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Analysis

Demonetisation: Most reactionary and illogical policy ever

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(‘Note-Bandi: Demonetisation and India’s Elusive Chase for Black Money’ is an upcoming book from Oxford University Press dedicated to the “memory of Indian citizens who lost their lives due to demonetisation”). Excerpts from the preface by R. Ramakumar.

‘Demonetisation’– the withdrawal of legal tender status of notes of denomination Rs 500 and Rs 1,000 — announced by India’s Prime Minister Narendra Modi over a televised address on 8 November 2016 will go down in history as one of the most reactionary and illogical economic policies ever attempted in independent India.

It crippled an economy that ran on cash and was plagued by a slowdown; it destroyed the livelihoods of millions of farmers, workers, traders, women and the elderly; and it violated the dignity and liberty of law-abiding citizens.

Yet, in a post-truth world, demonetisation also left public opinion in India deeply polarised. The language of the state had a deceptive appeal. In a society marked by abject poverty and inequality, and where everyday lives of citizens are marred by myriad forms of corruption, it came as no surprise that Modi’s misadventure was received as a decisive measure.

Economists like me knew of the earlier demonetisation of 1978. But we also knew that it had failed to unearth any significant amount of black money. We were also aware of quack ideologues of the right-wing who demanded measures like demonetisation and the substitution of income tax with a blanket transactions tax. But we had also dismissed them as obscurantist drivel.

Never did one imagine that one among these irrational ideas would actually find a place in economic policy. Of course, many aspects of neoliberal economics are intrinsically inverted on logic. But the demonetisation of 2016 beat them all.

***
In his address to the nation, Modi made two major claims in defence of demonetisation: on the one hand, it would stamp out counterfeit currency that was aiding terrorism; on the other, it would help the government unearth ‘black money’. Soon after the address, one also heard television commentators waxing eloquent on India’s imminent embrace of a cashless economy.

***
First, the claim that demonetisation would hit terror financing was overstretched because the total circulation of counterfeit currency did not exceed 0.002 per cent of the total notes in circulation. Second, no significant mobilisation of black money may be expected, as about 94 per cent of the unaccounted wealth was stored in the form of non-cash assets. Third, a cashless economy can never be created over diktats, as the persistence of cash was a structural feature of the economy.

What India needed was a structural transformation of its informal economy into a modern and productive sphere, which would systemically reduce the dependence on cash. A ‘war on cash’ would thus be ineffective and premature. Sycophants apart, these views were also shared by economists across the Left-Right spectrum.

***
First, according to the Reserve Bank of India’s (RBI) Annual Report for 2016-17, the total value of counterfeit notes of denomination Rs 500 and Rs 1,000 detected by banks rose from Rs 27.4 crore in 2015-16 to Rs 40.8 crore in 2016-17: an increase by just about Rs 14 crore. As a share of the value of Rs 500 and Rs 1,000 notes in circulation in November 2016, the value of counterfeit notes detected in 2016-17 amounted to just 0.0027 per cent. The critics were right; the extent of circulation of counterfeit notes did not, in any way, justify a drastic action like demonetisation.

Second, the RBI also released estimates of the value of old notes returned to the banks between 10 November 2016 and 30 June 2017. Out of the Rs 15.44 lakh crore worth notes of Rs 500 and Rs 1,000 in circulation as on 8 November 2016, about Rs 15.28 lakh crore had returned to the banks. In other words, 98.96 per cent of the demonetised notes were back in the banks and only 1.04 per cent remained outside. The return of about 99 per cent of the demonetised notes is the most important indicator of the failure of demonetisation.

In December 2016, the Attorney-General of India, Mukul Rohatgi, had informed the Supreme Court that the government did not expect more than Rs 12 lakh crore to be back in the banks. The remaining Rs 3 lakh crore was black money, which would not return to the banks and could be ‘extinguished’ and passed on by the RBI to the government as dividend.

Red-faced, the government tried to contain the damage by claiming that demonetisation was intended to bring back all cash into the formal banking system. But in the public eye, the jury was no more out. There was no black money left to be ‘extinguished’.

Third, the Central Statistics Office (CSO) releases quarterly estimates of gross value added (GVA). As chapters in this volume would argue, these estimates typically underestimate changes in the informal sector. Yet, despite methodological infirmities, on a year-to-year basis, the growth rate of GVA showed a decline from 7.6 per cent in the first quarter (Q1) of 2016-17 to 5.6 per cent in the Q1 of 2017-18. This decline was in continuation of a similar decline reported for the fourth quarter (Q4) of 2016-17. The CSO estimates have officially signalled that demonetisation was instrumental in intensifying recessionary tendencies in the Indian economy.

* * *
Stung by the estimates released by the RBI and the CSO, the Modi government tried to initiate a campaign to celebrate the ‘success’ of demonetisation in August-September 2017. This campaign made three major claims. First, demonetisation resulted in the ‘highest ever black money detection’. Black money worth Rs 16,000 crore (i.e., the remaining 1.04 per cent of Rs 15.44 lakh crore) did not return to the banking system.

Second, there was an ‘unprecedented increase in tax compliance’ after demonetisation. About 56 lakh taxpayers were newly added and the number of tax returns filed rose by 24.7 per cent in 2017-18 over 2016-17. Third, digital banking grew rapidly after November 2016. The number of digital transactions rose by 56 per cent between October 2016 and May 2017.

All the three claims were false. Papers in this volume provide a comprehensive coverage in this regard.

First, the claim of detection of Rs 16,000 crore was actually an admission of failure, because the very premise of demonetisation was the existence of at least Rs 3 lakh crore as black money. In fact, the costs of demonetisation hugely outrun its benefits.

One, even if we assume, conservatively, that India’s GVA shrank by 1 per cent after November 2016, the resulting economic loss would be about Rs 1.5 lakh crore.

Two, due to demonetisation, banks were inundated with new deposits worth lakhs of crores while credit outflows largely stagnated. As a result, the RBI had to mop up excess liquidity worth Rs 10.1 lakh crore from banks under the Market Stabilisation Scheme (MSS). The total interest outgo of the RBI on this count alone was Rs 5,700 crore.

Three, the RBI’s costs incurred for printing new notes rose from Rs 3,420 crore in 2015-16 to Rs 7,965 crore in 2016-17: a rise by Rs 4,545 crore. These costs did not include intangibles, such as the time spent by bank staff on consumer interface and paperwork over many months.

Four, due to the higher costs incurred by the RBI under different heads, the total surplus transferred by the RBI to the government fell from Rs 65,876 crore in 2015-16 to Rs 30,659 crore in 2016-17: i.e., a decline of Rs 35,217 crore.

In sum, demonetisation was an extraordinarily loss-making proposition for the exchequer.

Second, the claim of rise in tax compliance after demonetisation is simply unimpressive.

One, there is nothing remarkable about the rise in the number of tax returns filed in 2017-18 compared to earlier years. Compared to the corresponding previous year, the rise in the number of tax returns filed was 51 per cent in 2013-14; 12.2 per cent in 2014-15; 29.9 per cent in 2015-16; and 24.3 per cent in 2016-17.3

Two, even among the 56 lakh assessees newly added, about 38.8 lakh assessees (or about 69.4 per cent) reported an annual income of less than Rs 5 lakh. The average annual income of these new taxpayers was only Rs 2.7 lakh. In sum, the increase in tax revenue from the new assessees would be insignificant.

Three, the claims of the government on the extent of spread of digital banking defy basic statistical logic. Analysis shows that, one, the percentage rise in the number of digital transactions were primarily owing to low base effects. Two, the total value of non-cash transactions rose by only 18.8 per cent between November 2016 and August 2017. Despite efforts to popularise mobile banking, the value and volume of mobile-based transactions recorded negative growth rates between November 2016 and August 2017.

All available evidence till August 2017 points to the return of cash in everyday transactions. The government’s aim of forcing citizens to shun cash had failed.

By : R. Ramakumar

DISCLAIMER : Views expressed above are the author’s own.

(R. Ramakumar is Dean, Centre for Study of Developing Economies, School of Development Studies, Tata Institute of Social Sciences, Mumbai. He can be reached at [email protected])

Analysis

India’s Sri Lanka challenge

From all accounts, India’s encirclement has begun with ruthless efficiency. Pakistan is gone. Maldives is about to fall. Nepal is almost there.

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70th Independence Day celebrations in Colombo

My wife and I recently visited Sri Lanka on a holiday with friends. For both of us, it was the first visit after almost 15 years. At that time, the idyllic island country was caught up in a deadly civil war that claimed countless lives and devastated the economy. When Mahinda Rajapaksa assumed power as the Sri Lankan President, he made the elimination of the Tamil Tigers his foremost objective. After 30 months of relentless assaults, the 26-year-old civil war finally ended in 2009, with the killing of Tamil Tigers (LTTE) leader Velupillai Prabhakaran and the ruthless decimation of his supporters.

It is argued that widespread human rights excesses occurred and that the Tamils were openly discriminated against. This is true. Yet, what is also true is that the island country finally saw peace for the very first time after decades of unrest, uncertainty and terrorism. The Sri Lanka we visited was in complete contrast with the one I had grown accustomed to, with gun-toting security personnel everywhere. Now there was a sense of calm. Even impatience, at being held back for so many years. It is as if it was time to claim the life that had been long denied.

For India, the end of the civil war and of the Liberation Tigers of Tamil Eelam (LTTE) was good news. It had already declared the LTTE as a terrorist organisation, but domestic compulsions — with its allies in Tamil Nadu openly aligning with Prabhakaran — forced New Delhi to opt for covert support for the anti-LTTE military operations. Tragically, with the end of the civil war, history repeated itself and India, once again, lost its momentum. Today, we are on the brink of losing Sri Lanka to Beijing.

The Chinese presence in Sri Lanka is not covert. Far from it. You see them everywhere and the pace of the activity is hectic. Chinese dredging ships can be openly seen working at a furious pace. Work on the Hanbantota port has started. Chinese workers are everywhere, from shopping malls to pubs. Many are learning to speak Sinhalese. Hotels, roads and infrastructure, performing arts theatres, a swanky cricket stadium are not simply projects on the drawing board. People can see them. The importance of the visual should never be underestimated. And given the speed with which the Chinese execute projects, a real estate transformation is credibly under way.

Over a period of 12 years (2005–17), Beijing has poured in $15 billion into projects in Sri Lanka. The Chinese Ambassador conveyed an unambiguous message to India, which sees Chinese presence in Sri Lanka as an intrusion in its immediate sphere of influence, when he said, “No negative force can undermine the cooperation between Sri Lanka and China.”

For India, this is a disturbing development. Indian foreign policy has relied heavily on “time-tested civilisational links”. While this is undoubtedly appealing, there is an aspirational impatience among Sri Lankans that India failed to see and respond to with the scale, speed and imagination that only Beijing appears capable of.

It is common enough to hear Sri Lankans say how disgruntled and unhappy they are with the intrusive presence of the Chinese, who are loud and arrogant. It is like a deadly embrace but one that they find lucrative, if they wish to fast-track to a prosperous future. Artists impressions of future Colombo tell Sri Lankans that it will rival Singapore. It will bring in investments, tourism, employment and economic well-being. This can be seriously tempting.

From all accounts, India’s encirclement has begun with ruthless efficiency. Pakistan is gone. Maldives is about to fall. Nepal is almost there. And Sri Lanka is under an understandable hypnotic trance. India genuinely faces its most serious security challenge.

If India is to get its act together, it needs not only imagination but the speed and efficiency to deliver on its promises to offer Sri Lankans a future that the civil war denied them. For Indian Foreign Secretary Vijay Gokhale, India’s neighbourhood will be a disturbing challenge. The problem he would face is convincing the political, bureaucratic and corporate partners that India faces its greatest-ever security threat and one that we are on the brink of losing.

As the legendary chess player Bobby Fisher once remarked, “If you are playing the game, you play to win. But if you’ve lost the game, it’s because you took your eyes off the pieces and then, you deserve to lose.”

By : Amit Dasgupta

(Amit Dasgupta is a former Indian diplomat. The article is in special arrangement with www.southasiamonitor.org)

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Analysis

Air war in 1971: A view from the other side

Where does one seek authentic information about India’s contemporary military history?

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The Air and Naval War 1971

Disregarding the counsel of wise men, from Herodotus to George Santayana, Indians have consistently ignored the importance of reading, writing and learning from history. So, when retired US Air Force Brigadier “Chuck” Yeager, head of the US Military Assistance Advisory Group in Islamabad during the 1971 War, says, in his autobiography that the “Pakistanis whipped the Indians’ asses in the sky… the Pakistanis scored a three-to-one kill ratio, knocking out 102 Russian-made Indian jets and losing 34 airplanes of their own…”, we are left fumbling for a response. Other Western “experts” have alleged that, in 1971, the IAF was supported by Tupolev-126 early warning aircraft flown by Soviet crews, who supposedly jammed PAF radars and homed-in Indian aircraft.

Where does one seek authentic information about India’s contemporary military history? The Ministry of Defence (MoD) website mentions a History Division, but the output of this organisation is not displayed, and it seems to have gone into hibernation after a brief spell of activity. A Google search reveals copies of two typed documents, circa 1984, on the Internet, titled “History of the 1965 War” and “History of the 1971 War” — neither of which is designated as “official history”.

A chapter of the latter document deals with the air-war in the Western theatre, and opens with a comparison of the opposing air forces. The 1971 inventory of the IAF is assessed at 625 combat aircraft, while the PAF strength is estimated at about 275. After providing day-by-day accounts of air-defence, counter-air close-support and maritime air-operations, the “History of the 1971 War” (or HoW) compares aircraft losses, on both sides, and attempts a cursory analysis of the air war.

The IAF is declared as having utilised its forces “four times as well as the PAF” and being “definitely on the way to victory” at the time of ceasefire. Commending the PAF for having managed to survive in a war against an “enemy double its strength”, it uses a boxing metaphor, to add a (left-handed) compliment: “…by its refusal to close with its stronger enemy, it at least remained on its feet, and in the ring, when the bell sounded…”

This is the phrase that Pakistani Air Commodore M. Kaiser Tufail (retd) has picked up for the title of his very recent book: “In the Ring and on its Feet” (Ferozsons Pvt Ltd., Lahore, 2017) about the PAF’s role in the 1971 Indo-Pak war. Commissioned in 1975, this former Pakistani fighter-pilot is a historian and bold commentator on strategic affairs. Currently unavailable in India, the book may, prima facie, be accepted as authentic, because the author asserts that in two of his appointments, he was the “custodian of PAF’s war records”, which he was, officially, permitted to access in writing the book.

Tufail starts with an attempt to dispel the “ludicrous Indian fabrication about Pakistan having initiated the war”, and offers the thesis that since war was already in progress, the ineffective 3rd December PAF pre-emptive attacks were merely “first strikes” meant to overburden the IAF’s retaliatory capability. Apart from this half-hearted attempt at obfuscation, the rest of Tufail’s narrative is refreshingly candid, free of hyperbole and — one hopes — reliable. Having served in an IAF fighter squadron during the 1971 war, I was fascinated by Tufail’s account, and share a few of his frank insights into wartime events in this article.

Tufail suggests that the wartime PAF Chief, Air Marshal Rahim Khan, was an inarticulate, short-tempered and lacklustre personality, who, at this crucial juncture, chose his two most important advisers — the ACAS (Operations) and the Deputy Chief — from the ranks of transport pilots. His problems were compounded by low service morale, due to the massacre of 30 airmen in East Pakistan and defections by Bengali PAF personnel.

As far as the two orders-of-battle are concerned, it is interesting to note that the HoW figures of 625 combat aircraft for the IAF and 273 for the PAF are pretty close to Tufail’s estimates of 640 and 290 respectively. A fact not commonly known, in 1971, was that while the IAF’s work-horses, Sukhoi-7s, Hunters, Gnats, HF-24s, Mysteres and Vampires were armed only with 30/20 mm guns, the opposition had the advantage of air-to-air missiles. While all PAF western-origin fighters carried Sidewinders or R-530s, Yeager tells us, “One of my first jobs (in Pakistan) was to help them put US Sidewinders on their Chinese MiGs… I also worked with their squadrons and helped them develop combat tactics.”

Tufail provides a tabular account of both IAF and PAF aircraft losses, with pilots’ names, squadron numbers and (for PAF) aircraft tail numbers. To my mind, one particular statistic alone confirms Tufail’s objectivity. As the squadron diarist of IAF’s No. 20 Squadron, I recall recording the result of a Hunter raid on PAF base Murid, on December 8,1971, as “one transport, two fighters (probable) and vehicles destroyed on ground.” In his book, Tufail confirms that 20 Squadron actually destroyed five F-86 fighters in this mission — making it the most spectacular IAF raid of the war!

Particularly gratifying to read are Tufail’s reconstructions, of many combat missions, which have remained shrouded in doubt and ambiguity for 47 years. Personally, I experienced a sense of closure after reading his accounts of the final heroic moments of 20 Squadron comrades — Jal Mistry and K.P. Muralidharan — as well as fellow naval aviators — Roy, Sirohi and Vijayan — shot down at sea. Tufail also nails the canard about Soviet Tupolev-126 support to IAF, and describes how it was the clever employment of IAF MiG-21s to act as “radio-relay posts” that fooled the PAF.

Coming to the “final reckoning”, there is only a small difference between the figures given in the HoW and those provided by Tufail for IAF losses; both of which make nonsense of Yeager’s pompous declarations. According to the tabulated Pakistani account (giving names of Indian aircrew), the IAF lost 60 aircraft. The HoW records the IAF’s losses in action as 56 aircraft (43 in the west and 13 in the east). However, a dichotomy surfaces when it comes to PAF losses. While Tufail lists the tail numbers of only 27 aircraft destroyed, the HoW mentions IAF claims of 75 PAF aircraft destroyed, but credits only 46 (27 in the west and 19 in the east).

Using the “utilisation rate” per aircraft and “attrition rate”, as a percentage of (only) the offensive missions flown by both air forces, the HoW declares that the IAF’s utilisation rate being almost double, and its attrition rate being half that of the PAF, “…had the war continued, the IAF would certainly have inflicted a decisive defeat on the PAF”.

Adopting a different approach, Tufail concludes that the overall “attrition rate” (loss per 100 sorties) for each air force as well as aircraft losses, as percentage of both IAF and PAF inventories, are numerically equal. Thus, according to him, “…both air forces were on par… though the IAF flew many more ground-attack sorties in a vulnerable air and ground environment”.

He ends his narrative on a sanguine note, remarking: “The PAF denied a much stronger IAF… the possibility of delivering a knock-out punch to it.”

Air Commodore Tufail’s book clearly demonstrates that there are at least two good reasons for writing war histories: Lessons are learnt about the political sagacity underpinning employment of state military power, and militaries can test the validity of the Principles of War. Sensible nations, therefore, ensure that history is not replaced by mythology. There is a whole new crop of young scholar-warriors, like Kaiser Tufail, emerging in India, eager to record its rich military history. But as long as our obdurate bureaucracy maintains the inexplicable “omerta” vis-a-vis official records, this deplorable historical vacuum will persist.

By : Admiral Arun Prakash

(Admiral Arun Prakash is a former chief of the Indian Navy. He can be contacted at [email protected] )

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Analysis

Kashmir’s laugh doctor: He wants to bring mirth back to Kashmir’s depressed lives

There is no source of entertainment in Kashmir. Cinema halls have been closed. There is no local film industry as many other Indian states have.

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Hazaar Dastaan

Srinagar, Feb 18 : Long before it was infected by violence and its streets reverberated with sounds of slogans and gunfire, Kashmir was a place where one could hear laughter in every household in the evenings when Nazir Josh, Kashmir’s very own “Charlie Chaplin”, used to come on Doordarshan (DD), the national broadcaster, with his facial expressions of total bewilderment, the street impressions of a joker and strong Chaplinesque elements in his walking style.

In this conflict-ridden region where young people have grown up witnessing violence erupting in their public spaces on a regular basis, the 67-year-old comedy king of Kashmir says that revival of humour is the only way to bring back smiles and laughter to the stoic faces of Kashmiris deprived of a normal existence.

A local poet, script writer, director and actor, Josh is known to every household here just as “Jum German”, “Ahead Raza” and half a dozen other names based on the lead roles he has played in TV serials.

He ran regular comedy serials on the local DD which were very well received by every Kashmiri. But it was all brought to a halt when separatist violence broke out in Kashmir in the late 1990s. While he was never directly at the receiving end of the violence, in the grim, strife-torn Valley there was little space left for humour and satire, and he was left without any sponsors.

Josh believes that Kashmiris are facing many social and psychological problems which cannot be addressed by medication alone.

“People here need to unwind, and for that, humour and satire are the best avenues,” Josh told IANS.

He recalled how a local family had come to thank him for helping cure their mother of depression.

“The son of the lady being treated for depression told me his mother had laughed after a long time when she saw an episode of my comedy serial ‘Hazaar Dastaan’.

“The boy said when the family told the psychiatrist about his mother’s laughter, which came after long months of depression, the psychiatrist advised them to show her more episodes of the comedy serial. It completely cured the lady.”

Josh feels that in a place where curfews, shutdowns and street violence are a norm rather than an aberration, there is a genuine need for some laughter in people’s lives to sustain their sanity.

But as violence took centrestage in the Valley, Nazir Josh and his TV serials, which were based on social and political satire, had to take backstage.

The last TV serial based on social satire produced by him was “Jum German” in 1989. But it could not go beyond 25 episodes as the situation took a violent turn in Kashmir, Josh said, as he fixed his gaze at the clouds outside his central Kashmir Badgam district home.

A feeble winter sun was trying to make its way through the heavy clouds that preventing its rays from reaching the earth.
“This is the present situation. Heavy and dark clouds of gloom everywhere you go. Seventy per cent patients who visit various hospitals in the Valley are suffering from depression.

“There is no source of entertainment in Kashmir. Cinema halls have been closed. There is no local film industry as many other Indian states have.

“There is only one TV station in Kashmir and that too has not been doing anything to revive entertainment so that people are able to laugh tensions out of their lives,” Josh said.

He still remembers the good old days when Kashmiris would eagerly wait for humorous weekly TV dramas.

“I know of some local homes where womenfolk sold ornaments to buy TV sets so that they could watch my serial titled ‘Hazaar Dastaan’ which ran 52 episodes on the local DD channel between 1985 and 1987.

“The serial was a political satire on people in power in the state — their callous and casual approach to people’s problems was depicted through the serial.

“Some local politicians were disturbed by the popularity of the serial. They went to Delhi and complained to the central leadership that their position was becoming awkward because of this serial.

“After that complaint, each episode was first taken for a preview in Delhi with a Kashmiri translator. The preview committee said it was genuine political and social satire that needed to be encouraged,” Josh recalled.

Josh had started his career in the local theatre. In the beginning, we would stage plays at the village and district levels. In 1968, he staged a play at the Tagore Hall in Srinagar where a drama festival was organised by the state cultural academy.

He then wrote a play in 1973 for the television titled ‘Haier Kkr’. Its success encouraged him to write humorous serials regularly till 1989 — when violence brought down the curtains on entertainment and laughter in Kashmir.

He is not completely discouraged and says humour and satire can still be revived in Kashmir, provided the state and central governments support his work.

“We need at least production cost so that the past glory is regained. I am hopeful that, in the near future, better sense will prevail so I am again able to make Kashmiris laugh away their daily tensions through my TV serials,” Josh said.

He believes there is immense talent among local youth. “These young boys and girls need to be rigorously trained in acting and directing productions to ensure that theatre and TV serials do not die an unsung death here,” he said hopefully.

And he wants to re-create the past rather than merely become a wistful memory of the halcyon days of Kashmir.

(The weekly feature series is part of a positive-journalism project of IANS and the Frank Islam Foundation. Sheikh Qayoom can be contacted at [email protected] )

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