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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

Trump’s decision to cut troops in Afghanistan creates policy vacuum

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Afghanistan-terror-attacks

New York: President Donald Trump’s decision at his administration’s sunset to pull back US troops from Afghanistan and Iraq is among his final attempts to keep his original campaign promise, but creates a policy vacuum and complicates the transition to Democrat Joe Biden in January.

Acting Defence Secretary Christopher Miller’s announcement that the US troop strengths in those two countries would be reduced to 2,500 each by January 15 – just five days before Biden takes over – creates a policy vacuum there.

Miller said on Wednesday, “In the coming year, we will finish this generational war and bring our men and women home.”

The war that began in 2001 to root out the Al-Qaeda that carried out the 9/11 attack on the US, and the Taliban than allowed to operate from Afghanistan, has claimed about 2,350 US lives and left more than 20,000 wounded.

Trump had promised in his 2016 campaign to bring all US troops home.

The troops remaining in Afghanistan and Iraq are to defend the US diplomatic and other facilities there.

There was a confluence of views between Trump and some Democratic leaders and opposition from Republicans and the NATO.

The House of Representatives Armed Services Committee Chair Adam Smith, a Democrat, said, “Reducing our forward deployed footprint in Afghanistan down to 2,500 troops is the right policy decision. At the same time, this reduction must be responsibly and carefully executed to ensure stability in the region.”

But the committee’s Republican leader Mac Thornberry warned Trump, “These additional reductions of American troops from terrorist areas are a mistake.”

“Further reductions in Afghanistan will also undercut negotiations there; the Taliban has done nothing – met no condition – that would justify this cut,” he added.

The peace agreement with the Taliban, which was seen as a precondition for troop withdrawal, has yet to materialise and the terrorist group has continued attacks in Afghanistan.

“The price for leaving too soon or in an uncoordinated way could be very high,” NATO Secretary-General Jens Stoltenberg said in Brussels.

He warned that Afghanistan risks becoming again the centre of international terror with the Islamic State (ISIS) moving there to rebuild “the terror caliphate it lost in Syria and Iraq.”

While Biden has committed to end the “forever wars in Afghanistan and the Middle East” and to “narrowly focus our mission on Al-Qaeda and ISIS,” neither he nor his transition team has reacted to the preemptive move by Trump.

Trump’s action would make policy-making and implementation difficult as soon as he takes over. It is compounded by him and his transition team being cut out of briefings and denied access to officials and information.

As vice president, Biden had been sceptical of his President Barack Obama’s troop surge in Afghanistan, when the force-strength was increased from about 30,000 when he assumed office in 2009 to nearly 100,000 in about a year as he attempted to decisively crush the terrorists in hope of a pull out.

Pakistan has been a key figure in the region, playing all sides. It has benefited from the US invasion of Afghanistan after the 2001 attacks on the US the Al-Qaeda, which was protected by the Taliban and Islamabad, which gave that group’s leader Osama Bin Laden asylum.

Pakistan Prime Minister Imran Khan visited Kabul for the first time on Thursday, a day after the US announced the troop cutback, but according to reports did not say anything about it.

The US-backed Kabul government has been suspicious of and critical of Pakistan for its backing of the Taliban.

But now President Ashraf Ghani will have to come to terms with Islamabad, which had facilitated the peace between the Taliban and the US, with nominal participation of the Kabul government in the process.

As the patron of the Taliban, Khan will wield more direct influence over Afghanistan as Washington winds down its involvement.

But on the other hand, when the US involvement is minimised and troops are no longer active beyond the protection of US resources, Islamabad’s leverage is also reduced because US troops would no longer be vulnerable to cross-border terrorism and terror attacks by Pakistan’s proxies and therefore will not have to be deferential to it.

Nor would Islamabad be able to exert influence by manipulating Taliban diplomacy.

The danger for Pakistan and the world will be the rise of the ISIS in an Afghan vacuum. Islamic State’s Khorasan Province (ISIS-K) group has been a threat to both Afghanistan and Pakistan and Islamabad will have to contain it and similar groups for its own protection – and not make a deal with them lest it face a backlash from the US.

There has been no signs of opposition in the Pentagon to the troop withdrawal.

After Miller took over the defence portfolio when Trump fired Secretary Mark Esper days after the November 3 election there has been a change in personnel at the top level to douse dissent.

(Arul Louis can be reached at [email protected] and followed on Twitter at @arulouis)

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Analysis

American democracy loses when most popular candidate is kept from race twice

Sanders’ popularity is now recognized, but after he spelt out the scenario on October 23 in a talk show on how the drama will unfold when votes are counted in these elections, he is well on his way to being prophetic.

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Bernie Sanders

It was nice to receive mails from friends who had assembled at Lucknow boy Nusrat Durrani’s Dumbo apartment under the Brooklyn Bridge on November 3, 2016, election night, armed with champagne bottles to be uncorked as soon as Hillary Clinton pipped the post.

In the event, the champagne bottles stood in one straight line on the dining table like a row of brooding bishops. Trump had shocked all the guests. A submarine sandwich hurled as a missile by a despairing guest knocked the lamp over.

I have repeated the above story because that is what history is supposed to be — a continuous repetition of facts. So indelibly etched on my mind is that party in Brooklyn that every US election will bring alive that episode.

There is another reason for that episode to be so etched on my mind. I did not wish to be the only one out of sync with the general mood that evening, but I was in a minority of one who expected Hillary to lose. Having arrived in New York a fortnight ago for a discussion in the various campuses of my book, ‘Being the Other: The Muslim in India’, kept me away from a 24X7 bombardment of punditry on elections.

A cluttering of detail tends to push out of focus the simple, plausible outline conditioning of electoral behaviour. Experience from most electoral theatres had taught me a simple lesson: people were tired of two parties, one indistinguishable from the other.

This was happening at local levels too, even in India. The Aam Aadmi Party’s record 67 out of 70 seats in 2015 was one such wave, smothered by the media which is controlled by the corporates whose key projects in New Delhi were threatened by the untried party. It did not have the ideological spine to withstand the assault from the main political parties and the corporate media. Therefore, the bubble burst. AAP is now an ordinary party circling around power.

There are comparisons between Joe Biden scraping through and Hillary Clinton losing in 2016: neither were popular candidates. They were candidates that the Democratic Party “manoeuvred” as front-runners because on both occasions Bernie Sanders was the most popular candidate, but his democratic socialism was anathema to the establishment.

As soon as it became clear that Sanders was leading the field, the establishment came out, all guns blazing. Thomas Friedman, whom the New York Times values as its star columnist, forgot all decencies of independent journalism and wrote two full columns rooting for former New York Mayor, Michael Bloomberg and a billionaire several times over, as one of the Democratic front-runners. There was no hope in hell that Bloomberg would win (buy) the nomination but, by spending a billion on TV, he would disrupt the game sufficiently for Sanders to advance. “This is a capitalist country,” thundered Bloomberg. To protect his credibility, Friedman admitted in his column, that his wife worked for one of Bloomberg’s charities. This was just one of the umpteen tricks employed to obstruct Sanders.

There was a straightforward reason why Clinton was the wrong candidate. The velocity given to globalization after the Soviet collapse gave a fillip to rampaging capitalism. Inequalities broke all barriers. It did not require Thomas Piketty to enlighten as that even in India barely one per cent of the rich had cornered 51.53 per cent of the wealth. The picture in the US was worse. Occupy Wall Street became a popular movement. It invited a capitalist riposte — the Tea Party. People were disgusted with Washington, which symbolized the US establishment. A quest began for an anti establishment candidate. Just one such candidate appeared to be Bernie Sanders. People were looking for social welfare, universal healthcare, education — exactly what the Bloombergs of the US thought would kill the initiative which made America great. Quite unabashedly, the Democratic Party gave the impression that it was preferable to lose the White House than lose corporate support.

One hoped the shock reversal of 2016 would have taught the Democrats a lesson. Across the Atlantic, Jeremy Corbyn was being likewise thwarted by New Labour. One of their leading lights, Lord Peter Mandelson, had sworn to “undermine” Corbyn. The other day they suspended him. Corbyn was to Mandelson what Sanders was to Bloomberg. This in June 2017 when the latest opinion polls projected Corbyn as the possible Prime Minister. Another example that the establishment trumps the popular will. Whither democracy, then?

At this very time, another reality was allowed to go unnoticed. A Fox News poll showed that Sanders has a +28 rating above politicians on both sides of the political spectrum. At that time, the Guardian’s Trevor Timm wrote, “One would think with numbers like that, Democratic politicians would be falling over themselves to be associated with Sanders, especially considering the Party as a whole is more unpopular than the Republicans and even Donald Trump right now. Yet, instead of embracing his message, the establishment of the party continues to resist him at almost every turn, and they seem insistent they don’t have to change their ways to gain back the support of huge swathes of the country.”

Sanders’ popularity is now recognized, but after he spelt out the scenario on October 23 in a talk show on how the drama will unfold when votes are counted in these elections, he is well on his way to being prophetic.

“In states like Pennsylvania, Michigan, Wisconsin, and elsewhere, Republicans are likely to go to the polling booths to cast their votes. Democrats, are likely to mail in their votes. When counting begins, the votes counted first will be Republican votes for that reason. So, by 10 pm on counting day, Trump will thank his voters and announce victory. But next morning when millions of mails will be counted, the trend will change. That is when Trump will scream murder: I told you they’ll cheat.” Mayor Rudi Giuliani has already elaborated the case in Philadelphia.

(Saeed Naqvi is a senior commentator on political and diplomatic issues. The views expressed are personal. He can be reached on [email protected])

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Analysis

The US presidential elections and future of India-US relations

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Donald Trump Joe Biden

As the coronavirus pandemic dominates global news in the United States, progress toward the next presidential election scheduled to be held on November 3 moves slowly forward. President Donald Trump had no real opposition in the Republican party and is running for re-election. And it has now become apparent that former Vice President Joe Biden will be his opponent as the Democratic candidate for president.

What would a Trump victory bode for the future of US-India relations? What would a Biden victory bode? Let me answer each of those questions in turn.

Given the love fests of Prime Minister Narendra Modi’s ‘Howdy Modi’ event in Houston, Texas, in which Trump participated in September of 2019, and Trump’s ‘Namaste Trump’ event hosted by Modi in India in February of this year, it might be assumed that the future for US-India relations is a splendid one. This would be an incorrect assumption.

Both of these events were more symbolic than substantive. Trump’s participation in them undoubtedly helped to persuade some — perhaps many — Indian American Modi supporters who voted for Hillary Clinton in 2016 to cast their ballots for Trump in 2020. Trump’s campaign team took steps to ensure this by holding an event at his Mar-a-Lago resort in which a group of prominent Indian Americans announced their plans to work for his re-election and to mobilize Indian Americans on his behalf.

To understand the future potential of India’s relations with the US. with Trump as president, however, it is necessary to look beyond these political moves and to examine the present state of those relations and Trump’s personal style.

In a word, the best way to characterize the current relations between the US and India is “functional”. The relationship was relatively good for the first two years of Trump’s presidency. In fact, near the end of 2018, Alice Wells, the Acting Assistant Secretary of State for South and Central Asia, was quoted in the media s saying: “This has been a landmark year for US-India ties as we build out stronger relationships across the board.”

Then, in 2019, the relations went off the track in the first half of the year after the US and India got into a tit-for-tat tariff war after the US terminated India’s Generalized System of Preferences which allowed India to send certain goods to the US duty-free. There have been continuing efforts to structure a “modest” trade deal since then. It was thought there might be some type of deal done in September of 2019 while Modi was in the US by year’s end, and then during Trump’s India visit. But, as of today, there is still no deal.

This inability to get any meaningful trade agreement in place speaks volumes about India’s potential future relations with India with Trump as president. So, too does Trump’s style.

Trump’s campaign slogans this time around are “Keep America Great” and “Promises Made, Promises Kept.” Trump is not a policy wonk and most of his effort will go toward “America First”. This involves making the US more isolated by withdrawing from international agreements, restructuring trade agreements, emphasizing building walls to stop immigrants at the border, using tariffs to block trade with countries who are taking away American jobs, and confronting businesses who are allegedlly stealing American trade secrets.

This perspective suggests what India can expect for its relations with the US if it has to deal with Trump for a second term as president. The relations will stay functional at best. As I have said before, that’s because the words partnership, cooperation and collaboration are not in Trump’s vocabulary. Nationalism, isolationism and protectionism are.

Joe Biden stands in stark contrast to President Trump both professionally and personally. Biden is a strategic thinker and doer with a solid eight-year track record of leadership experience as Vice-President in forging alliances that have made a difference around the world and he has also been a long-standing friend of India.

He was chairman of the Senate Foreign Relations Committee and a leading advocate for the Congressional passage of the Indo-US civic nuclear deal in 2005. At a dinner convened 10 years later in 2015 by the Confederation of Indian Industry and the Carnegie Endowment for International Peace, Vice President Biden discussed the tremendous joint progress that had been made by the two countries in the past and declared “We are on the cusp of a sea change decade.”

Early in his campaign for the Democratic nomination for president in July of 2019, in laying out his foreign policy vision, Biden stated that the US had to reach out to India and other Asian partners to strengthen ties with them. The items on Biden’s foreign policy agenda for strengthening which are of importance for India include climate change, nuclear proliferation and cyberwarfare.

During his vice presidency, Biden worked side by side with President Barack Obama to do things that would contribute to achieving Obama’s vision stated in 2010 of India and America being “indispensable partners in meeting the challenges of our time.” In 2020, those challenges are even greater than they were a decade ago.

That is why it is so essential that India and the US develop a strategic relationship that enables them to become those indispensable partners. That can happen if Biden assumes the presidency on January 20, 2021. It cannot happen if Donald Trump remains as president for a second term.

The results of this upcoming election in the US matter greatly for the future of the United States. They matter greatly for the future of India-US relations as well. Time and the American electorate will tell what that future will be.

(Frank F. Islam is an entrepreneur, civic and thought leader based in Washington DC. The views expressed here are personal)

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