In Defence of Black Money

The magic is in Rajesh’s mixing – the tossing of the puffed rice, the timing of each wet and dry ingredient and the exact amount of mustard oil that he puts in the jhal muri. You just need to be a little patient as he moves across his push-cart. Rajesh had polio as a child.

Every day, two beat cops come and stand with the small crowd of his dedicated clientele. There’s an unconscious acceptance amongst everyone, that the cops will get priority. Almost everyone who stands there is rich or powerful enough to make the cops wait, but they all know it will get Rajesh into trouble.

I had once asked him how much hafta the cops take from him, for allowing him to stand with his cart at the street corner. He smiled and said that they give him a discount.

“Langda hoon saheb,” he explained. It’s a sympathy rebate that the other thelawalas and hawkers, on the road outside our office, do not get. “Bakiyon ka fix rate hai – koi 500 deta hai, koi do hazaar. Jitni zyaada sale hai, utna zyaada dena padta hai.”

“Aap log complain kyon nahin karte?” I had asked, somewhat indignantly.

Rajesh smiled and said “policewaale, MCD waale, yeh log hafta nahin lenge to phir humko yahaan kaun khada hone dega?”

Things suddenly fell into place. I remembered how, about a year ago, an honest officer had taken over the local thana. The hawkers on the street were raided, their thelas confiscated. They disappeared for almost a month, till the SHO was transferred.

Rajesh is wary of honest officers, who implement the law zealously. He was once evicted from his home by an honest officer. It was in a large cluster of jhuggis that had sprung up on municipality land. Hawkers, daily wagers, maids, rickshaw pullers and an entire range of self-employed entrepreneurs who make up the bulk of India’s service sector, lived in the encroachment.

Like his neighbours, Rajesh paid high rates for an illegal power line to his jhuggi. Like others he paid extortionist prices for water from the private tanker that came every two days. Every month, the local dada – Babubhai – came and collected his share of the money that had to be paid to the cops and the municipality officers.

Rajesh was Babubhai’s favourite. He sometimes came for a packet of bhujiya and for a head massage. Rajesh had strong fingers in strong hands, which had once been broken by a local cop. Babubhai had taken a group of locals and surrounded the thana. The cop had to be transferred.

Babubhai was elected to the local ward, but even he could not stop Inspector Karamvir Singh from getting the jhuggi demolished. Inspector Singh was incorruptible and didn’t fear politicians. He had joined the force to implement the law, and evicting the encroachers was part of that. Later, the Inspector had personally come and given Rajesh 500 rupees, but told him that he must go and live in an authorized colony.

Predictably, Inspector Karamvir was quickly posted to somewhere in the hinterland of Haryana. The encroachers returned, but Babubhai charged an extra fee to make up for lost revenues. Here too, Rajesh got a sympathy discount. His polio made life cheaper for him.

People like Rajesh help generate black-money every day. Bribing allows them to live in the interstices of urban India. They know that the law protects the right to property more than any other right. They survive by breaking these property rights – standing with a thela at the crossing, setting up house on municipality land, stealing electricity from the closest pole.

The bribes go up an interconnected chain, right to the top – to top cops, politicians, ministers, babus and judges. They flow and coalesce as bundles of black money - sometimes as hoards, sometimes as real estate and at other times as gold or even P-notes. It creates a network of power that runs parallel to the network of law and liberty. It weaves together a political society right next to the civil society of middle-class propertied citizens.

Rajesh is the biggest victim of black-money and corruption. But, without it Rajesh would never be able to survive, because, people like Rajesh have no place in the nation of citizens. They will forever remain fragments invisible to the law. 

What Was He Thinking?!!!

When you think of the BJP, you think of Brahmins and Baniyas. Add to that, some Adivasi groups who have been Sanskritised by Sangh missionaries and you broadly have the social base of the party. In other words the BJP has largely been a coalition of upper castes and traders, with some adivasis and communally polarised groups thrown in.

In 2014, Narendra Modi rode on this core base, which makes up about 20% of India’s voters, and added to it all the discontents of the UPA’s disastrous second avatar – the urban poor crushed under runaway inflation, the unemployed youth, the farmer facing higher input costs, the agricultural labourer denied the promise of MNREGA and the businessman affected by an overall slowdown in the economy.

But, it is easier to promise acche din when you are fighting an unpopular incumbent, than when you have to deliver on those promises as PM. Two and a half years into his rule, Modi has realised that the economy is in a worse shape than what the Manmohan-Chidambaram duo left it in: farmers are in deep distress, there are no new jobs and businesses have no reason to invest. Narendra Modi has realised that he needs a radical new plan if he is to expand the BJP’s core base beyond the stable 20%.

Demonetisation is that radical plan, the mega gamble. If it fails, Modi loses nothing, because he would have lost the next elections any way. If it works, he reinvents Indian politics by creating a new coalition of the poor and big business that the Congress depended on for the first 30 years after independence.

Whether Modi anticipated the immediate impact of demonetisation or not, he has committed himself to a series of other actions to make political capital out of it. There is little doubt that this one act has helped him reinvent his image as a pro-poor PM, something last done by Indira Gandhi in the early 70s. There is an element of schadenfreude in the way the poor have reacted to demonetisation. Even when they curse the cash-crunch and the loss of wages, they praise the PM’s intentions. They believe that even if they are suffering, the corrupt rich are suffering more.

Of course, Modi knows that this emotion will not last forever. Even the greatest supporter of demonetisation knows that, in the short run, it will hit the poor the most. Even after the economy is remonetised, the action against black money will also hit the poor.

Here are a few facts to back that:

        

• About half of the Indian economy is in the cash-dominated informal sector and it employs 80% of the workforce.
• 45% of India’s GDP comes from small and medium enterprises who employ 46 crore people. They will take a huge hit if they have to pay regular taxes.
• There are 10 crore small traders and retailers and only 1% of them have credit or debit card machines. Reducing cash transactions will push consumers to organised players.
• All of village India operates on cash, because 93% of villages do not have an actual bank branch.
• The black-money driven real estate sector, which is one of India’s biggest employers of daily wage-workers, will slow down.
• Another black-money driven sector, gems and jewellery, which employs about 1.5-2 crore daily wage workers, will also be hit.
• The informal-dominated textiles and garments industry, which employs 3 crore people has already stopped paying 50 lakh daily wage workers.
• Rabi crop sowing, which grew by 16% in the week leading to demonetisation, dropped marginally in the following week and grew by less than 5% two weeks later. Coarse cereals grown by poor farmers has dropped by 19%. And this is in a year when reservoirs have 25% more water than last year.

So, why did Narendra Modi demonetise when even a little analysis must have told him it will hurt the poor? The answer will, most probably, be known on the 1^st of February when next year’s Union Budget is announced.

Modi’s aim is clearly to create a large fiscal space for himself ahead of the busy election years of 2017 and 2018. This can be achieved through the following moves:

• Get the RBI to hand over the entire ‘profits’ from 1000 and 500 rupee notes that are not returned or exchanged, to the government. Current estimates suggest it could be anywhere between 2 to 3 lakh crore rupees. The special dividend payout might be legally suspect, but no one is betting on Urjit Patel standing in the way.
• Levy punitive taxes on unaccounted for cash deposits – don’t forget it is the I.T. department which will decide whether your cash is black – and collect an additional one lakh crore rupees in the next assessment year.
• High level of bank deposits will push up the demand for government bonds and bring down yields. It will also reduce the government’s interest payments, which is its single biggest expense. A one per cent drop in interest rates could shave off 40-50,000 crore rupees.
• The budget will project higher level of direct and indirect tax receipts by claiming that the action against black money will force many more people to pay taxes. If the government estimates net tax receipts to go up by 15% in nominal terms that will work out to an additional 1.5 lakh crore rupees.
•  Finally, Modi might even say that the economy needs a fiscal stimulus and therefore the Budget will not stick to the 3% fiscal deficit target for 2017-18.

In effect, the Modi government could give itself an additional fiscal space of 5-6 lakh crore rupees, over and above the five lakh crore rupee fiscal deficit it would have otherwise worked with in this budget. In terms of actual expenditure, the government could end up with a chance to spend 24-25 lakh crore rupees, instead of the 19 lakh crore rupees it is budgeted to spend this year.  There is a lot that can be done with so much extra money.

• Take food for all. The UPA had estimated in 2013 that it will cost one lakh crore rupees extra to cover everyone under a liberal PDS scheme. In current prices that would be about 1.2 lakh crore rupees.  
• Another two lakh crores could be transferred directly through DBT to 10 crore poor households. That’s a neat 20,000 rupees additional income per year for each family.
• The remaining 2-3 lakh crore rupees can be spread across various things like additional stimulus to infrastructure, tax holidays and incentives to high-employment sectors like textiles, real estate.
• He could also spend more on defence, especially increasing the size of the army. This would provide a stable and respectable source of income for the rural poor.

In other words, Modi can combine populism with Keynesian economics. This will create additional jobs, boost lower-end consumption of staples, boost demand for two-wheelers, feature phones, telecom services, cement, capital goods, steel, power and fuel. And then, instead of a slowing down, the economy would pick up pace and ultimately, even private investment cycle could revive. By 2019, India Inc could also start seeing their earnings grow.

In the process, Narendra Modi would have changed the political character of the BJP. His core voters would have shifted from the upper caste/trader combine to a much wider lower-class/lower-caste support base.

Of course, all this is easier said than done. The social composition of the BJP’s cadre is upper-caste. There is a deep distrust towards Dalits and backwards within the party. Its moneybags are mostly from the trading classes and Modi himself has got a lot of money and backing from India Inc. Anything that works against these groups is going to disrupt the entire political-mobilization and fund-raising structure of the BJP.

Can the Modi-Shah combine pull it off? They have done it in Gujarat in the past, by winning elections even when sections of the RSS and VHP have worked against them. They did in Uttar Pradesh in 2014, when the entrenched backbone of the party organisation in the state refused to work under Amit Shah.

Feature phones, WhatsApp, Twitter are the key weapons in the Modi-Shah armoury. In their hands, Digital India is a political weapon – a means to bypassing the physical networks of political organisation.

Modi is trying to turn India into a cyber-nation, where the citizen’s identity is driven by a WhatsApp nationalism. Much of political rhetoric today is constructed through videos, images, jokes, trends and viral memes, all of which have successfully created a new language of extreme nationalism – a binary of deshbhakti and deshdroh.

Modi had already won this semiotic battle. He is now trying to create the economic conditions to turn it into an unbeatable political strategy.  

The Jan Don’t Have Any Dhan

“Whatever you might say, this move has started flushing out black money and bringing it into the banking system,” I said, turning my morning daily’s banner headline towards the wife, who was sitting across the dining table.

“More than 60,000 crore rupees has been deposited into Jan Dhan accounts across India. Surely this is not money belonging to the great unwashed in India’s villages, who you care so much about?” I said with a smirk.

“How many Jan dhan accounts do you think there are?” the wife asked smiling condescendingly.

“I don’t know,” I said. “Must be a few million, but I don’t see how that matters. Surely the poor don’t have 60,000 crore rupees!”

“The number is approximately 26 crore,” the wife said. “60,000 crore rupees in 26 crore accounts. How much does that work out to, Mr Einstein?”

“I can’t calculate that fast, but it is clearly a big number”, I said defensively as I buttered my toast.

“It is a princely sum of 2,300 rupees per account.” The wife smiled derisively. “2,300 rupees of black money from each account holder.”

“Oh! Come on!” I said. “That is the average. Surely many of the accounts would have got many times that amount.”

“You are absolutely right,” the wife said. “They must have. That’s because even in September this year, 25% of all Jan Dhan accounts were completely inactive and another 30-35% had less than 10 rupees in them. In many cases, banks themselves have been depositing small amounts of cash into these defunct accounts to meet their targets.”

“I have to check all this data,” I said. “How do I know you are not making them up to prove me wrong?”

“If only you even read the morning papers properly, you would have known all this,” the wife snapped. She hates it when she is accused of fudging data. “If you read a little bit, you would have known that in many cases, people are being forced to deposit 50 rupees in their accounts to just operate them, even though the government had promised to make these zero balance.”

“So what? At least it’s an attempt to bring banking to everyone,” I said. “This is what financial inclusion is all about.”

“No,” the wife said vehemently. “It is a massive wastage. On an average a Jan Dhan account gets no more than 300-400 rupees a year in deposits, and a bank earns just 9-12 rupees from that. It costs many times that amount to just maintain these accounts. Public sector banks are forced to operate these loss-making accounts and then told they are inefficient because they don’t make enough profits.”

“You MNC bankers have no problem with that, because you continue to service the rich and wealthy,” the wife said glaring at me, as if I represented all that was evil about the world of finance.

“Poor people are being forced to open accounts, which are serviced by roving banking correspondents,” she continued. “The banking correspondents park themselves in small towns and poor villagers have to waste a day and spend money on bus tickets to go and get their dues from them.”

“Right now, thanks to demonetization, the banking correspondents and local branch officials have become all-powerful petty-potentates.” The wife had started using big words again and I had started losing track of her argument.

“Bank officials of all sorts have full access to the accounts held by the rural poor, along with all their KYC documents. It is very easy for them to fudge deposits and turn black money held by grain traders, money-lenders and big farmers into white, by putting them into Jan dhan accounts.”

“That’s just a conspiracy theory,” I said weakly.

The wife ignored by intervention. “The deposits will be small enough to be below the radar and will be spread across thousands of accounts. After a while, the money will be withdrawn in crisp new notes and handed back to the original black money holders for a sizeable cut.”

She drained her coffee cup and put it down with a flourish. Clearly, we were nearing the end of the speech.

“So, this is what your great financial inclusion is about. Millions of poor people will unwittingly turn other people’s black money to white, without ever knowing what went on in their accounts.”

“And at the end of it all, the jan will continue to be without any dhan.”

Sharmaji Wants to Donate

Sharma: Namaste Panditji, Kaise hain? Aapka to phone hee nahin lag raha hai do din se. (Greetings Panditji, How are you? You haven’t been taking calls in the past two days.)

Panditji: Ha ha ha! Kya bataun Sharmaji. Abhi sab ko bhagwaan yaad aa rahe hain. Bataiye aap ki kya seva kar sakte hain? (Ha, ha ha! What should I say, Sharmaji. Suddenly every body is remembering God. Tell me what can I do for you?”

Sharma: Wahee seva jo aap har saal karte hain, ha ha ha ha! Kuchh daan dena hai, samajh gaye na? (The same thing that you do every year. Ha ha ha! I want to donate some money. You have understood, right?)

Panditji: Bahut le nahin paoonga, Sharmaji. Naye note abhi tak hamaare paas aye nahin hain. Waapas karne mein bhi samay lagega. Aapko ussey koi kasht to nahin hogee? (I won’t be able to take too much, Sharmaji. We haven’t got new notes yet, so it will take time to return the money. I hope you won’t have any problem with that?)

Sharma: Pareshani kya? Aap kabhi bhi de dijiyega. Lekin daan mujhe 30 December tak dena hee hoga. (What problem? You return it whenever you want. But, I have to donate by the 30^th of December.)

Panditji: Nahin, nahin Sharmaji. Humein bhi to hundi ka paisa 30 taarikh tak jama karna padega. 15 december ke baad purane note hum nahin le payenge. (No, no Sharmaji. We also have to deposit the Hundi money by the 30^th of December. We will not be able to accept any old notes after 15^th December.)

Sharma: Samajh gaya, panditji. Main to 30 november se pahle pahle saara kuchh daan paatra mein daal doonga. (I have understood, Panditji. I will donate the money before 30^th November.)

Panditji: Bahut achcha. Lekin Sharmaji, isbaar 10% se nahin chalega. Hamaara bhi kaam bahut barh gaya hai. Is baar hum 25% lenge. C-block mein Shani mandir waale to 30% le rahe hain. Aap swayam pata kar lijiye. (That is great. But, Sharmaji, this time the 10% rate won’t work. Our workload has increased. This time we will charge 25%. The Shani temple in C-block is charging 305. You can check it out yourself.)

Sharma: Arey panditji, aap kaisee baat kar rahe hain? Aap ki kathan hamaare liye aadesh jaise hai. (What are you saying, Panditji? Your wish is our command.)

Panditji: Bahut achha. To 25% tay rahe. Aap sheeghra hee daan le aayega. Lekin naye note hum agle saal hee de payenge. Ram Ram. (Okay. Then it’s agreed that it will be 25%. You should get the donations as fast as you can, but, we will only be able to give you new notes next year. Bye-Bye.)

Sharma: Ram Ram. (Bye-bye).

The Wife Speaks on Black Money

“Why are you such an idiot, so utterly simple-minded?”

Strong words even by the wife’s standards. Clearly she was frustrated that the PM had proved everyone wrong and taken such a bold step.

“I don’t understand why supporting a surgical strike against black money is idiotic or simple-minded,” I replied.

The wife looked at me with her habitual mix of desperation and disdain. “Because, it is not a surgical strike against black money. It is a silly branding exercise that shows that this government doesn’t give a fig about what happens to people.”

“Oh! Really? Can you please explain your brilliant theories, which clearly run counter to what all well-known economists are saying?” I asked, trying to bring as much sarcasm as I could to my voice.

“Well-known stooges you mean,” she snarled. “Let’s start with a simple fact, black money emerges out of white money. It comes from the banking system, which is the original source of all cash.”

“Every business needs to generate cash to pay bribes for getting tenders, winning contracts, getting clearances, paying hafta to local policemen and political goons, chanda to religious institutions.”

“How do they do it?”, the wife asked, looking at me. Clearly this was just a rhetorical question, because she continued without stopping.

“They over-report costs and under-report revenues. If something cost 80 rupees, they say it cost 100 rupees and if something was sold for 120 rupees, they say they got 110 rupees. So, a 40 rupee profit is reported as 10 rupees. Even the most honest businessman needs to do this, because the bribes they have to pay cannot be offset as expenses.”

The wife paused to take a dose of nourishment from her cup of coffee. “But, bribes are not the only reason businesses have to generate cash. Almost every business, however big, has to deal with the informal cash economy. Carpenters, plumbers, contractors, construction workers, casual labourers, truckers, raw material suppliers take cash. They are in the informal sector and the fact that they do not pay taxes is key to keeping their businesses competitive.”

“So, if you have been able to follow what I have said till now – and I know it is difficult for someone who has not had any real higher education,” the wife said, taking a dig at my MBA from Cornell, “then you will understand that cash has to be generated not only to fund corruption, but also to deal with the informal economy, which employs many more people than the formal organized sector.”

I was about to say something, but didn’t get a chance. “Now, let’s come to migrant labourers who work at construction sites, spend their nights there under makeshift shelters and then go back to their villages in time for sowing or harvesting season. Do they have bank accounts? Do they have credit cards? Do they use e-wallets?” Rhetorical question, don’t answer, I told myself.

“Such people can only be paid in cash. The payments are likely to be registered as wages, but again over-reported, so that the construction company or builder can generate cash. And that brings us to real estate, by necessity, the biggest generator of cash.” The words were becoming bigger, which means the wife was getting more passionate as she spoke.

“A real estate project starts with getting a plot of land, but even before you buy the plot, you have to pay a bribe to get information on where to buy it. Will there be a road coming near it soon? Is a metro station likely to come up there? Once you have paid cash for the information, you start paying cash to get clearances. You then pay cash to buy bricks and sand – both in the informal sector. You pay partly in cash to get cement and steel transported. You pay cash for municipal clearances and connection to utilities. And, you pay cash to the labourers who erect the buildings. So, even before you have sold a single house, you have to generate cash.”

Caffeine pause and then the onslaught continued.

“No wonder, real estate players take cash when they sell homes. No wonder that in the process of generating cash and paying bribes they become politically connected, and then those political connections help them get land, clearances and generate even more cash.”

The wife suddenly turned to me and asked, “are you telling me that from tomorrow, none of this will be required anymore? Are you telling me that from tomorrow every babu, every policewalla will suddenly become honest?”

I didn’t think she wanted an answer, but she was glaring at me, so I blurted out, “I-I don’t know.”

“Of course they won’t, you idiot,” she shouted. “Things will pause for a few days, maybe weeks, and then the button will be reset. Things will go right back to where they were.”

 “Now, let’s come to the stock of black money. Only people who need to transact in cash on a regular basis, keep large amounts of currency notes in stock. So, all small businesses, real estate agents, builders, traders, stockists, small shop owners, will always have a significant amount of cash, much of which would be unaccounted for.”

“Those who have black money as wealth, turn it into white very quickly,” the wife continued. “And, there are many methods of doing it. The easiest is to buy gold or jewellery and store it in your locker. Another method is to go to your friendly neighbourhood pandit, deposit all the cash into the temple hundi and then get it back after some time in white. There are also thousands of small companies, which give backdated certificates that you made equity investments in the past, the valuation increased and now you have sold your stake for a profit. For a small cost, the black money turns into white.”

“How do you know all this?” I asked smirking. There’s no harm in introducing a bit of levity. The wife glared at me, and continued her speech.

“People who have big black money, also convert it into foreign exchange and take it out of the country through hawala. There is also another method, where companies which have ‘cash in hand’ in their books but no real cash, take black money.”

“What do you mean by that?” I asked. Surely, the wife didn’t think she was not going to teach me about balance sheets.

“It’s simple. As I told you earlier, every business has to generate cash to pay bribes or deal with the informal sector. But, sometimes it is difficult for them to account for the cash payments and it turns up as ‘cash in hand’ on the books, even when there is actually no cash in their hands. This was not taught at Cornell, because real business isn’t taught there” Unkindest cut, I say.

 “So, it is easy for such businesses to deposit real cash into the banks, because they can account for it in their books. They take black money, deposit it into banks and turn it into white. Sometime later, a fake loan contract is worked out between the black money holder and the company. Over time, the loan is repaid, as white money, to the original holder of black money.”

“Then there are penny stocks, which are artificially boosted and over just a few days, their price goes up multiple times. This is then sold and shown as capital gains. A small short-term capital gains tax is paid on it and black is turned into white.”

“But, surely, all this can be caught if the trail is scrutinized closely?” I asked.

 “Of course, they can,” the wife said. “In fact, that is the only way to stop tax chori, by painstakingly scrutinizing tax returns and money trails. It can’t be done by suddenly banning currency notes and throwing things into chaos.”

“But, for that, you need to employ more people in the Income tax department. But, that is not going to happen, because, when it comes to generating employment, your beloved PM is a complete failure.”