Month: November 2016

Regular Demonetisation of Paper Money is a Stupid Idea

rupee

On November 8, 2016, Modi announced the decision of the government to demonetise notes of Rs 500 an Rs 1,000. Several economists have made suggestions since then on what the prime minister Narendra Modi, should be doing next to tackle the huge amount of black money in the country.

One suggestion has been made by Soumya Kanti Ghosh, the group chief economic adviser of the State Bank of India (SBI), the largest bank in the country. In a column in the Business Standard titled Demonetisation and Note Burning and dated November 15, 2016, Ghosh wrote: “We suggest that this demonetisation may be carried out over periodic intervals with the surprise element and the government makes its intention clear on that. In such an eventuality, people will be discouraged to hold cash.”

What Ghosh is essentially saying here is that the government should carry out regular demonetisation of currency in the years to come. This basically means that the government should regularly make old currency useless and introduce new currency. He also suggests that the government retain the surprise element of the move like it did this time around.

This means that one fine evening (or morning or afternoon for that matter), the prime minister should suddenly announce to the nation, like he did this time around, that the high-denomination notes are basically useless now and new ones will be introduced. Ghosh hopes that by doing this people will be discouraged from holding on to cash. In the process the economy will move from being an “informal economy to a more formal economy”. In simpler terms, it means that the black portion of the economy will come down.

This I think is a stupid suggestion. Allow me to explain.

Paper money doesn’t have any value on its own, like various other forms of money like gold or silver, have had over the years. The Rs 10 note is not very different from the demonetised Rs 500 note except for the colour of the ink and the amount of paper used, to make it. The difference in the value of the notes is clearly not Rs 490. A Rs 10 note has a purchasing power of Rs 10 because the government deems it so. And so was true for the Rs 500 note, before it was demonetised.

So what is paper money? It is primarily a token deemed to have a certain value by the government and which everyone accepts and is used to carry out transactions in the everyday economy.

Without enough paper money in the economy, people can’t carry out transactions and the economy comes to a standstill. This is what is happening right now all-across the country. Mobile phone sales have collapsed. People aren’t buying two-wheelers. Restaurants are deserted. And normal taxis are not getting enough business. The farming economy has slowed down tremendously. Daily wage workers like plumbers and electricians are not getting enough work. For more examples, you can open any newspaper and there will be enough stories there. Generally, business is slow.

This isn’t surprising given that close to 86 per cent of the currency by value has been rendered useless by the demonetisation move. Of course, this wouldn’t have mattered if Indians were used to transacting through debit cards, credit cards, net banking, wallets and so on. The show would have gone on.

But that has not happened.  India is a country where a bulk of transactions are still carried out in cash.  An estimate made by  the Fletcher School at the Tufts University in the United States, said that in 2012, in India, 86.6 per cent of the transactions by value were carried out in cash. While this figure would have come down since then, it would still be at a very high level.  In comparison, card transactions stood at 4.1 per cent of the total transactions. The electronic transactions stood at 6.8 per cent.

Another research paper titled The Cost of Cash in India points out that “the ratio of currency to GDP in India (12.2%) is higher than countries such as Russia (11.9%), Brazil (4.1%), and Mexico (5.7%)”.

We can be prude about the matter and say that people should move away from cash, but societal habits are not easy to change. Given this, high importance of cash in our lives, it isn’t surprising that business in all kinds of markets has come down substantially. There isn’t enough token or paper money going around for people to carry out these transactions.

The only way to tackle this is to put out enough new money into the financial system in order to replace the old money. This will ensure that people will go back to carrying out transactions and businesses will go back to being normal again. But this is easier said than done.

Economist Saumitra Chaudhuri writing in The Economic Times said that “the timeline to replace the existing stock of 1,658 crore pieces of Rs 500 notes will run into May 2017.” He arrives at this number taking into account the printing capacity of the existing mints. This basically tells us that the implementation of the demonetisation move wasn’t really thought through. As usual we have managed to screw up on the implementation bit. And this has created problems in the everyday economy.

The basic hope of Ghosh of SBI is that with frequent demonetisation people will get on to other more formal mechanisms of paying than cash. That is likely to take place. But what will also happen is that more amount of black money will now quickly move into gold. There is nothing stopping that from happening.

And the thing is that India produces almost next to no gold. We import almost all of the gold that we consume. This has its share of repercussions on the balance of payments and the rupee dollar exchange rate.

But there is a bigger worry. All paper money essentially works on faith. This faith leads people to believe, that a piece of paper with some ink, digits and promises on it, is basically money. It is this faith which leads people to believe that a Rs 10 note has a purchasing power of Rs 10 and a Rs 100 note has a purchasing power of Rs 100, though essentially there isn’t much difference between the notes.

This faith is what basically keeps paper money going as money. I know for sure that when I use rupees to pay for goods or services, they will be accepted by others. And this is what keeps the economy going. If this faith breaks down, paper money breaks down. People move on to other forms of paper money or simply gold.

Let’s look at some evidence of what regular demonetisation does to an economy. One country which has gone through regular demonetisation of a large scale is Myanmar (or Burma as it is more commonly known as in India).

As the Federal Reserve Bank of San Francisco points out in a document titled Burma—Paving the Road to a Modern Banking System: “After the 1962 coup, the government installed a socialist economic system and nationalized all banks, including foreign banks. Subsequently, three major demonetizations occurred in 1964, 1985, and 1987. In the latest 1987 demonetization, the Ne Win military regime effectively declared about 75 percent of the cash in circulation illegal and eliminated three banknote denominations without exchange or compensation. The demonetization eroded most of the populace’s savings and resulted in widespread protests and the 1988 coup. Demonetization coupled with rampant inflation in the 1990s has led to the retainment of little faith in the storage value of the kyat. As a result, the economy is partly dollarized.”

While, the Indian demonetisation is nowhere as extreme as the ones in Burma, but the part in italics in the above paragraph is what is important. Regular demonetisation has led to people having little faith in the Burmese currency kyat. Hence, people prefer to deal in dollars rather than the local currency.

This is something recounted by a writer on the National Public Radio website: “[In 1987]… the country’s leader created new bills overnight in denominations that were multiples of nine — his lucky number… So people started to sock away their extra money in U.S. currency. And when your life savings is a few U.S. $100 bills, you want to keep them pristine.”

Regular demonetisation can lead to people losing faith in the country’s currency and moving on to dollars. And that is something no Indian government would want. Other than losing control on the monetary policy, it is going to have other repercussions as well. In the Indian case, more and more people will simply move to gold, given our love for the yellow metal.

Once this is considered, the suggestion from the chief economic adviser of the country’s largest bank, seems rather silly. The only possible explanation for it lies in the fact that he was perhaps trying to please his political bosses.

The column originally appeared in Vivek Kaul’s Diary on November 17, 2016

Demonetisation Impact: If Real Estate Prices Fall, Dual Financing Might Be Next Big Headache

India-Real-Estate-Market

The demonetisation of Rs 500 and Rs 1,000 notes is expected to lead to a fall in real estate prices. I had discussed this point in detail in a column last week.

I think that real estate prices will fall, but I am really not sure whether they will crash. The reason for that is straight forward. Every time in the past, real estate prices have started to slowdown, lending from the banks to the sector has gone up.

Banks probably fear that the real estate companies will default on their loans, if prices fall. The loans ensure that the real estate companies do not need to cut prices and the real estate bubble continues to stay inflated. My guess is that the public-sector banks are essentially forced to lend to these companies by politicians.

Hence, my point is that the real estate prices will come down dramatically, if the government wants them to fall. If public sector banks are not forced to lend to these companies, then real estate prices can come down.

Having said that there is another issue that needs to be discussed here. It’s called dual financing and doesn’t get discussed much in the media.  Let’s try and understand this through an example.

A builder wants to build apartments. He takes a loan from a bank for construction. He offers the project (basically the land) in which the flats are to be built as a collateral to the bank. At the same time, he starts selling flats which are yet to be built to the prospective buyers.

The genuine buyers take a home loan from the bank and hand over a portion of it to the builder. The buyers offer their flats that will be built as a collateral to the bank from which they are taking on the home loan.

So, what is happening here? The builder before marketing the project had taken on a loan from the bank against the project. What happens after that? The buyers take on home loans offering the flats that are being built in the project as a collateral.

Basically, the same asset has been offered as a collateral twice. This is referred to as dual financing. If the apartment is built and handed over to the prospective buyer, there is no problem at all. Everyone lives happily ever after.

But if the builder defaults on the loan he had taken from the bank to construct the flats, there is a problem. The project has been offered as a collateral to a bank. The flats on the other hand are collaterals against which buyers have taken home loans from other banks.

Given that the builder has taken the loan first, the first charge is created in favour of the bank which gave the loan to the builder. A first charge ensures that the loan given by the bank to the builder takes precedence over the home loans that have been taken on against the same collateral.

The Reserve Bank of India(RBI) has reiterated the same in a letter to the banks dated January 20, 2016, wherein it said: “if builders/promoters fail to repay the loan availed from the bank… the bank would have first charge over the property”.

This basically means that if the bank seizes the flats to sell them to recover its loan in case the builder defaults, there is nothing much that the buyers can do about the same. This is because the bank giving the loan to the builder has the first charge.

What happens to the buyers? They must fight a legal battle trying to establish their ownership over the flats. Meanwhile, they must continue paying their EMIs on the home loans that they had taken on. If they stop paying their EMIs, their banks will come after their other assets. In India, home loans are recourse i.e. the banks can go after the other assets of the borrower as well, other than the home offered as a collateral, to recover their loan.

What are the safeguards built into the system to protect the prospective home-buyers? Banks giving loans to builders need to make sure that the builder tells the prospective buyers very clearly that he has already borrowed money against the project.

In fact, as the RBI Master Circular on Housing Finance for Scheduled Commercial Banks points out: “while granting finance to specific housing / development projects, banks are advised to stipulate as a part of the terms and conditions that:

(a) the builder / developer / company would disclose in the Pamphlets / Brochures etc., the name(s) of the bank(s) to which the property is mortgaged.
(b) the builder / developer / company would append the information relating to mortgage while publishing advertisement of a particular scheme in newspapers / magazines etc.
(c) the builder / developer / company would indicate in their pamphlets / brochures, that they would provide No Objection Certificate (NOC) / permission of the mortgagee bank for sale of flats / property, if required.
(d) Banks are advised to ensure compliance of the above terms and conditions and funds should not be released unless the builder/developer/company fulfils the above requirements.”

What the circular basically says is that the builder taking a loan from the bank needs to tell the buyer buying a flat about the project being mortgaged with the bank. Also, it is the bank’s job to ensure that the builder is following this instruction. Further, if the builder does not follow this instruction then the bank should not release funds to him.

If this regulation was being followed, the borrowers would have known that something called “dual-financing” exists. But most home loan borrowers continue to be unaware about this part of our financial system. As the RBI letter to the banks dated January 20, 2016, cited earlier in this piece points out: “It has been observed on several instances that banks are not insisting builders/promotors who avail the credit facilities for their building projects disclose the details of mortgage/terms and conditions of the bank loan availed by them to the borrowers/potential borrowers purchasing the flats through advertisement/pamphlets.”

The point being that builders are not telling the flat buyers who are taking on home loans, that the project is already mortgaged. If the builder does not reveal these details, it is very difficult for the prospective buyers to go figuring out details on their own.

The interesting thing is that the RBI does not allow Urban Cooperative Banks to carry out dual financing. As the Master Circular on Housing Finance for Urban Cooperative Banks points out: “Builders/contractors generally require huge funds, take advance payments from the prospective buyers or from those on whose behalf construction is undertaken and, therefore, may not normally require bank finance for the purpose. Any financial assistance extended to them by primary (urban) co-operative banks may result in dual financing. Banks should, therefore, normally refrain from sanctioning loans and advances to this category of borrowers.”

The question is how can one logic apply for Urban Cooperative Banks and not apply for the Scheduled Commercial Banks? This is something that the RBI needs to explain.

So, the question is why am I discussing this in today’s column? The dual financing problem has been around for a while, and did not crop up recently. The answer lies in the fact that dual financing becomes a problem only when the builders default on the loans they have taken from banks.

The demonetisation of high-denomination notes has led to a lot of talk about real estate prices falling. A major reason for this lies in the fact that people won’t be able to put together the black component of the payment, given that the old high-denomination notes are invalid and there aren’t enough new ones going around.

This is likely to lead to lower prices, the experts who follow real estate have been saying. One risk that this runs is that lower prices may lead to builders defaulting on their loans to banks. In this situation, the banks will seize the collateral and want to sell off the flats to recover their money.

This is likely to lead to problems for those buyers who have taken on home loans to buy these flats. It will also lead to problems for those buyers who haven’t taken a home loan to buy these flats. This is one fall out of low real estate prices because of high denomination notes which is possible.

And if anything like this were to happen in the days, the middle class is likely to get hurt. When the middle class gets hurt, it tends to make a lot of noise. It’s extremely possible that such a thing can happen in the time to come. The Modi government needs to be prepared for this because it is important the real estate prices fall, to improve the affordability of real estate in the days to come.

The column originally appeared in Vivek Kaul’s Diary on November 16, 2016

Why Trump Won

donald_trump_by_gage_skidmore_2

A small cottage industry has emerged around trying to explain why Donald Trump won the US Presidential elections and is now set to become the 45th President of the United States, in January 2017.

In this column, I will not try and explain why Trump won, but something a little more than that. Hence, the headline to that extent is misleading.

The mainstream media in the United States is primarily based out of Washington and New York, which are on the east coast. Given this, we are now being told, they were not in touch with the realities of working class Americans in middle and rural America.

And it is these working-class Americans who ultimately voted for Trump. At least, this is the narrative that is emerging now, to explain why Trump won. Even if this post-facto narrative that is now emerging, is true, the Americans who voted for Trump did so for the wrong reason. Allow me to explain.

During the heydays of the manufacturing in the United States, the factories were based out throughout the large parts of middle America. Gradually, these factories have shut down and jobs have been lost. The conventional narrative is that these jobs have been outsourced to China, where its way cheaper to manufacture stuff that was earlier being manufactured in the United States.

This loss of jobs has impacted the sense of self of many Americans. As Ryan Avent writes in his book The Wealth of Humans—Work and its Absence in the Twenty-First Century: “Work is not just the means by which we obtain the resources needed to put food on the table. It is also a source of personal identity. It helps give structure to our days and our lives. It offers the possibility of personal fulfilment that comes from being of use to others, and it is a critical part of the glue that holds society together and smoothes its operation.”

Hence, those who have lost jobs over the last few decades, think the Chinese and the immigrants are to be blamed for it. In fact, this is one of the major reasons being offered by those analysing Trump’s success. We are now being told that Trump managed to tap into this frustration of middle America, of jobs that had been lost and so and so forth. Or as Donald Trump put it: “We will make America great again”.

But the figures do not reflect this. As economist Michael Hicks writes in a research paper titled The Myth and Reality of Manufacturing in America: “Almost 88 percent of job losses in manufacturing in recent years can be attributable to productivity growth, and the long-term changes to manufacturing employment are mostly linked to the productivity of American factories.”

What does this mean in simple English? It essentially means that an average American worker is producing more stuff while working in a factory than he did in the past. And this is because of the advances made in automation and information technology. This has led to the average worker producing more. It has also led to the need for fewer factories carrying out manufacturing

As Hicks puts it: “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”  Hence, American jobs have not been lost to China, nor have they been taken over by immigrants willing to work at lower salaries. They have essentially been lost to better robots.

But as the old saying goes “perception is reality”. The average white American living in middle America thinks that the Chinese and immigrants have taken over his jobs. He can come to that conclusion by driving around his area and seeing all the factories that used to manufacture stuff, now shut. He can see localities and areas which were once burgeoning with people, now having been abandoned. To him this is the reality.

The availability effect is at work here. Nobel Prize winning psychologist Daniel Kahneman defines the availability effect as the “ease with which instances come to mind”. Hence, an average American looks at the scene around him and thinks that the Chinese have taken away his jobs.

This is perception of the reality. This is an average American’s reality. And this has helped Trump win. Or so we are being now told.

The column originally appeared in Bangalore Mirror on November 16, 2016

 

If Modi Wants to Eliminate Black Money, He Needs to Clean Up Political Funding

narendra_modi

In November 8, 2016, prime minister Narendra Modi made the announcement to demonetise Rs 500 and Rs 1,000 notes. Up until December 30, 2016, the old notes can be deposited in banks and post offices. They can also be exchanged for new ones.

While presenting these notes at the bank or the post office a proof of identity needs to be shown. Right now, I have around Rs 3,500 in old Rs 500 notes. As and when I go the bank I must show my PAN card, passport etc.

This is the correct way of going about things because one of the aims of demonetisation is to eliminate black money, “which casts a long shadow of parallel economy on our real economy”. i And in order eliminate black money an accounting trail needs to be established.

While individuals are supposed to show their PAN cards while depositing money into banks, the same does not apply to political parties. And this is the basic issue I will discuss in this column.

The decision to demonetise Rs 500 and Rs 1,000 notes essentially hits at the stock of black money. People who have hoarded on to black money in the form of cash and are unable to get it exchanged for new notes or gold or any other physical asset, will end up with useless pieces of paper.

At this point of time, it is difficult to estimate what portion of the stock of black money is likely to be destroyed. The only thing that can be said with some certainty is that some of the black money which has been accumulated in the form of notes or cash, over the years, will not make it back to the financial system.

Also, after this demonetisation move, people who are wont to holding black money in the form of cash are unlikely to do the same, at least, not to the same extent.

The demonetisation though does not stop people from starting to accumulate black money all over again. Along with new notes of Rs 500 and Rs 2,000 which have been introduced, a new note of Rs 1,000 is also on its way. Once these new notes are there in the market, they can be used to start accumulating black money all over again.

Given this, the demonetisation move is unlikely to hurt the flow of black money i.e., it’s further accumulation. If the government wants to do that, one of the things that it needs to do is to reform the financing of political parties.

If as a citizen I need to show my identity card while depositing my old notes to the bank, people making donations to political parties should also be made to do the same. This will make the accounts of political parties completely auditable.

Now that is something that does not happen as of now. I had discussed this point in the September 30, 2016, edition of the Vivek Kaul Letter (subscription required). Given the situation as it has evolved, the points are worth repeating here.

An analysis carried out by the National Election Watch and Association of Democratic Reforms reveals that during the period 2004-05 and 2011-12, the total income of the national political parties was Rs 4,899.46 crores. ii

There are six national political parties. These are Indian National Congress, Bhartiya Janata Party, Nationalist Congress Party, Bahujan Samaj Party, Communist Party of India and Communist Party of India(Marxist).

The Congress party declared the highest income of Rs 2,365.02 crores. This is hardly surprising given that it was the Congress led United Progressive Alliance was in power in Delhi throughout this period. It was followed by the Bhartiya Janata Party which declared an income of Rs 1,304.22 crores, and was the principal opposition party during the period. (See Figure 1)

Figure 1:

National 

Between 2004-05 and 2011-12, there were two Lok Sabha elections (in 2004 and 2009) and multiple state assembly elections. It doesn’t take rocket science to conclude that the incomes declared by the political parties were clearly not enough to fight so many elections.

And how did things look in the 2014 Lok Sabha elections? Look at Figure 2.

Figure 2:

Sabha 

As per Figure 2, the six national political parties spent Rs 2,453.98 crore in the last three Lok Sabha elections. Of this around Rs 1,308.73 crore was spent in the 2014 Lok Sabha elections.

Now compare this to an estimate made by the Centre for Media Studies in March 2014. It estimated that around Rs 30,000 crore would be spent during the 16th Lok Sabha elections which happened in April and May 2014. Of this amount, the central government would spend around Rs 7,000-8,000 crore to conduct the elections. The remaining amount of around Rs 22,000-23,000 crore would be spent by the candidates for wooing the voters and fighting the elections.

Of course, national political parties are not the only parties fighting elections. Nevertheless, the difference between the officially declared expenditure and the ‘real’ expenditure to fight elections, is huge. Where does this money come from?

As Sandip Sukhtankar and Milan Vaishnav write in a research paper titled Corruption in India: Bridging Research Evidence and Policy Options: “On the expenditure side, candidates face strict limits on spending once elections have been announced, but election authorities struggle to properly verify their reported expenditure since a substantial portion typically occurs “in the black.”” Hence, it can be deduced that it is black money which mostly finances political parties and in the process elections in India.

The laws are also structured to help this. As Sukhtankar and Vaishnav point out: “For instance, corporations and parties are only legally required to publicly disclose political contributions in excess of Rs 20,000. This rule allows contributors to package unlimited political contributions just below this threshold value completely free of disclosure. Indeed, in 2014 the Association for Democratic Reforms (ADR) reported that 75 percent of the income of India’s six major parties comes from undocumented sources.”

Take the case of the Bahujan Samaj Party. For 2014-2015, the party “claims not having received any donation above Rs 20,000 hence no donations details of the party are in public domain.” iii

As mentioned earlier there are limits to the total amount of money that a candidate can spend during Lok Sabha elections. For bigger states like Bihar, Uttar Pradesh, Madhya Pradesh, etc., this limit is set at Rs 70 lakh. But for smaller states, like Goa, Sikkim and Arunachal Pradesh, this limit is set at Rs 54 lakh. Nevertheless, there is a loophole here which helps parties spend much more money than the prescribed limits. As Sukhtankar and Vaishnav write: “Under existing statute, the Election Commission of India(ECI) lacks clear powers to take follow-up action in the event a candidate files false or misleading declarations. An even bigger problem lies with a loophole in the law that allows candidates to keep secret party and supporter expenditures on behalf of their campaigns that are spent propagating the party programme rather than endorsing the specific candidate in question.”

All these loopholes allow political parties to spend black money in their campaigning. Any government which is serious about cracking down on black money should be addressing these loopholes with utmost seriousness.

Another important observation that needs to be made here is regarding bringing political parties under the Right to Information Act. In an affidavit submitted to the Supreme Court in August 2015, the Modi government said: “If political parties are held to be public authorities under RTI Act, it would hamper their smooth internal working, which is not the objective of the RTI Act and was not envisaged by Parliament. Further, it is apprehended that political rivals might file RTI applications with malicious intentions, adversely affecting their political functioning.” iv

In fact, the Congress Party has argued along similar lines against the 2013 order of the Central Information Commission to bring the six national parties under the ambit of the Right to Information Act. In June 2016, it argued before the commission: “Declaring a political party as public authority under the RTI Act would hamper its smooth internal working, which is not the objective of the RTI Act.” v

The Congress Party had further said that if political parties were brought under RTI, rivals would maliciously file many RTIs and adversely impact the functioning of the political parties. This is a pretty ridiculous argument given that if some party decides to do this with the Congress, the Congress can do the same with that political party. Hence, there is already a sense of balance in the system.

If the political parties are brought under the ambit of RTI, they will have to function in a much more transparent way in comparison to what they do now. This would mean keeping proper records of where the funds to finance them are coming from. Also, cash donations to political parties need to stop. Payments need to made through cheques or the various digital alternatives that are available.

In fact, Modi and the Bhartiya Janata Party can take a step forward on this front and promote the usage the recently launched of United Payment Interface for the small donations that are made to a political party.

To conclude, real estate companies or builders are major financiers of political parties, at least at the state level. There is some very good research evidence to suggest that builders do finance politicians before elections. In a paper titled Quid Pro Quo: Builders, Politicians, and Election Finance in India, authors Devesh Kapur and Milan Vaishnav, look at the cement consumption of builders to show how extensively builders have to feed the politicians.

All construction requires cement. When it comes to cement demand, the real estate sector accounts for a major part of the demand in India. When the construction activity carried out by the real estate sector goes up, the demand for cement increases. If the real estate companies are key financiers of politicians, as they are assumed to be, then just before the elections, they will need money to finance the electoral campaign of politicians.

If the real estate companies pay the politicians, it would mean that they will have lesser money to carry out their own activities. This would mean a slowdown in construction activity. And a slowdown in construction activity should lead to a fall in cement consumption.

Hence, cement consumption can be tracked to figure out whether real estate companies are financing politicians. Kapur and Vaishnav looked at elections in seventeen Indian states between 1995 and 2010. They found a “contraction in cement consumption (representing a 12 to 15 percent decline) during the month of state assembly elections”. What this clearly tells us is that real estate companies do finance state level politicians, as is commonly inferred.

In fact, the authors even offer some anecdotal evidence. A builder constructing a hotel in Mumbai was told by the government it would issue permits required, if there was a quid pro quo. And what was the quid pro quo? It wasn’t cash but a stake of five per cent in the hotel in the name of a firm connected to a local politician. vi

Hence, if the political parties are brought under the ambit of RTI and are forced to declare where their donations are coming from in a timely manner, the nexus between politicians and builders will come under proper scrutiny. This will mean a big attack on the black economy and will slow down the generation of black money in the economy.

The decision to demonetise high-denomination bank notes only attacks the current stock of black money. It doesn’t do anything about its flow or future generation. Let’s see if Modi gets around to doing this. That will be a real victory over black money.

The column originally appeared in Vivek Kaul’s Diary on Equitymaster on November 15, 2016

Of Bhakts, Jhollawallahs and Demonetisation

rupee(This is a spoof)

It was early in the morning. Delhi was smoggy as usual. And I had stepped out to buy milk.

At the milk booth, I ran into a bhakt and a jhollawallah.

The bhakt did not have a red tilak on his forehead and the jhollawallah wasn’t carrying a jhollah. He was wearing Nike shoes though and not the kolhapuri chappals that he used to, until a few years back. Also, he hadn’t studied at JNU.

And I immediately asked him? “What Sir, how come you are wearing Nike shoes? One of the most famous brands of unabashed American capitalism.”

“Oh, Nike, is now Made in China, you see,” he replied.

“But how does that matter?”

“China, is still run by the Party. And anything run by the Party is communist enough for me.”

“Oh, yes. The biggest capitalist enterprise in the world, the Chinese Communist party,” I replied.

The bhakt decided this was a good time to butt into the conversation and started to shout “Modi, Modi,” soon to realise that it was early in the morning, the road was deserted and there was no one out there watching his performance.

“What a fantastic decision Modi ji has taken to ban Rs 500 and Rs 1,000 notes. All the black money wallahs will now have a tough time,” he said.

“Arre what are you saying? Look at my maid. She has run out cash. She doesn’t have money to buy food and the banks are giving Rs 2,000 notes only. She has never withdrawn money from an ATM. How is she supposed to live? Did Mr Modi think about this?” the jhollawallah asked, suddenly having developed great compassion for the maid.

“What your maid doesn’t have Paytm?” the bhakt asked, with a great degree of surprise.

“But why don’t you just take her to an ATM and help her withdraw that money. I mean, she will get used to the idea if you show it to her once,” I said. “It isn’t rocket science exactly.”

“I don’t have the time for that,” the jhollawallah replied.

“And my maid’s sister, she had saved Rs 25,000 in Rs 500 and Rs 1,000 notes, away from her alcoholic and abusive husband. She doesn’t have a bank account, what is she supposed to do with that money now?” he continued.

“Oh, even she doesn’t have Paytm?” the bhakt asked, doubly surprised.

“But don’t the Chinese have a big investment in Paytm?” I asked innocently. “And until last week weren’t we supposed to boycott Chinese goods and services?”

The bhakt ignored my remark.

“And look at all the lines that have cropped up outside ATMs. People are wasting so much time to withdraw their own money,” the jhollawallah remarked swinging his Rahul Roy hair, to one side. “And I had heard that Rs 15 lakh will be deposited into every account. Now I have to stand in line to withdraw my own money. What rubbish is this?”

“Lines?” screamed the bhakt. “Did you complain when you stood in a line to buy cricket match tickets? Did you complain when you stood in a line to buy movie tickets?” he asked. This was a performance which was straight out of Amitabh Bachchan’s Deewar. “Jao pehle us aadmi ka sign lekar aao,” I was suddenly muttering.

But I soon got back on track. “Well, the last time I stood in a line was to watch the first day first show of Raja Babu at the Sujata Cinema in Ranchi. These days I Paytm,” I explained.

“Ah, Raja Babu,” said the jhollawallah. “Thinking of Karishma gyrating to sarkaye liyo khatiya jaada laga still gives me the Goosebumps.”

The memories of Karishma Kapoor led to a pause and gave me an opportunity to ask a question. “So what do you think of this new Rs 2,000 note? Looks kinda sexy,” I said.

“It’s a conspiracy against the masses,” the jhollawallah screamed.

“They could have done better,” said the bhakt.

And this had me surprised. How could the bhakt and the jhollawallah agree on something.

“Why?”

“Because it’s pink,” both blurted out at the same time.

“So?” I asked.

“Pink is like saffron.” “Pink is like red,” said the jhollawallah and the bhakt, almost at the same time.  And I thought Pink was Bachchan all the way.

“So how do you think the new Rs 2,000 note will stop the generation of black money?” I asked.

“The new Rs 2,000 note will have a nano chip built into it,” said the Bhakt. “I read it on WhatsApp. With the built-in chip, the note can be tracked over a computer at any point of time.”

“And how will that help?” asked the jhollawallah.

“At any point of time the government will know where each note is,” the bhakt explained confidently.

“So?” I asked.

“So the government will come to know when the note reaches in the hands of a bad man.”

“Oh. Does the note have a camera built in as well?” I humbly asked. “And the government will employ one individual with every note, so that he or she can keep tracking it all the time.”

“Eh.”

“And when some man with the Rs 2,000 note tries to do a dishonest thing, the Mahatma himself will come out of the note and ask him not to do it,” I said, with a loud laugh.

“You are hurting my feelings,” said the Bhakt.

“Oh, that was just a WhatsApp forward that I just received,” I said. “And in bhakt land, everything received on WhatsApp is true.”

Before I could say any further, the milk booth owner had arrived and opened the shutters. The jhollawallah pulled out a Rs 500 note and asked for milk. The bhakt had no cash and wanted to pay through Paytm.

I took out a hundred-rupee note bought two litres of milk, collected the change and walked off.

The column originally appeared in Vivek Kaul’s Diary on November 14, 2016