‘India’s Prime Minister Has Singlehandedly Crushed The Economy With His Reckless Cash Ban’ runs the headline of one of the latest articles condemning the so-called ‘demonetisation’ unleashed by Modi in India. ‘Modi is quickly solidifying his place as one of monetary history’s biggest idiots’ it adds, before going on to display even more staggering ignorance and error than many of the other hundreds of similar articles on this subject have done.
Before we continue, a few simple definitions and explanations are in order. Last November 8 India awoke to a shock announcement: the 500 and 1000 rupee notes issued by the Reserve Bank of India were no longer to be legal tender and should either be exchanged for other bills or paid into bank accounts immediately. Up to a maximum of 2.5 lakh rupees in cash (250,000 rupees, roughly $3500 or £3000) only, allowed. Amounts handed in larger than that would be subject to a 15% fine or ‘tax’, and could only be deposited in accounts amenable to the knowledge of the tax authorities, who might then inquire as to how, why and where the depositor had accumulated such a pile of cash, if it was out of proportion to his declared income.
This move had been planned and executed in total secrecy by Modi and only about three or four trusted allies (I use the word advisedly), and was designed as a decisive strategy with two major objectives:
1) to purge the economy and society of the vast sums of illegal ‘black money’, the proceeds of crimes such as tax evasion, money laundering and bribery, rampant in India for decades, especially since the encouragement given by Indira Gandhi’s 90+% levels of taxation imposed back in the 1970s.
2) to shift the economy in a major way towards a more digital and electronic system of payments and accounting, which would reduce the economic friction of transactions and widen the basis of tax collection, mostly by eliminating the ability of the corrupt to deal easily in cash.
Ultimately, these two objectives, being met, would fund the state according to how its current laws envisage it being funded, allowing India to provide services, infrastructure and welfare as befits a modern technological state and increasing welfare, progress and development (as opposed to the Hobbesian free-for-all that has been customary since Independence). It would also bring social justice and curtail the ability of the powerful to trample on the poor and weak by exploiting the system while not paying back into it – something we need desperately to relearn in the West.
Many of the hysterical articles that have appeared in the Western press and on the internet have completely misunderstood what the term ‘demonetarisation’ means. This is especially true of the ‘libertarian’ Right where there is a feverish paranoia that governments around the world are attempting to get rid of cash as part of a surveillance-and-control process to enslave their populations.
It is sad to have to disappoint the (sometimes justifiably) concerned Right, but that is not what Modi is doing. For the umpteenth time: Modi is not getting rid of cash. I can type that in capital letters with multiple explanation points if needed. The following is what has happened: two banknotes, the 500 rupee and the 1000 rupee note (to a Brit, the equivalent of the fiver and tenner) have indeed been withdrawn. They are now being replaced with NEW 500 and 1000 rupee notes. Modi has vowed that sufficient replacement notes will be in circulation by December 30. He is bang on target so far.
Is that clear? Totally clear to everybody? The new notes will render the old ones, which have been hoarded for years by economic crooks, obselete. This will remove a great deal of dead weight (‘RBI promises to pay the bearer’ etc) from the economy, just as it pulls in new taxpayers and at least 15% of tax money that would not otherwise have been recovered. It also puts a spanner in the works of the Pakistani state-sponsored forgers who use their fraudulent rupee notes to fund Islamic terror in India. The new, modern, plasticky notes are much harder to copy.
It is true there won’t be so much paper cash sloshing around the economy afterwards because ordinary people are going to learn quickly how much safer and more convenient it is to use their new bank accounts to get paid and to settle debts. (Modi has overseen the opening of about half a billion of these in the past two years.) People will pay by debit card! Paper money won’t be needed so much although it won’t, pace all the ignorant journalism I have read, be banned at all. In fact a new 2000 rupee note is being issued so that people will not need to carry such thick wads of bills around with them as before. So much more convenience, not less.
Inevitably, following the necessary shock announcement on November 8, there was mass disruption as cash left the economy. But had there been a warning, mass amounts of the black money would simply have been ‘washed’ and disappeared into goods and accounts, rendering a large portion of the exercise futile. In a sense the disruption was unavoidable and also in a sense it was tutelary and purgative and laudible. Ordinary, meaning poor, people, would not suffer too much as low value transactions (using 100 rupee notes, for example, the equivalent of dollar bills, which is what many of the poor are lucky to even see) could continue quite well until the new notes could be introduced.
The interesting fact is that prices in the markets have neither soared due to supply of goods being interrupted, nor plummeted due to cash demand having collapsed. In fact prices have stayed exactly where they were prior to November 8. This article explains why the rupee itself is the only unbiased reporter around.
No, the squealing piggies were the rich and those whose precious (and illegal) stashes of bills – hundred-weights of banknotes on pallets in go-downs and secret rooms, in many cases – were instantly, gloriously worthless. The ensuing social comedy was priceless and deeply gratifying for the ‘lower classes’. Previously ill-treated servants found themselves suddenly being flattered and cooed at by their employers, who begged the servants to please bank this 2.5 lakh rupees in their accounts and keep a portion of it; or please accept the next year’s wages in cash now.
Absolutely hilarious. It is unsurprising that the vast majority of Indians have borne the past six weeks of inconvenience stoically and even with amusement as they have observed the predicament of their ‘betters’. We have been witnessing a scene of historic government-engineered social revolution, in the interests of the common people; no wonder all the media and political snowflakes have been crying out in pain and, since this seems to be the season for it, manufacturing endless fake-news stories of queues, riots and (always vague, no-name) gold-confiscation. These hysterical stories are mostly for consumption by the scandalised and well-heeled Western friends of over-privileged Indians.
As always, the question is not ‘why?’ but ‘why now?’ Why did Modi choose this particular point to unleash his dastardly plan, which it is now clear had been planned since he assumed the prime ministership (actually from before that, now I think back on it). Journalists appear baffled by this apparent attempt at political suicide, but they are dead wrong. Modi knew that he was elected on sufferance by the majority on condition that he would do something about the privileged and corrupt babus and bakhts of Indian society – everybody knows who they are so I won’t spell it out. Modi was elected to recover the black money stolen from the Indian people over the years, and to cease the operations of the corrupt rich. If he failed in that he was finished. I often said this when giving talks to various audiences and repeated that it was the number-one consideration (domestically) that would define the success or failure of Modi’s first and possibly only term as PM. If he didn’t get the black money back, he would be gone. He has spent two years preparing, and now has two years to ensure the desired results of his plans. November 2016 was the perfect, pivotal time for him to act.
Of course, black money laundered over decades, spent, dispersed, buried by bribery in hard-to-find vaults and investments, is almost impossible to re-assemble in anything like the amounts that were originally stolen. And of course it is known who many of the main beneficiaries are, but the significant piles of now hereditary loot are kept abroad; also recovery is politically fraught as the Indian English-language media and the Western press would leap to the defense of the guilty.
So the recovery of ordinary Indians’ inheritance had to be accomplished in a stealthier and more cunning manner, sparing – for now – the megastars of embezzlement but snaring en masse the several millions of culprits who never thought they would be examined, and whose ill-gotten gains anyway dwarfed the billions of dollars siphoned off by a few families, who shall remain nameless.
During the first two years of his time in office, Modi had assiduously worked on setting up bank accounts for ordinary Indians after having announced the programme – the Jan Dhan Yojana – on Independence Day 2014, just three months after becoming PM. ‘When a bank account is opened, it’s a step towards joining the economic mainstream,’ he said at the time. The poor, even those who lacked identity cards, would all be eligible, and would accrue the unimagined social benefits of a debit card and accident insurance cover of up to 100,000 or 1 lakh rupees as well as an overdraft facility of up to 5,000 rupees. ‘When a bank account is opened, it’s a step towards joining the economic mainstream,’ he said, and this was all part of the planning behing the shock measures of last November 8. For when it happened, the economic impact had already been softened by the financial infrastructure of the Jan Dhan Yojana put in place over the past two years. Instead of finding themselves financially bereft, ordinary Indians would instead begin to use their new electronic bank accounts to the full extent, if they weren’t already doing so, and would see the benefits of doing so very quickly. Only the rich and crooked would howl in agony.
Demonstrably, and to the intense discomfort of Modi’s social and political enemies, including those in his own party, the wider Indian population has a ringside seat to watch the spectacle of black money being purged from the clutches of the crooked and corrupt and being reclaimed on their behalf by Modi, as he fulfils his prime electoral promise.
Several commentators in India (not elsewhere of course) have noted how rare it is for a politician to be willing to suffer even such short-term pain as this, occasioned by the demonetisation, in the interests of long-term gain. Modi it appears is one of these rare politicos. But it must be said that he has form here, for he did something strikingly similar in 2003, a couple of years after he became chief minister in Gujarat. Then it was the Jyotigram Scheme to bring electricity to all the villages of the state, and then just as now the measures Modi took to make it happen appeared to outsiders to be a form of political suicide. For in Gujarat at that time almost nobody paid for electricity, and the power suppliers were hopelessly bankrupt as a result. The whole system was perpetually on the point of collpase. Because electricity was widely stolen, it meant that it was not valued, and that the ubiquitous electric pumps that brought up water and powered machinery and ran the state’s agriculure were broken-down and inefficient. The net result was that the desert state’s water was being wasted, farmers were failing and desertification was spreading. Modi saw that if you wanted a proper supply of water, you needed a reliable supply of electricity to pump it (and light the villages and do a thousand other things). But to have reliable electricity it had to be paid for. So he made everybody pay for it for the first time ever. Soon, there were strikes and demonstrations and Modi was condemned by all sides, including his own party. It was political suicide, they cried – he was a moron, a madman.
In fact, it was the turning point for Gujarat, which soon became the powerhouse of India. It turned out that paying for electricity made people value it and use it properly; meant they could be bothered to repair their machinery and invest in new plant, use and husband water properly once the supply became reliable, thanks to the new supply of reliable electrity pumping it to the surface. Back then, the water table had been dropping precipitously; now it is higher than ever and desertification was long ago defeated. Guharat leads India in agriculture, power production, industry …
I humbly contend that Modi is doing much the the same thing with demonetisation, once again in the teeth of almost universal criticism, and that he knows exactly what he is up to. Now let’s see if Finance Minister Arun Jaitley can ruin it all with a stupid Union Budget on February 1.
That’s my only worry.