lead to some very big fish getting caught, and brought to book. I think that is where Modi's challenge will lie. And I am quite sure that all those who got their "wealth" converted, are still shitting in their pants, re' what might happen.

An equally big, if not bigger, challenge is to ensure that further "black money" is not generated. I think his thrust for digital-money is a step towards that goal. However, cyber systems and their security are another level of challenge. I can only hope that Modi is not on flimsy grounds here in terms of getting sane advice. While I have recommended to Modi (come on, I am a nobody and not his advisor, I am a 300 followers twitter guy. I just twitted to him) an article "Reflections on Trusting Trust" (link here), I would remind him of another few quotes: 1. Cryptography is not broken, it is bypassed. 2. Security does not work because we have locks, it works because we have police. Again, I am no expert, I have merely gleaned this from the web, and also confirmed it with some people who I think know at least a little about cyber security. So Modi needs to be aware of two things: 1. While cryptography is a great science and engineering marvel, it by itself does not ensure security. Designs must incorporate mechanisms to thwart its bypassing. I am mentioning this because I think presently Modi is relying on UIDAI flunkies who seem cyber-security dumb-fucks. I earnestly hope that I am wrong, but I fear I am not. So he needs better cyber security advice. 2. He needs to strengthen cyber police. I mean this obsession with tracking down who posted Sonia's nude pics etc needs to give way to teams which monitor real security threats, intrusions, breaches and pursue and apprehend the perpetrators and bring them to justice. However, if Indian cyber police remains as bad as India's normal police, this fetish re' digital-currency could lead to a pretty bad wash-out!

So to summarize: In terms of goals, demonetization has (already) succeeded in bringing (all) money to formal economy. The remaining parts are: 1. How many (big) fish are caught, brought to book etc? Time will tell. 2. What additional measures are taken (like benami property etc)? In near future, time will tell. 3. How to stop generation of black money? In addition to. so called digital economy, simplification and rationalization of tax laws will be needed. So the forthcoming budget might give some hints.

So in that sense, one could say, so far so good.

But there was another aspect: Implementation.

Now, while this was not the best of implementation, it was reasonably good, except, and I insist except, that I suspect there was some insider treason. I mention a few points. That's not all of it though. Others may mention other points.

1. I think sufficient adversarial analysis was not done. I had twitted the suggestion for indelible ink mark re' cash-exchange. I do not know if the clerks in Modi's team already had thought of it. If they had not thought of it, I consider it a very very serious lapse. And besides such collossal incompetence, there is this aspect of deliberate subversion. I think, demonetization has also brought this aspect into the fore that "government system" is infested with bugs and worms (likely loyalists of previous governments, politicians etc). This is a major problem. Modi will have to ReBoot this part also.

2. I would strongly recommend that Modi gets bank records digitized and secured (has multiple copies etc). For, I suspect that "big fish" will surely attempt destruction of records to escape law. We have seen such things happen many times. Recall Abhishek Manu Singhvi claiming that something got eaten by termites.

3. Detecting fraud etc will need really able minds. Just "imported" big-data software may not suffice. And if Modi's big data team will be like his BJP-IT cell team, MyGov team, etc., then Modi can kiss success a good bye. Modi is already making noises like, for the first time some thing so large has been attempted. Sounds so much like the Aadhaar blabber. The Aadhaar promoters were using the exact same language. Modi should understand that such statements can also be read as: For the first time we screwed 1.2 billion people on such a large scale, so quickly. So get rid of such platitudes. Get the real job done.

4. Modi must smoke out treasonous bugs from his team. As well as, get loyal as well as competent teams built.


1. Demonetization has been so far so good: Money has got entry into the formal accounted economy.

2. Sustained and high quality effort will be needed to catch the fraudsters. Ditto to thwart further generation of black money, as well as checking corruption.

3. Digital Currency, Digitial economy is promising, but without proper care it could lead to precipitous situations. Get sane and competent Cyber advice, set up cyber police (not a la 66A kind though).

4. The biggest take away has been the human-trust capital that people have showered on Modi. He must humbly accept it, and make use of it to lead people to their greater destiny. If he can work out a few great ideas (not the fucked up "true secular" ones), and succeed (say) even in 3 out of 5, he would do wonders to his people. While planning for winning 2019 elections must not be taken lightly, with such trust-capital he must aim much higher, and as well achieve more than his aim.

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