4 years on, was demonetization a scam as it is still believed to be?

India’s economy has been on a downward slide from the time the knife of demonetization was struck deep into it’s heart in 2016. Everything that could go wrong has gone wrong from that time. 4 years on, majority of the people were struggling to get back on their feet when COVID-19 decided to make an uninvited visit. In Kerala, the Indian state where I come from, there is a saying about a man struck by lightning getting bitten by a snake. It is exactly such a double whammy that India has been subjected to. I still see people on social media cursing PM Modi for the demonetization fiasco and calling it the biggest ever scam in India.

Even I believed so for more than a couple of years till I started connecting the dots. I am admittedly not much of a finance guy because I believe businesses are run more by human needs and emotions than by numbers. But the aftermath and fallout of demonetization forced me to look under the hood. First of all, back in 2016 when I was in Bangalore, I had befriended a birder at a park. He was a retired bank officer with good knowledge about birds. One day, during a casual conversation he said government should demonetize its high value currencies. I was taken aback. I wasn’t able to wrap my brain around what he said at that time. I remembered this when demonetization happened but because of government’s constantly changing narratives about it I wasn’t able to do my own analysis clearly.

In order to understand demonetization it is necessary to understand the situation of the country’s banking system at that time. NPAs on every type of loans were mounting and banks had no option but to liquidate assets of borrowers to recover at least the principal amount of loans. The fallout of the financial meltdown of 2008 was simply not going away. Banks got pushed to the corner with the NPAs of corporate loans. When Kingfisher reported losses and Vijay Mallya told the banking consortium that things were spiraling out of his hands, they decided to top up on the existing loans expecting the airline to make a belated turnaround from its beleaguered situation. What the banks got in return was Kingfisher’s assets – office buildings, airplanes, etc. Banks are not in the business of selling buildings and airplanes. This is just one example. Essentially banks got stuck with a pile of assets they couldn’t liquidate.

But banks were already under the pump for a bigger reason. India’s economy is firmly divided into organized and unorganized sectors. The greatest challenge of successive Indian governments has been to rein in and control the unorganized sector and convert as much of it as possible into organized sector because of an important reason. I take money from my bank account, buy from a local grocery vendor and that money flows into the local market where it goes into circulation most probably without ever going back into the banking system. I have even heard of professionally employed people who refuse any large deposits into their bank accounts. People were using innumerable & innovative methods to evade taxes they are entitled to pay without realizing that they were inadvertently gnawing away at the banking system.

Trampled from two sides and cash strapped, banks needed an urgent ventilator. The problem was too big for the Reserve Bank of India (RBI) to solve. Government had to step in and the only way to let off the steam albeit temporarily was to pull back all the high currency notes from the unorganized sector. Demonetization was probably seen as the only solution. The bank officer had told me about demonetizing high value currency notes in 2015 when he was already retired. This means demonetization was being discussed for the past several years from the time of the previous UPA government.

The biggest giveaway about demonetization was the government’s changing narratives about it’s purpose. It initially said demonetization will stop black money hoarding and neutralize counterfeit money rackets. But then 97% of notes recovered by banks were found to be legitimate. Then they changed their narrative to terror funding. In this case it was not enough to demonetize only high value currencies. In both cases it made no sense to demonetize existing high value currencies and then introduce a currency of even higher value. To tackle terror funding, all currencies had to be demonetized in a phased manner and new currency notes introduced to replace the old ones. Then the government said it was for digitizing the economy. In a country dominated by the unorganized sector and 90% transactions done through cash, a fully digital India is a remotely distant dream.

Demonetization in itself was not a scam but the way it was executed created many scams. Banks knew about it in advance as did everyone with power and influence. They all legalized their black money well in advance. After demonetization was implemented, bank managers were openly helping people make their unaccounted money legal for a fee and made a windfall out of it. None of the currency notes were demonetized from the time of India’s independence after which they were introduced so it is scarcely believable that 97% of the currency deposited in the banks were clean.

With the government’s close proximity to some corporate groups, I assumed for a long time that demonetization was a direct offensive against the unorganized sector to diminish it’s control over the country’s economy. They may have had thought that this would be an outcome of demonetization. But demonetization was not an outright scam as many assume it was even now. Banks had to be rescued in one way or the other or the economy could have collapsed. The execution of demonetization was what turned out to be a complete disaster, why I call it DEMONetization & DeMo, the Mo an indicator to Modi.

Was demonetization necessary? Was demonetization the only way to rescue banks? Did the government have to put the entire population of the country in duress for months to demonetize two high value currencies? New notes for lower value currencies were introduced and for those currencies, new and old notes coexist now. The government has since then introduced a new currency note of slightly higher value and reintroduced one of the demonetized high value currency note with a new design. The present currency system makes no sense to me. The colours and patterns of the newly introduced currency notes are confusing as well. Other than hurling a wrecking ball on an already limping economy, the government seems to have achieved nothing from demonetization.

India’s yearly budgets are a major driver for unbridled corruption from it’s grass root level

The Indian government has released its Union budget plan for the FY 2019-2020. The country’s economy has been in doldrums since demonetization delivered a knockout punch to it in 2016. Back at the helm of governance for a second term after general elections, all eyes are on the BJP government to see if and how it is going to pull up its straps and get the economy back on track.

Before doing an evaluation of the budget, it is important to understand what the budget is. In the scope of work of the government that gets elected in democracies or what we call as governance, there are a slew of areas that need development and maintenance, such as agriculture, defense, infrastructure development, etc. This is the reason why governments are empowered to levy taxes, control prices and manage money. Budgets help to create wealth and to allocate it to different sectors from where development schemes deliver the benefits to the people. This is the ideal situation but is a Utopian world for us.

A high level perspective of the budget reveals something important. Majority of the scope of the budget is intended to generate more wealth for the government. More national highways means more toll booths and consequently more toll charges. Increase in fuel prices means travel is going to get more expensive, not just for vehicle owners but for people in general. So the government is essentially acting like a financial institution which is lending out money with the objective of bringing in more money. In such a case, it becomes imperative that governments adhere to certain best practices followed in the corporate world.

First one is the Balanced Scorecard which looks at the 4 key aspects of financial performance, customer satisfaction, internal process and organizational growth. This can be easily translated into 1) how effectively the government is using the resources (wealth) at its disposal 2) Satisfaction levels of people (who are the government’s customers) 3) how the government’s internal process can be improved and 4) how the infrastructure and culture of government bodies can be improved. There is a very important model used across industries to help deliver better results from projects and it is known as the RACI (Responsible, Accountable, Consulted, Informed) model. In the corporate, business strategies when executed as projects are what creates wealth. In governance, budgets are the government’s business strategies and when they are executed through development schemes and taxes generates wealth for the government. Projects are executed using the SMART (Specific, Measurable, Achievable, Relevant, Time bound) model and development schemes need to be executed using the same model.

But the most important of all is accountability. Where is the report card of last year’s budget with the details of the government’s performance in executing its development schemes and how much money was spent on them? How much money has been gained from taxes and other means? A high level report does not suffice when the country has been segmented into states, cities, corporations, municipalities and panchayats. From the level of panchayats, report cards need to be generated to understand what development schemes were implemented, how much money was spent and how successful are they. Such report cards have to be generated for every aspect of governance. Corporate uses what is called as metrics to measure success using parameters for measurements known as CSFs (Critical Success Factors). Metrics when measured for evaluating performance are known as KPIs (Key Performance Indicators) and when measured for understanding risk are known as KRIs (Key Risk Indicators). Insights from data obtained by using these parameters for one FY should be used to create the next FY’s budget.

And what do we have in our country? This FY, there is budgetary allocation of Rs. 65,837 crore and outlay for capital expenditure of Rs. 1.60 lakh crore for railways. Where exactly is all this money going to be used? The trains are still of the same old design, maintained just enough for them to run the intended distances and poor and unhygienic food services (vessels get washed inside train toilets which are themselves stinking dirty). I have heard several cases of people in states like UP, MP, Bihar etc where people muscle their way into A/c compartments, travel without tickets and even ticket examiners (TTs) getting thrown out of moving trains for trying to get such people out. During every year’s budget, a certain amount of money gets allocated to railways and on the ground almost everything remains the same which means governments simply want to keep running the shows with zero interest in improvements.

Stable fuel prices is a critical parameter for stable prices of commodities and maintaining lower inflation levels. We have continuously fluctuating fuel prices which is resulting in higher cost of commodities and higher inflation. Rs. 70,000 crore capital for PSU banks without a clear plan for recovering high value corporate loans that have defaulted to NPAs (Non-Performing Accounts) and stopping black money from getting hoarded continuously out of the country is insensible. In education, there are no schemes to improve government schools across the country and make education equally accessible to all sections of the society. As I have always known, equal education to all would be fatal to vote bank politics on which all political parties are thriving. What worries me is, there is not a word about nature conservation and sustainability which in turn gives corporate a free hand to use and destroy natural resources at their whims and fancies. No mention on air pollution, water conservation (wanton destruction of drinking water resources) and improving quality of living conditions. What value does governance have if it does not help in improving people’s lives?

Budgets without accountability is the chief contributor of corruption in our country. Only 20% of the allotted money for development schemes create value for people and the whopping 80% gets fed into bureaucratic red tape to get the 20% work done. A one nation one transport card has been proposed in the budget but it remains to be seen how long it will take to see the light of the day and we won’t even know how much money is going to get spent on it. We all know how the Aadhaar fiasco unraveled. Any tax breaks or incentives is only meant to cajole people into putting more of their money into the market or borrow more money from the market which in turn will create more wealth for the government. With burgeoning population, omnipresent corruption and very little of the resources getting used for development, it is no surprise that no one gets any benefits out of paying taxes and the entire country is in perpetual struggle for sustenance. Unless the entire system of governance is overhauled, yearly budgets have little effect on people’s lives except the ones who are licking their lips and waiting for their piece of the pie. What is growing is the demand for public sector jobs and career in politics and we all know why.

Another scam in India: why it should and doesn’t matter

Indian economy has been limping after the twin strikes of Demonetization and GST implementation which came on top of sluggish economic growth and ever rising inflation. The economy did not take that hard a beating as most of the other countries in the wake of the financial meltdown of 2008 because the RBI had smartly manipulated the value of the Rupee. But I realized our currency is not so robust after all when I read about how a change in the value of the government bonds in the US had triggered tremors in the value of the Rupee. To add to all of this, two diseases have been plaguing the Indian economy and have prevented it from growing to the levels it should have long back. Black money and scams.
Tax evasion is a part of daily life in India and all that money goes underground immediately which then flows out to bank accounts in countries like Switzerland and Monaco. There is a reality check that can be done with regards to tax payment in India and it can throw up staggering details. The agricultural class and religious centers do not have to pay taxes, business class evades tax as much as they can and unemployed people and people below the poverty line cannot pay tax. So where does the majority of tax money come from? Just the working middle class. What is their % in the total population of India? 20% max. So taxes from 20% people run the entire country and also supports the rest 80% of the population. There is another catch here. There is no country in the world that is free of corruption. In developed countries, 80% of taxpayer’s money goes back into the development and maintenance of the infrastructure and 20% goes into corruption which happens at the highest levels. In India, the percentages are just the opposite. 80% of the money goes into corruption from the grass root to the highest levels and with 20% of the money we have still developed so much. Imagine where 80% could have taken us. The black money ends up in the black hole which is lost forever. Some of it is being speculated to be flowing back into the country as FDI.

 
Scam is like a fashion statement now. Everyone is trying to pull off scams in their own ways. Nigerian scamsters are constantly sending spam mails to trick unsuspecting victims. One reason why the erstwhile Congress government fell away in the 2014 elections was because many of the scams that happened under the noses during their 10 year regime were brought to light. But no political party can wash their hands off and plead innocence here. For a big scam to succeed, the entire system has to be corrupt and corruption can nurture where there is unaccounted money. So it all ties together. The recession of 2008 was completely scam driven. Just like black money fraudsters, these scamsters find loopholes in the banking and financial systems to avail massive loans and get away from paying them back resulting in financial collapses of banks and other lenders. Vijay Mallya is the biggest fish under the scanner now and now a new one called Nirav Modi has leapt into limelight in the past week.
Banks in India are struggling to contain loans of all categories from becoming NPAs. Most of their pain is because of business loans that become NPAs and they are simply not able to get even their principal amounts back. This is how the corrupt system rears up it’s ugly head here. All loans are disbursed through one of the branches of the banks. For normal loans, branches initiate strict checks and ensure that either through timely repayment or recovery procedures, loans can be closed. But business loans never go through the same channel of verification. The top level executives of the banks are connected to the political and business class so they ensure that loans are disbursed without enough verification because it is common knowledge that such loans will never pass a thorough verification. No business deals are completely clean and transparent so business loans will also have a dark side to it. Vijay Mallya reportedly told the lending banks that Kingfisher airlines was running on losses and there was no way he could turn it around but the lenders kept pumping in more cash with the hope of making it profitable again. I am not aware of Nirav Modi’s background yet, if dug deep enough, he may be connected or related to the top 1% of the population who call themselves the elitists who control all the major businesses and financial institutions in their countries. Without such connections it is impossible to pull off such big scams and escape from the country so easily.
Now what is the impact of black money and scams on the country’s economy? If the GDP numbers are good, it indicates a thriving economy where people are earning and spending more and this translates to substantial cash flow in the system. The central banks increase the quantity of currency based primarily on 3 critical factors:

1. GDP growth rate

2. Bullion reserves

3. Foreign exchange (FOREX) reserves
When GDP growth rate is good, central banks get enough cash flow to buy gold and silver and expand their bullion reserves. When international trade is on the upswing, FOREX reserves will grow. Central banks use bullion reserves to settle international debt and also lends to bullion banks which in turn does trading in the precious metals market thereby generating cash flow. This entire cash flow gets adversely affected when money goes missing through laundering and scams. Central banks will have to lend out more from it’s bullion reserves to stimulate cash flow thereby shrinking the bullion reserves. Reduced cash flow will affect trade and stall the growth of FOREX reserves. All of this will decrease GDP growth rate and reduce the value of the currency which in turn will shrink the FOREX reserves. Central banks cannot simply print more currency notes because it will lead to inflation.
Back in 2014 during the heat and din of the general elections, when the present PM was claiming to bring back all the laundered black money stashed away in foreign banks, the present CM of Delhi had let out pearls of wisdom to the people and to the media which no one had cared to even hear. He had said that the need of the hour was to first stop any further laundering of black money. There are banks in India that aid the flow of laundered money to foreign banks. These banks have to be neutralized first and their operations have to be decapacitated. Going after stashed money is the next step. The system we are all in is a Matrix and no one bothers about anyone who goes against the system. So a Vijay Mallya or a Nirav Modi will be in the limelight time and again. I am sure there are gigantic fishes with billions or trillions of dollars in debts to banks but are happily living their lives because they are well protected by the system. This is where the imbalance in the economic structure of capitalism has taken the world to. Nothing exemplifies this better than a palatial mansion in Mumbai right in the middle of a large slum area.
Now how does any of all of these matter to the common people? It does but no one has time to know about it or ask questions. A struggling economy fraught with inflation and unemployment means people are having to constantly and tirelessly work to find ways to make their ends meet and find even an ounce of prosperity. This effectively neutralises the educated middle class, the ones who are most likely to understand what is going on and ask questions. Questions are the biggest threat to the system so engage people to a level where they do not even have time to understand what is going on. Use the media to blank out truth and reality from the public. Keep the rural population largely illiterate and maintain unemployment and BPL levels. Politicians effectively secure their vote banks and the elitists have total control over the system.