Sunday, November 27, 2016

How to use any bonanza the RBI/Govt. gets from demonetization?




I was shocked by the article by Swaminathan Aiyar (SA) in the Times of India today.  

I read his column every Sunday and respect him as a serious commentator on economic policies.

Two numbers he quotes are worth repeating here. Rs. Fifteen trillion (also known as Fifteen lakh crores of Rupees) is the value of Rs. 500 and 1000 notes banned by the Prime Minister’s (PM’s) announcement on Nov 8 2016. The second number is Rs. 640 billion rupees (aka Rs. 64,000 lakh crores) is the value to which “Jan Dhan[1] accounts have suddenly swollen”.  SA speculates on what the Govt. could do with any part of the 15 trillion worth of notes that are not deposited in bank accounts. He “suspects” that as much as 3 trillion worth would not be deposited. This is gain for the RBI/Govt. because what is not deposited would become trash, and the banks would not have to issue new currency to replace it.

Now, he comes with this amazing statement that the PM could emerge triumphant by combining “imaginative accounting, populism and good economic sense”. How? – by depositing Rs 10,000 in each Jan Dhan account; as a gift from the Govt? Some regional parties all over India would be turning green with envy! They could never buy vote banks by using Govt. munificence on this scale! There are over 250 million Jan Dhan accounts!

Either SA is kidding, or he suspects that the political temptation to do this would be very high. I am sure that he would have surely read at least summaries of the Economic Survey 2015-16: 


which says that India should increase the tax/GDP ratio. 
If there is Rs. 3 trillion bonanza, a fraction of that would clearly be income tax that should have been collected but was not. Another fraction would be loot extorted by corrupt officials and politicians. So, SA, you want this to be used for buying votes?
What happened to your enthusiasm for building infrastructure? Can’t we use the bonanza to fund mass transportation systems? Can’t use it to improve the quality of our education and health services? Or, promote the switch to alternative sources of energy and cut the annual oil import bill? How all this should be done without introducing inefficiency and corruption endemic in every major Govt. effort is worth discussion, but obviously, there are ways of doing that.
  
I am also concerned about the crores of people who stood in the queues in front of banks. Many of them were honest citizens who had come to deposit their own money. However, there were also millions in those queues who were earning 5% or something like that for depositing someone else’s money into their own bank accounts. The goondas who had hired them have probably made 15 to 20% by acting as wholesalers for the operation. Those who stood in the queues were getting training in making easy money through whitewashing other’s ill-gotten wealth. They are not going to forget this training as well as the “working relationships” they developed with the goondas they worked for. They will look for new “opportunities” to make easy money. Many will go far, as far as doing some foreign travel on behalf of hawala operators!

Let me ask my concluding question – to what extent will the bonanza be reduced because of the great big white washing machine that the currency ban has created?

[1] Bank accounts promoted by the Govt. for purposes of financial inclusion. Many of them were zero balance accounts before the ban on Rs. 500 and 1000 currency notes. 

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