Righteous War - Flawed Strategy - Shoddy Execution

Civility in public discourse has become a rarity and even eminent people have been trading profanities unabashedly, as seen in the recent US elections. In today's sharply polarized environment this piece on demonetization too would elicit very contrasting reactions from Modi-bhakts and Modi-baiters, who are more likely to view it through their subjective, ideological  prisms. Due to our set ideas most of us tend to see everything in absolute terms - as purely white or black (pun unintended), while in the real world there are only varying shades of grey.  

Corruption is a worldwide scourge and no country is immune from it. While in developing countries the common folk face it in everyday life, in developed economies it has been finessed, and institutionalized at the highest political and corporate levels. One major difference however is that when scandals erupt in developed countries the culprits, howsoever high and mighty, are not spared, whereas in Third World countries the big fish always get away scot-free.  

That the war against corruption and its byproduct black money is 'righteous' is beyond dispute. All governments regardless of party affiliations claim to wage it, presumably sincerely, but with little or no success. The overarching 'intent' of the Govt's demonetization move per se  is laudable. However the apparent aim-plus - that of reaping political dividends, has  confounded the timing and seriously flawed its execution. To determine whether demonetization would indeed solve the problem of black money and reduce corruption, we need to view these terms in the correct perspective.   

Black money is unaccounted money that ought to have been taxed. It is generated by evading taxes on income acquired through legitimate means, as well as through blatantly criminal activities and bribes.  Thus, one could characterize the former as being less black than the latter. But is it cash alone? If it were to be hoarded in the form of real estate, gold, pricey antiques,  luxury cars, yachts etc, it would still be out of the tax net illegally, and thus unaccounted. 

Another misnomer is about cash within and outside the banking system. If one keeps large amounts of cash at home, for whatever reason, but has accounted for it and paid taxes, it does not amount to black money. Likewise, all money in bank accounts does not automatically qualify as white money, if it is not accounted for in tax returns. Further, if one were to avoid paying taxes through devious or ingenious means, would such cash holdings be strictly white? Donald Trump has not paid any Federal Income Tax for many years. It is a moot point if all of his billions are legit.   

Nowhere in the world has a direct co-relation been empirically established between cash, both inside or outside the banking system, and tax evasion. With such a plethora of sources that generate black money, there could not have been a single, one size fits all solution. It would require a series of measures, launched in lock-step fashion as part of a coherent and coordinated campaign. But was demonetization the ideal weapon, given its enormous cost and overwhelming logistics? Would it provide optimal results against all the different sources of black money? Let us analyze briefly.

• Evasion of corporate taxes by big business houses and multinational firms is done through mechanisms such as transfer pricing, intra-firm transfers to shell companies in tax havens, round-tripping etc. Demonetization would not affect such practices. 
• It would also not affect personal income taxes of corporate honchos; they do not receive salary and bonuses in cash. Most would have stashed their unaccounted wealth in foreign tax havens. In any case those in the ilk of Vijay Mallya have easier ways of living in luxury, by defaulting on the astronomical loans given by public sector banks without due diligence. 
• Likewise most politicians, bureaucrats, and professionals too would have stashed away their ill-gotten wealth abroad, away from the reach of the tax-man. 
• A substantial percentage of black-money lies converted into real-estate, gold and other assets, which demonetization cannot address, and would require separate detection and punitive measures.
• It would certainly affect cash transactions in satta, hawala, drugs, weapons, counterfeiting and other illicit activities. However, it is not beyond the devious capabilities of the corrupt to convert substantial portion of their black money via millions of Jan Dhan accounts and similar third party transactions, by keeping them below the announced threshold. Govt has warned that such transactions would be monitored and prosecuted. But it begs the question that if our IT and other vigilance agencies were indeed so capable, and sincere, about monitoring millions of such accounts, then how has black money risen to such monstrous proportions in the first place? There would be some token prosecutions, but the police/raid raj would would generate new black money of its own. As an aside, millions of poor Jan Dhan account holders, who have been eagerly waiting for their promised 15 lacs, could hardly be blamed for becoming the conduit, to earn few hundreds in commissions.  
• Black money is the biggest contributor to the poll financing of ALL political parties. The ill-prepared, hasty and untimely (sowing season) launch is strongly indicative of the political aim-plus of this move. Opposition parties have been upstaged ahead of three vital assembly polls. Not only their poll financing has been put out of gear, the propaganda value of dubbing their protests as "pro-black money," can be enormous.     

I am sure the powers-that-be must have done an in-depth cost-benefit analysis before launching this measure. Even if we ignore its legal implication (each currency note carries RBI Governor's solemn promise to pay the bearer), it involved the sudden withdrawal of almost 85% of the total value of the currency in circulation.  It was also imperative to provide the shortest possible window for note replacement, or else the black-money holders would render the exercise futile. 

They would have, I presume, taken into account the enormous costs of printing new notes, costs and logistics of transporting them to the remotest corners of our huge country and the monumental task of actual replacement, manually as well as through ATMs - the latter only after re-calibration. And during all this time our economy - so preponderantly dependent upon cash transactions - was supposed to carry on business as usual.

And for all these costs, what benefits are likely to accrue? While some black money would go out of the parallel economy, a substantial amount of unaccounted wealth would still be out-of-reach as discussed above. Separate measures would need to be taken to monitor, detect and recover unaccounted wealth from those sources. Hence, may one ask, why could not those measures be taken first, rather than carpet-bombing the entire economy with demonetization? It would be evident to everyone that it has resulted in widespread collateral damage, and achieved only sub-optimal gains. It makes as little sense as Bush's advisers resorting to the monstrous 15000 lb daisy-cutter bombs in Tora Bora mountains to get Osama and his hordes, who merrily escaped to safe havens in Pakistan. 

This measure was also intended to counter terror-funding since enormous amounts of counterfeit currency is being injected from Pakistan. That is indeed a major benefit, at least in the near-term, till such time ISI is able to replicate the safety features in the new notes. In this case too, would it not have been more cost-effective for our much-vaunted, intelligence agencies to undertake more effective steps for physical interception of such currency, as well as electronic monitoring and disruption of the hawala conduits? 

The chaotic scenes witnessed in the past few days, and the Govt's piecemeal, band-aid responses indicate that neither this mammoth exercise had been thought through in depth, nor any contingency planning was done. In the face of growing public resentment Govt is taking knee-jerk actions. All such relaxations are increasing the window of opportunity for the corrupt and thus reducing the efficacy of this ultra-expensive and disruptive measure. The Govt is clearly caught between a rock and a hard place.  

It is obvious that the PM's  advisers have let him down by presenting an ill-conceived plan without due analysis, and even more so by shoddy execution. A frantic fire-fighting operation is now on to somehow muddle through the chaos with instant fixes. On the political front, patriotism of the hapless citizens is being invoked, and voices of protest are being drowned by dubbing them anti-national and pro-corrupt.