Friday, December 02, 2016

Idiotic debate on Demonetization

Since the announcement of demonetization we have quite a lot of noise but no analysis. I am on the look out for genuine criticism of the policy.

Semantics of false criticism
There is a lot of criticism of the government's policy. The international criticism is uninformed and disconnected from Indian ground realities. Quite a bit is a shallow analysis of Nigeria, USSR and some other countries which had demonetized previously. Generally, the criticism falls into the following buckets:
  1. Demonetization alone will not stop black money: That is not proper criticism. 
    1. The government never maintained that it will. 
    2. In fact, Finance ministry circular highlights various measures undertaken by the government till date. 
    3. Further, the prime minister indicated that this was just the beginning and more announcement will come.
  2. Removing 85% of the currency will cause a lot of pain to the people
    1. Well when you ask the people, most are happy with it. Some are very angry. In a country of 1.2 billion you will have voices. 
    2. The prime minister took a smart-phone based app poll which revealed 90% approve of the move. Media quickly jumped up stating the questions are biased. I myself took the poll. The questions were not as biased as media made them out to be. It is a fair poll - you CAN express dissent if you don't like the move.
    3. But the fact remains none of the media channels or anyone tried to do a sms-based poll. We can have a poll for Indian Idol or some crazy show, can media people not fashion a proper poll and report if people are indeed pro- or against.
    4. I tried to go through You-Tube videos about demonetisation uploaded after November 28. I suspected people will give proper reaction once they have been in ATM lines for a few days. I left out videos uploaded by news channels and focussed on videos uploaded by general people. Not many have uploaded but I found one by Roshini Ali & her friend exploring the poor of Kolkata informative. One other fellow explored Mumbai and Aurangabad but he wasn't as comprehensive as Roshini Ali.
  3. Economy will be hurt as currency is withdrawn from circulation
    1. This is the closest people have come to making rational arguments. I don't mind general public making this argument. But from experts, I expect more.
    2. Many experts confuse the measured part of the economy (GDP etc) with unmeasured part (black economy). In an extreme view, since the black economy is not measured its destruction won't affect measured economy. That is flawed as black and white economies intermingle often. Yet they are not quite as intermingled as people make it out to be.
    3. A substantial part of the black economy comes from tax evasion. For example, sales without bill are quite rampant in India. Over billing (for cold drinks) is also rampant. These are black transactions. With proper triggers, these transactions will come to the white economy. (Though demonetization is not that trigger).
  4. Only time will tell if it works:
    1. I understand general public expressing this sentiment. It is a healthy attitude to take.
    2. But when experts take this position, I don't like this. I expect the experts to define their goals for the policy - when will they say it worked. 
    3. And I want them to state it now not once results are out. Because once data is available the narrative will be tailored to the outcome.
    4. Further, be realistic as to what can be achieved by demonetization. I don't want people setting targets "I want black money to become zero".
    5. I want to see the goal post that is set out by all these experts.
  5. Bull-shit interviews/feedback:
    1. Many interviews of government officials and supporters of policy are quite brash. The interviewer does not want to know the policy but instead he wants to hammer the expert. Karan Thaper did that to Bibek Debroy (who I don't really admire - but he is most lucid in the lengthy Ashok Malik interview).
    2. Most media reporting is negative and most general people reporting is positive. One TV channel interviewed a Hindi Speaking shopkeeper in Chennai.
    3. If I watch TV channels interviews then I get different pictures. Pro-government channels say good things and anti-government channels always highlight bad things.
    4. Some channels have shown non-working ATMs quite a few times. And others have shown longer queues giving impression that the queues are that long all the time. People who are on the ground dont find that many long queues all the time.
    5. I have concluded that most of the people do not yet understand what exactly the possible strategy is. None have read the Arthakranti proposal even those who have interviewed the founder Anil Bokil.

Basic framework
Just wanted to clarify one thing here.

Tackling Black money requires a repository of measures. Yes many measures together will help reduce black money. Black money cannot be eliminated completely, it can be reduced drastically.

Demonetisation results in many things out of which one is hurting black money transactions. It freezes the black money transactions and not the assets created out of black money. It also results in other effects - anti-counterfeiting, promoting cash-less transactions etc.

The two are only slightly overlapping. Government hasn't claimed that demonetisation is only aimed at black money. It has correctly stated the what demonetisation can achieve. To confuse the two only shows your ignorance.


Policy Details - possible and others
For interested readers who want to know what is the possible logic behind Government's measures, you can parse some of the links here:
  1. Amithabh Kant on CNN (focusses on going cash-less)
  2. Anil Bokil on ABPMaza (in Marathi) in Anil Bokil in Hindi
  3. Arthakranti Proposal (click here for benefits, benefits to individuals, objections)
  4. Bibek Debroy on Demonetisation and other issues
  5. Ken Rogoff author of The curse of Cash advises gradual demonetisation of high-value notes.
  6. James Henry's article calling for surprise currency recall (from Ken Rogoff)


Setting Goalposts
It is important to set out clear goals when we announce the success of a measure. My goalpost is thus:
  1. I want to evaluate current demonetisation on following parameters:
    1. Total amount deposited with banks / total currency in circulation: I suspect we will get close to entire currency in circulation back into the bank accounts/exchanged. This is because I suspect counterfeit currency in the system is to the tune of 40% i.e. ~ Rs. 6 Trillion making total currency in circulation at ~Rs. 20Trillion.
    2. GDP in Q3 and Q4 of FY 2017 should not reduce more than 1.5%. Thus I expect Q3 and Q4 to be at least 5.8%
    3. Net bank deposits gain: After stabilization, i.e. say by Sep 2017, bank deposits should appreciate by at least 40% of currency in circulation i.e. Rs. 6 Trillion. This is figure after deposits and withdrawals have stabilized.
    4. Share of E-transactions: As per Mastercard data 2% of transactions (number) are cash-less. I would like this number to be around 33% ~ 1 of every 3 transactions should be cashless. 
  2. With respect to Black Money targeting, there should be a continuous targeting of black money holders and black economy.
  3. Tax simplification and rationalization proposal in Union Budget 2017 (which will be in January). I think we should try Banking Transaction Tax once 2 out of 3 transactions are cashless.