Dear PM Modi, Demonetisation ‘Brahmastra’ Could Have Spared The Poor

This column has been republished after RBI’s annual report showed nearly 99 percent of demonetised currency has made its way into the banking system.

I am utterly, totally confused and frustrated. Why would a prime minister take an audacious gamble to de-legalise 86 percent of his own currency, but then convert a potential brahmastra into a cruel, sputtering half measure?

Why would he heap incalculable hardship on marginal/middle income earners, who should have been the biggest beneficiaries of his surgical strike on illegal cash hoarders?

Think of the maid who had saved Rs 5,000 in five currency notes to send to her ailing parents in the village. She has a Jan Dhan account which she has never operated. She is panicking because she believes rumours that this pinkish red paper is worthless. Her shopkeeper ‘friend’ comes to her ‘rescue’ by giving her Rs 500 in five currency notes as a ‘favour’. And off he goes to the bank with his windfall gain of Rs 4,500 captured in her ‘tainted’ notes.

Now think of the milk-seller who could not pay his principal supplier, so had to go without his daily wage. Or the poor farmer who carried his wife for a life-saving Caesarian to Chennai, but could not pay for her admission? I pray that his wife and to-be-born child survived a painful tissue burst on the pavement. Ouch! Let me now save you a million such horror stories.

A Four-Hour Ultimatum Was Cruel And Unnecessary

My real point is simple – the demonetisation was bold, surgical, audacious (I am just repeating my adjectives for impact!). But why were simple, ordinary folk in India's sprawling informal economy given only four hours before their cash savings were wiped out? What was the need to give them this ultimatum? Couldn't we have just said that:

• Effective on the midnight of December 31, 2016, Rs 500 and Rs 1,000 notes will cease to be legal tender.
• Beginning today, banks/ATMs will stop issuing these notes, although you will be free to deposit them in a bank account with full supporting documentation.
• You can continue to do normal transactions with these Rs 500/Rs 1,000 notes until the last day. On January 1, 2017, new notes in several other denominations will be issued by banks/ATMs.

That's it. Simple. All objectives achieved. No wretched, destitute people created by a government firman.

I guess by now I have set the proverbial cat among bureaucratic pigeons. “How stupid, Mr Bahl; what a hare-brained plan! If we give a 50 days notice to people whose mattresses are stuffed with black currency notes, they will find a million different ways to whisk them away into other assets. You private sector wallahs have no clue about how to run government schemes. Leave it to us, the seasoned IAS and IRS types. We know how to skin these fat cats.”

Really? Would Black Currency Notes Have Gotten ‘Whisked Away’?

Where, my dear IAS friends, where? Remember this demonetisation attacks only one part of India's black economy, i.e. only unaccounted cash stashed away by scamsters. Every other element of the black economy – viz real estate, undeclared gold, overseas assets etc. etc. – is totally impervious to this plan.

So let's see what would Rambhai have done if he had Rs 1 crore in pinkish red notes lying in newspaper wrapped bundles in a blue suitcase under his bed.

At 8 pm on November 8, 2016, Rambhai would have finished a greasy vegetarian meal and settled down to listen to his hero, Prime Minister Modi's specially televised address. By 8.30 pm, he would have begun sweating, palpitating, cursing.

At 8.45 pm, he would have called Shyambhai, his jeweller, to buy gold worth Rs 50 lakh in cash. Shyambhai would have said, “sure, but if the payment is going to be in pinkish red notes, I will charge a 30 percent premium, i.e. I will give you Rs 40 lakh of gold biscuits, but take Rs 60 lakh.”

Rambhai would have instantly agreed.

Now Rambhai is left with Rs 40 lakh, some gold biscuits, and a loss of Rs 20 lakh. Since Rambhai had been eyeing a Jaguar XF for several days, he decides “what the heck! These pinkish red notes will become worthless in 50 days, why not buy a sparkling red car for the Mrs?”.

There you go - the local auto dealer does the usual jugaad, takes the cash and sells the car. Lo behold, Rs 40 lakh of black money has made its way into the Tata Motors balance sheet and India's GDP growth rate has gone up because an extra car has been sold.

Now look at what Shyambhai does. He calls his regular Hawala operator to buy dollars. The Dubai based gentleman politely declines, saying “what will I do with plasticky pinkish red toilet paper?”

A dejected Shyambhai runs into his family, all of whom are eagerly waiting in the living room. His son has been baying for a new Harley, his daughter for an iPhone7 and the Mrs for a new ‘Italian jacuzzi’. He splurges Rs 60 lakh on all these goodies. Done! Another Rs 60 lakh are added to India's spiking GDP growth.

Once A Currency Note Is Killed, You Either Lose It Or Convert It Into An Asset

I could go on and on, but the point has been made and it's graphic: whichever way you look at it, whatever route it takes, however many hands it goes through, once a currency note is destined to die 50 days out, it can only result in two outcomes – it either becomes a loss for its owner, or enters the legitimate or ‘white’ economy via an exchange of assets.

In either case, Prime Minister Modi would have achieved exactly the same end point, but without heaping that monstrous four-hour death sentence on the wretched and destitute.

Please Worry About The Boomerang Black Economy, Not About The Moral Hazard

But these naysayers are stubborn and will strike back with the demon of ‘moral hazard.’ “By giving such an escape route to congenital criminals, you are creating an incentive for wrong doing,” they will protest. And honestly, they have a point. But have you thought about the moral hazard embedded in the current exercise?

No, I bet you haven't, so let me take you through that fiendish simulation.

We pick up the story from where Rambhai is sweating, palpitating and cursing at 8.45 pm on Nov 8, after Prime Minister Modi has concluded his sensational address. Rambhai is one among a million other minds which are dizzingly trying to figure out a way to save the Rs 4 lakh crore that are lying in more than a million basements, mattresses, suitcases, lockers, and even in household utensils. Do you think they will just roll over and die, quietly giving up their lifelong ‘earnings’ to a ‘rapacious taxman?’

No sir, they won't. They will try every jugaad, any manoeuvre – good, bad, ugly, clever, criminal – to salvage their cash.

Slowly, the enormous computing power of a million crooked minds – the terabytes powering the Internet of Thugs – will devise a plan. They will round up 1 crore poor, unemployed people all over the country, especially in small towns and far-flung villages.

For 50 mornings, these 1 crore people will throng to the banks and post offices, depositing cash in small quantities in their hitherto unused Jan Dhan Accounts. Each will deposit an average of Rs 3 lakh, until Rs 3 lakh crore are in the bank. But what about the balance Rs 1 lakh crore out of the total estimate of Rs 4 lakh crore in ‘black currency?’

Here's where the story gets really ironical. This Rs 1 lakh crore will be the good old ‘speed money’ paid to complicit remote/upcountry bank branch managers, post masters, touts, couriers, sundry middlemen and body contractors, who will make this whole operation possible, just as they do today when you want to get a passport, or register your property, or reduce your electricity bill.

Welcome to Swachh New Bharat, which by now should have been rid of black money and corruption - but heck, it's got these lakhs of new benami bank accounts and assets. And what's more, come January 1, these very accounts will spew out spanking new purple coloured Rs 2,000 notes, vigorously restarting the black money spiral, with one vital difference - the size of Rambhai's blue suitcase would have halved. Because its newspaper wrapped bundles would now contain Rs 2,000, not Rs 1,000 notes!

A Diabolical Status Quo

Finally, a diabolical status quo will get entrenched. Because my dear Prime Minister's wise advisers have trapped him in a blind alley. What could have been a brahmastra has sputtered into a phus pataka (dead cracker), creating more sound than light, adding to the deadly haze of corruption that hangs over the country. What a pity!

Postscript: This morning, as I was checking out of my hotel, I fished out my wallet to pay my customary Rs 100 tip to the valet. But I had two notes, Rs 1000 and Rs 100. I gave him Rs 1000, and kept Rs 100 for myself (what if I felt like having a bar of Snickers at the airport?). Amongst all the destitution, at least my Valet was momentarily excited!

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of two books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, and ‘Super Economies: America, India, China & The Future Of The World’.