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Thursday, November 17, 2016

Demonetization of Rs 500 and Rs 1000: Could Modi have done it differently?

On November 8, just when a large number of Americans were queuing up to cast their votes in, what would turn out to be a historic presidential election, here in India, Prime Minister Narendra Modi made a surprise and unscheduled appearance on national television at 8 pm, in what would turn out to be a startling economic policy pronouncement that made as much as 86 per cent of India's currency invalid.

His aim was to wipe out the massive amounts of counterfeit banknotes in the denomination of Rs 500 and Rs 1000; and also to render invalid huge stacks of these currency that have been set apart to fuel unlawful practices like street protests, terror activities and corruption.  

Modi, who has survived cataclysmic social upheavals in Gujarat as its chief minister, knows well not only the power of symbolism but also that for anything to have a lasting impact it has to be swift and strong. The November 8 'surgical strike' on people who are wrecking India's economy and financial well-being, fitted well into the Modi style of governance.

The severity of Modi's decision can be gauged from the fact that it took at least one full day for the new economic order to sink in. Almost immediately, the stark reality of what is in every Indian's wallets struck each of them -- invalid Rs 1000 and Rs 500 notes and very few valid Rs 100 notes. Indians simply ran out of cash. And, to make it worse, banks and ATMs too ran out of cash. So, Modi's assurance that the invalid notes can be exchanged in banks for new ones amounted to not much.

Today is the ninth day; and instead of things getting better, seemingly it's getting worse. For example, today, the revenue secretary announced that the old notes can be swapped for new ones in banks only up to a maximum of Rs 2,000 per person. It was Rs 4,500. Since many ATMs aren't working, there is no point in depositing in accounts, since the money can't be withdrawn. 

While Prime Minister Modi deserves credit for taking this bold step, the lengthening queues outside banks and ATMs are fueling discontent among people and making both purchases and selling difficult. In short, it's hurting the economy, may be in the short term. But how it will play out in the coming days is not known.

Why Modi is correct

* Corruption is endemic in India. When the going gets tough, reach out for the banknotes, seems to a national mantra. Though it is commonly associated with government-related services, people bribe their way to convenience very often. While in some instances, cash can speed up matters, on other occasions it can mean serious compromise in quality. And, when government services are corrupted, nation's financial health weakens.

* Black money is in plenty. This is a large amount of unaccounted wealth. The beneficiaries are individuals, and groups of people who run organizations. The losers are the country (the government) and institutions, both private and public. Basically Indian financial culture is such that it promotes illegal wealth. For example, people don't mind forgoing the bill in return for a discount. They fake bills and financial agreements to escape tax. Many resort to cash transactions to avoid leaving a trail which would result in payment of tax. Poor people are only too willing to accept wads of currency from political parties who seek their votes. It's a huge ugly mess.

* Fake banknotes in the denominations of Rs 500 and Rs 1000 were so many that banks themselves were dispensing them and honest people too had them in their wallets.

* India has to reduce its dependence on hard cash. There has to be more of cheque or electronic transactions that will leave a trail. Unless people are pushed into it like this, the lethargic, complacent average Indian will not change.

Could this have been done differently?

* The Prime Minister had to make it a surprise announcement, since any inkling of this would have resulted in people turning black money into white, defeating the whole purpose of the exercise.

* It was common knowledge that - considering the amount of fake notes in circulation - demonetization was the only option. The most intuitive of the businessmen might have seen this coming, sooner than later.

* While the announcement of demonetization would have had to be a surprise, at the backend the government could have set the stage to minimise the hardship for people. 

* The RBI (Reserve Bank of India, the banking regulator) could have increased the supply of Rs 100 notes and instructed the banks not to put Rs 500 and Rs 1000 back into circulation. Instead new Rs 500 notes could have been put into circulation. It would have been a gradual process, and no one would have found anything amiss there. 

* May be a month into this quiet backend operation, the Prime Minister could have made the announcement of demonetization of the "old" bank notes. This way, while the end objective of curbing black money (it can't wiped out totally) would be achieved, the subtlety of the operation would have ensured that people had minimum inconvenience. 

What is at stake?

* This has both political and economic implications. Modi's advantage is that the opposition is fragmented, rudderless and leaderless. Elections in UP and Punjab could end up as a referendum on Modi's governance.

* Undoubtedly, business across the board has been hit. There isn't any cash around. Many people say this is just a temporary phenomenon. But how things would be dramatically better after a few months is not known.

* Nothing will totally wipe away black money from the economy. It can be reduced to a considerable extent. The government will have to follow this up with raids on tax evaders, bringing them book or even imprison them. Otherwise, this will just go down in history as a political stunt which amounted to nothing but inconvenience to the people.

Wednesday, November 9, 2016

Donald Trump's victory over Hillary Clinton: stunning but not surprising

What has happened in the US today is not what was probable but what was possible. Donald Trump had promised a Brexit like outcome and that has come true.

What's stunning is Trump's win rather than Clinton's defeat. But I am not surprised. What has mattered finally is the frustration of the grassroots of the society like middle class and working class with a system that simply didn't work for them.

His win has followed a familiar pattern where anti-establishment forces have prevailed over status quo-ist, and politically correct conformists. We saw that in the Brexit referendum. We saw that in the rise of Narendra Modi and of Arvind Kejriwal; and also of Rodrigo Duterte as the President of the Philippines.

This is more of Trump's victory than that of the Republican Party, because another reason for the historic result is the yawning gap between political parties and the people.

Trump and Clinton stuck to the script. He blasted the elitist Washington coterie and promised moon to middle class, factory workers, delivery boys and gas station employees. She attacked Trump, focused on women, immigrants and educated elite. Finally his script worked.

The way Trump controversially but steadily worked his way through the primaries to the White House is remarkable. He began as nothing. And as he progressed, no one seemed to like his ways. But he was progressing. That was a reality, which a vast majority of people, and the media, either were blind to, or thought would peter out finally. But that was not to be.

What we now need to see is how far Trump will be able to bring the fractured Republican Party and its supporters together. Because without that unity, he won't be able carry through many of his grandiose plans. Actually he will need to reach out across the aisle as well. There is a limit to how much confrontation can achieve.

The first indications of what the Trump presidency will be came in his acceptance speech. He is doing what inevitably he has to -- sounding Presidential, conciliatory and inclusive.

But still we really don't know what his plans are. He has broken many rules already. So we can expect quite a few out of the box policy plans from him. Exciting days ahead.

Donald Trump's acceptance speech


Hillary Clinton's concession speech


Barack Obama's speech on Trump victory



Wednesday, November 2, 2016

Book Review: The Madras Affair by Sundari Venkatraman

The Madras Affair
It was the catchy title of this book that made me check it out on Kindle Unlimited.

But, even before getting over 25% of the book, I was impressed by a very unlikely aspect of it: there were no typos or grammatical errors. I have spotted many mistakes in e-books even by well-known authors, and I wondered if the physical books too had them, or these errors were there only in the e-version, due to some technical issues. Kudos to the publishers, Readomania!

The book made very easy and good reading. The theme is a socially relevant one. Urban or rural, there are many families that give traditional customs precedence over individual comforts and happiness. "What will people say ... " often determines decisions. This book deals with it at different stages.

The story revolves around the life of Sangita. How much ever we are advanced in terms of money, education or technology, there are many 'Sangitas' around. They are trapped by the diktats of family elders who take false pride in adhering to some age-old customs, at the cost of the happiness and well-being of their own daughters or sisters. Some remain trapped for their entire lives; some manage to escape. The author has done well to not only focus on the life of a Sangita, but also give a positive spin to her story, and debunk a few myths.

The plot is well-structured and the story line generally flows well, though I thought at a few places the author could have detailed the scene a bit more, for emphasis. I shall refrain from mentioning those, lest it will be a spoiler.

My rating: 4 of 5 stars