As many who follow international news would know by now, the Indian government recently banned all 500 rupee and 1000 rupee notes that were in circulation (these notes constituted 86% of the total cash that was in circulation in the economy). I had been trying to not comment on this for sometime because there are clearly pros and cons to this – and I was waiting to see which will outweigh the other. And to be frank, I am still waiting to see how this plays out, but in the meantime, I just couldn’t stop myself from commenting on what seems to be, in my opinion, a grand move with goddamn repurcussions for the most honest, hard working people in the country, who frankly built that country despite the government and not because of it.
First of all, let’s take the pros of this sudden action by the central (federal) government. India is one of the most corrupt countries in the world. Period. No ifs. No buts. And this action of banning or making the 500 and 1000 rupee notes invalid has basically made all that corrupt money to become worthless – well, atleast the ones that were held as cash. Putting aside the fine points of the economic arguments aside for a minute, this is a huge positive to the quality of life for the Indians in the long run – because all the corrupt money (or illegally obtained money) that was in the economy was the root cause of various law & order issues – including growth of land mafia, gangsters related to political parties and so many more illegal activities across the country. And to make things worse, these illegal activities were becoming a business where younger generation Indians found a way to make money rather than confront it. So in other words, all this corrupt money was changing the culture of the country itself. So rooting out this gives a fresh opening to make things better in a country that has so high potential with a billion plus individuals.
But what are the cons? Well, consider this: how would it be if in order to confront an illegal activity going on in a house in the street, the entire street is destroyed? That is how this sudden policy action seems to be. And in that same street where the illegal activity was taking place, poor farmers were residing, migrant construction workers who buy their lunch with the money they earned that morning were residing, rural women entrepreneurs who learnt a skill through a cash based micro-finance loan and were giving their best to escape poverty were residing, older generation of grandparents who thought that the most responsible thing they did for their future generation was saving and hoarding cash that they earned so hard throughout their life were residing, children whose parents have never even seen the gates of a school but were ambitious enough to get a school or college degree through a loan or their parents savings were residing, patients who have saved every paise (penny) their entire life in order to finally have their life-saving surgery were residing, small business owners who have risen through decades despite the government policies and not because of them were residing, and so many other innocent, hardworking, wonderful people were residing. In other words, more than 90% of India was residing in the same street.
Why did the government had to do such a drastic move? Well, they provided two reasons and I don’t buy both of them. Here they are:
1. National Security concerns due to the prevalence of fake/counterfeit currency flooded in by foreign countries (a.k.a Pakistan) to destabilize India: Well, I am not a national security expert and let us assume (and most likely) this is true. But, common sense says, this amount, if anything, has to be so minimal relative to the overall huge Indian economy and the cash that was in circulation that it doesn’t warrant destroying the entire street (like I mentioned above). Moreover, fake currency doesn’t cross borders itself. Someone is bringing it in. So a responsible government would try to identify the source through which the counterfeit currency travels and would work on preventing it instead of…again, what is it? – that’s right! – destroying the entire street.
2. Unearthing black money: So the money that was legally or illegally earned but haven’t been reported and paid taxes on is called black money. Again, it is legally or illegally. Considering just the legally earned portion for now, for some reason, in a country like India, the officials fail to understand the concept that black money is not fake money. When we pay taxes, the government collects it as revenue and spends it back in the economy. When we don’t pay taxes, the individuals who have been hoarding that cash spend it back in the economy. Was that clear? In both ways, the money comes back to the economy. Now, I strongly believe we all should pay taxes so that we can build a safer and equitable society that covers all sections of the population. But in a country like India, where governments have either been inefficient or corrupt since independence, people have accustomed to under-reporting their income or have accustomed to not understanding the benefits of paying taxes. And this is 99% India. I re-iterate and I am not exaggerating – this is 99% India. So, in a country where tax revenues have been slowly going up every year, tax-base widened every year through gradual policy changes (like increasing the bond paper value on real estate transactions, mandatory income tax reporting on gold purchases above a certain amount at the time of purchase, or on other expensive transactions, or bringing more and more sectors into formal category through globalization and opening up to foreign investments), why on earth, in the name of “I know better, so I want to spend your money”, would the government disrupt and…..what is it again? right, right – destroy the entire street where more than 90% of Indians live?
But now that this disastrous move has been done, what next? Well, it all depends on what kind of fiscal policies the government comes up with? And the fiscal policy I would like to see and recommend is a tax holiday for a significant amount of time for all income below 50 lakh rupees (approximately $ 80,000) annually. And a moderate tax on the next 50 lakh earned. Income beyond that could be taxed at regular rates. With all the extra revenue that the government has obtained with the unearthed black money, this shouldn’t be a problem for the government to do. But it is extremely important for people to start generating and accumulating wealth again (legally). Without accumulation of wealth, because of this drastic move, the psychological damage that will be incurred by the sudden reduction in the monetary value of all currently held wealth will significantly dent demand growth for years to come. Without demand growth, local and foreign investments will slow – thereby resulting in further rupee weakness and inflation – which will once again hurt the poorest of the poor much and will suffocate them beyond what they can bear. The middle class will also shrink significantly while the rich will start to park and grow their money abroad. So a major policy, this time not just a bold one, but also a rational one, is urgently needed on the fiscal front. And I sincerely hope that the government uses tax-holiday as that fiscal weapon instead of government spending. There is never a time in today’s world where a government can better spend people’s money than people themselves. Governments can only facilitate growth, but ultimately growth itself has to come from people.
The government has been royal in their intentions, but reckless in their moves. It’s time for the government to correct that mistake – by first acknowledging the problem and the work before it, and stop being cocky, and build the street back up again!