Is it a failed Democracy?

The ascension to power of populist strongmen like Donald Trump in the U.S., Recep Tayyip Erdogan in Turkey and Narendra Modi in India demonstrates the limits of electoral democracy as a system of truly representing the political will of the people. In all three cases, the numbers suggest that most voters wanted these individuals and the political parties that they respectively lead — the Republican Party, the Justice and Development Party (AKP), and the Bharatiya Janata Party (BJP) — to form the government, but the reality in each country veers away from these purely numerical electoral outcomes.

The logic of democracy proposes that the choice of the majority will stand in for the choice of the whole electorate; but in fact, those who did not choose these leaders or their parties find not only that their will is not being communicated, but that it is being thwarted, undermined, or worse, directly opposed. This is how a supposedly democratic process ends up undermining ‘the people’ for very large numbers of voters.

Judging from Mr. Trump’s statements during his bruising election campaign, his administration will work against racial, religious and sexual minorities, coming down hardest on immigrant communities in America. He has nevertheless won the electoral college votes necessary to be named President-elect. But it is the presidential candidate of the Democratic Party, Hillary Clinton, who has won the popular vote by well over 2 million votes, and counting. Protests against Mr. Trump have swept across American cities, including New York, Chicago, Los Angeles, Portland, Austin, Boston and Miami, with hundreds or sometimes thousands of people asserting that he is “not my President”. The immediate aftermath of his election shows the U.S. to be a country utterly divided, calling into question the foundational “union” implied in its very name.

Mr. Erdogan and his AKP got elected with a decisive mandate of just below 50 per cent of the votes in the Turkish general elections of November 2015. But after the failed coup against him on July 15, 2016, he has come down hard on members of the Gülen Movement (followers of the shadowy cleric Fethullah Gülen) that engineered the coup attempt, and his political opponents loyal to the Kurdish nationalist party, the Peoples’ Democratic Party (HDP). His government has arrested, jailed and fired tens of thousands of suspected Gülenists and Kurdish sympathisers, picking out individuals from civil society, the army, the judiciary, universities, the press and political outfits. Mr. Erdogan’s purges are pushing what is technically a multi-party democracy towards what looks increasingly like a one-party state.

Democracies everywhere appear to be in danger. Many electoral democracies are becoming outright illiberal; some are deteriorating into forms of competitive authoritarianism.Violence against Muslims, Dalits and tribals, curbs on dissent and criticism, attacks on secularism and tolerance, and a sharp decline in the freedom of the media and academia have become vandalised in the name of a new “nationalism”. Since this summer, Kashmiris have endured the worst crackdowns against civilians and the longest curfews of the past 30 years under the BJP-Peoples Democratic Party coalition government.

The system of representational democracy — whether based on an electoral college or first-past-the-post — is also opaque about why citizens vote for this or that party.

The challenge is not only for citizens to reconcile their own opinions and aspirations with those of their compatriots who have different political preferences. The onus is on the government of the day to acknowledge that just because it won the election does not mean it represents the actual plurality of voters, their views and their interests. The sitting government has to rise above the ideology of its particular party in order to take the totality of the electorate and citizenry along with it.

Progressive, liberal, secular, egalitarian citizens of all three big electoral democracies — India, Turkey and the U.S. — have to find ways to protect the diverse and inclusive character of their nations, to strengthen their constitutional foundations, and keep in check the illiberal, populist strongmen who have ascended to power with mandates that are numerically partial and morally compromised.

To quote President Lincoln, “Democracy is the government of the people, by the people, for the people”. Is it really FOR THE PEOPLE?!

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Cash is the new Trash

In a new tryst with destiny, once again at the stroke of the midnight hour on November 8-9, Mr.Modi effectively demonetised large denomination notes in India. Of the Rs.16 lakh crore-plus in circulation, Rs.500 and Rs.1,000 notes account for about Rs.14 lakh crore and more than 85 per cent by value of all rupee bills in circulation, as per Reserve Bank of India data.

At the heart of it is the simple proposition that large currency notes are used more to conceal than to purchase. Mr. Modi has converted this one sentence into an economic boom in his true fight against black money and corruption, which is laudable.The U.S. stopped issuing $500 notes in 1969, the European Central Bank halted 500-euro notes early this year, and Singapore killed its $10,000 note and Canada its $1,000 note in 2000. India has one of the highest cash to GDP ratios at 12 per cent (excluding the parallel economy) and despite a well-publicised amnesty scheme, the fear of god had not sunk in. Now it will, with Mr. Modi’s big-bang step.

Indeed, there will be some contraction in money supply and thus a slight deflationary impact, which will cause some inconvenience in the very short term to the average citizen, which the Prime Minister has acknowledged repeatedly in his speech, but this will be compensated by significant benefits in the long term for all law-abiding citizens.

The deflationary impact could be felt in sectors where cash is the main instrument of transaction and perhaps in some asset prices as well, such as in real estate. In the longer term, it will lead to a greater proportion of the economy shifting from black to white. Those who hold large amounts of cash may, if they deposit it in banks and perhaps pay taxes on it, be forced to join the white economy. It may also raise permanently the cost of holding cash by adding a risk premium. This may encourage people to take the certainty of paying taxes in lieu of the uncertainty of holding black cash.The next big hit should be on purchase of benami property which is a national avocation, for that’s perhaps the other big outlet and repository of black money. When the Goods and Services Tax comes into force, the government should do away with stamp duty on land at any stage of the sale; moreover, the tax rates on purchase of property should be dramatically slashed. This apart, election funding reforms and online voting are all big steps in the continuum of reforms, of which this was just the first big step.

The incentives for honesty have been improved, dramatically, with this reform measure, much needed after it was last done in 1978. This will seriously affect the stock of black money but the effect on future flows is unpredictable. However, the flows will perhaps be reduced because of the increased risk perception in cash transactions. Further, the government should take steps to increase mobile penetration, pre-bundled with cash apps, which will make it easier for those who wish to go digital.

Cash is the new trash and the Prime Minister has acted decisively, ending reams of debates, declamations and declarations. Changing human behaviour is the hardest thing to do in the world — Mr. Modi is doing just that in one of the most difficult ecosystems in the world. As a small aside, he has also dealt a body blow to ‘terror money’, and electoral politics in India will never be the same again.

The new colour of Money

“Black money is so much a part of our white economy, a tumour in the centre of the brain – try to remove it and you kill the patient.”

Black money and white money are simplistic concepts; there is a grey area in between. In a country such as India, given the lack of financial inclusion, the financial and legal illiteracy, the history of tax laws and foreign exchange regulations, monetary and financial culture, nature of political funding, availability and use of insider information in the economic and political spheres, and so on, there is a need to handle matters in a sensitive manner. There is, of course, a need to do something about all the black money, even if parts of it are “grey”. The policy of demonetisation of high denomination currency notes may be viewed as a step in the direction of adopting a policy of coordination so that the Indian economy shifts from what economists call a bad equilibrium to a good equilibrium.

Benefits:

1) It shows government’s seriousness to tackle black money. This signaling effect alone is a huge benefit to the nation where many evade taxes.
2) It will ensure a significant part of the black money gets back to the government. It’s not true that nobody gains from the money burnt/thrown away.
3) The old money not swapped in banks is effectively the government’s Profit. Say 100 lakh crs of total money existed in old notes, and only 60 lakh crores comes back. For remaining 40 lakh crores, the government can print new notes, and keep it themselves. Hence, the government does stand to make a lot of money in this (which can be then used for people)
4) It’s nice to see a PM who works, has innovative ideas and wants to make a change. We have had leaders who sat quietly and did little. It is good to see a man of action.

At the same time, like any policy, there are some issues.

Issues:
1) Execution of such an exercise in India is no joke. We just aren’t technically ready to do this in a smooth manner. (That is why we are facing some execution issues.)
2) There are some tricks still people can use to swap black money into new money. It will reduce the amount of black money recovered.
3) There is a huge cash economy in India. It isn’t ‘black’. It’s just cash. To suck up so much liquidity will lead to a slowdown and losses for a lot of people, for no fault of their own. The slowdown in economic activity will cause lower profits, and in turn lower taxes for the government.
4) A potential crash in real estate prices. While some want property prices to fall, a huge drop can cause an economic shock, reduction in bank collateral values etc., again leading to a recession.
5) The exercise by definition involves everyone swapping their money after showing their credentials. In effect, everyone has to prove they are innocent and have clean money. This is somewhat invasive to citizens, and while there is no other way, it remains an issue.
6) The exercise would be expensive, and that cost needs to be taken into account.
7) It’s a jolt to our stable monetary system. Doing it again and again will cause people to lose confidence in our currency. It’s really a one-off, and even that destabilizes things.
8) The tax department may use it as an excuse to harass people later, with endless questioning about the extra bank entries.

Net Effect:
Overall, demonetization is a good move. Given the extent of black money in the country, and the tiny taxpayer base, something had to be done. It had to be drastic. It has been done now. We should now do what it takes to make it succeed.

THE EXECUTION:
As important as an idea is it’s execution. There clearly have been execution issues, causing pain to a lot of Indians who have wasted a lot of productive time in queues. While doing things for the nation is good, one need not have to suffer because of bad planning or someone not thinking things through. The good and bad of the execution are:

Good:
1. It’s happening, and still the country is chugging along. Banks across the country are slow, but doing their bit. There is no mass hunger, or calamity so far.
2. Government is taking steps to ease the pain. The change in limits helps. The banks are also devising ways to manage the crowds.
3. People in India are on the whole, taking it well.

Bad:
1. Someone didn’t plan the logistics well – it is one thing to make an excel spreadsheet of number of bank branches and the people involved. It is quite another to when you deal with India’s reality on the ground. There are bottlenecks galore in this exercise – whether printing of notes, uncaliberated ATMs, or limits to the number of cash vans. One can say whatever about the secrecy required, but it seems that while finance professionals sat and spoke up in the meetings, industrial engineers and operations research experts probably did not to the extent required. We are seeing the fallout now.
2. Citizens do not have to take so much pain. Inconvenience is one thing, suffering quite another. To say bear it in the name of patriotism is not listening to the issue – the execution is not efficient. It is the same as how people say – “Oh, the temple is dirty, bear it in the name of God.” Sorry, God had nothing to do with it. The temple management didn’t keep the temple clean. Same ways, patriotism has nothing to do with the fact that someone didn’t plan the ATMs better or didn’t make the new 500-Rs note available early.

In his speech the Prime Minister had invoked the metaphor of a purification of the economy by rooting out black money. But another form of purification can be espied in the action. In the prototype Rs.2,000 note to come, displayed on television, we can see the denomination written in the Devanagari numeral. It is a first. India’s founding fathers had avoided privileging any one language. This principle, so vital to the prospects of this great country, is set to be breached. The demonetisation has also proved to be a cultural opportunity.

FINAL CONCLUSION AND IDEAS FOR SMOOTH EXECUTION:

 

If you have a considerable amount of cash to be deposited, or know someone who does, or are generally looking for comprehensive information and customized advice relating to the demonetization scheme, hire a Chartered Accountant to help you with the process, instead of looking to twitter and social media to clear your doubts. Seriously.

In final analysis, we should support demonetization, but keep reminding the government to iron out the execution issues. Some ideas:

1. Online appointment booking for banks.
2. Easy forms, which can be pre-filled. Faster check-outs at banks.
3. Hiring interns at banks for short term, supervised by existing employees.
4. Opening banks 24 X 7 after new hires come in.
5. Supplying enough notes to banks as fast as possible.
6. Fixing the ATMs
7. Declaring one or two holidays (not for banks!) for people to get their finances in order
8. Removing withdrawal limits as fast as possible.
9. Having empathy for people in lines, from the highest levels of government.
10. Giving an incentive to people to come to the bank. A meal coupon would go a long way too.

“Power tends to corrupt; absolute power corrupts absolutely.”