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.”

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