The time has come for the PM to go ahead with a 2020 ReMo (remonetization) of the Indian economy, involving not only currency placed in the hand but deposits into individual bank accounts as well.
New Delhi: Prime Minister Narendra Modi, through the Health Ministry and the Ministry of External Affairs, has been personally responsible for the unprecedented steps taken by the Government of India to prevent or substantially suppress Stage III (the phase involving community infection) of the Covid-19 epidemic. The 1.29 billion people of India are now looking to the PM for similar bold and efficacious moves through the Finance, Agriculture and Industry Ministries to safeguard the economic health of the country. The efficacy of the measures ordered by the Prime Minister bring out the essentiality of the governance mechanism both in the Centre and in the States delivering the results expected of them rather than underperform. This level of effort will need close monitoring, enforcement of accountability and fine-tuning of the administration by the Prime Minister’s Office (PMO) such as will implement Modi’s desire for change. That the present Prime Minister of India is ahead of his time was clear from his early recognition of the fact that the world—and India in particular—needed to transition from paper to digital currency at the earliest. While the former can spread diseases within the population, the latter will not. While the former can be hidden away from prying eyes (a particular source of danger to society in cases where such cash has its origins in terror-related activities), the latter cannot be. The more digitalised a system becomes, the greater will be its level of transparency. It was presumably this knowledge that led Modi to ask his team to go forward with the 2016 DeMo (demonetization) of 86% of the country’s currency. Had this bold plan of the Prime Minister been implemented in the spirit in which it was conceived by him, at a minimum the new currency notes would have had safety features that made counterfeiting much more difficult than has long been the case with the rupee, which has long been among the most easily counterfeited currencies within the G-20. Thanks to DeMo, almost all the domestic currency that had been kept away from the banking system would have had to return to it in order to get exchanged for new notes. Such a process brought unaccounted cash into the open, even if several such deposits soon got converted back into currency. While dealing with the administrative structure, PM Modi settled on caution as the watchword. And DeMo is not the only path-breaking reform carried out under the watch of PM Modi. There were many who scoffed at the millions of Zero Balance bank accounts that he ordered to be created, but now these very accounts can ensure that money to tide over the novel coronavirus crisis goes straight into the accounts of those who need them most, and not stick en route to the fingers of corrupt officials. The Prime Minister needs to make an example of those few who are evil enough to create fake Jan Dhan accounts to drain bailout money and who commit other acts cheating the public. Rather than emulate the example of the US and crowd the jails at the expense of the exchequer, a hefty financial penalty needs to be levied on such officials, who should be put to community work for extended periods of time in locations where such activities are desperately needed.
THE BUREAUCRATIC LEGACY
Aware of the extent of the problem confronting him as he sought to transform the administrative structure, Modi encountered obstacles, but progress was always made. Being an admirer of Mahatma Gandhi, the Prime Minister decided to give officials prominent in the UPA period a chance to redeem themselves, this time by carrying forward the “Su-shashan” he was intent on achieving in place of the “Ku-shashan” that they had been participating in during past years. From 2011, a small handful of well-wishers of Narendra Modi had said that the then Chief Minister of Gujarat (once he became Prime Minister) would need to ensure that key roles in a future Modi dispensation at the Centre needed to get filled by those untouched by involvement in the misdeeds of the past, including not just the Sonia-decade, but the period when the stock market scam, the UTI-US64 imbroglio and inexplicable decisions such as the import of 6 lakh tonnes of sugar from Pakistan took place, besides national security decisions such as the missteps and compromises made during the Air India Kathmandu hijack episode and the manner in which the Pakistan army was able to occupy positions along the Kargil heights during the winter of 1998 and early 1999. Alas, replacements for such a large cohort were not to be found. Despite the innovative nature of Modi’s DeMo 2016, the Ministry of Finance as well as the RBI made missteps in implementation that inter alia had the effect of draining important segments of the economy completely of liquidity, something that the RBI in particular ought never to have allowed to happen even for a single day in a single sector. The Governor of the RBI responsible for this catastrophic draining away of liquidity from large parts of the economy and multiple households was later permitted to retire, albeit with both his reputation as well as that of the institution he led during the DeMo period in tatters. The fact that only a little over 6% of “black” wealth (defined in India as any asset that avoided the taxes due) were in the form of domestic currency. Almost 94% of “black wealth” had been converted into physical assets in India and abroad and much of the moneys were parked in offshore banks. 94% of black money therefore needed measures other than that taken on 8 November 2016. While the main goal of DeMo was clearly to bring unaccounted currency hoards into the banking system and this succeeded, at the same time the RBI ought to have ensured that much of the economy was not starved of liquidity as a consequence. Eight out of ten workers function in the unorganised sector, which mainly runs on cash, as does much of the rural economy. There needs to be a difference in approach towards Black Money, which should be defined as currency and assets that are the result of serious criminal actions and all terror-related activity, and Unaccounted Money, which is moneys earned in legitimate occupations but which has not been declared to the tax authorities. Had it been implemented in a proper manner, DeMo would have ensured that such a leakage of resources to the exchequer got considerably reduced. This would have been the case had the move been accompanied by action from North Block to effect sharp cuts in tax rates for those below the top 1% of income levels in the country, as well as on small (which should be defined as units below Rs 100 crore annual turnover) and medium (defined as units with annual turnover below Rs 500 crore). Any unit with an annual turnover below Rs 100 crore should be classified as “tiny” businesses and be subject to nominal tax and compliance methods. Given that entire lines of business operated in India on the basis of currency, it was incumbent on the RBI Governor to ensure that new currency notes were instantly made available to those seeking them from 9 November 2016 onwards, whereas in actuality there was a currency note famine for nearly a year. Not just Prime Minister Modi but the entire country was let down by the manner in which the 2016 demonetization was carried out in practice by elements of the governance mechanism.
Another essential reform was GST. Unlike PM Manmohan Singh, PM Modi was able to get GST adopted across the country. But bureaucratic lack of direct knowledge of the needs and functions of the economy resulted in multiple and often high rates (including a confusing array of levies on products made up of different components), together with the arbitrary adoption of specific rates to selected items and ambiguity in the compliance process. Indeed, in some situations, GST gets paid even when no income has accrued to the taxpayer, or is likely to ever be accrued. While the overall approach (which was not unlike the Gandhian economics favoured by the late Shriman Narayan) was certainly idealistic, Young India in particular is an aspirational society that seeks not increased austerity (there is already enough of that) but material betterment. Items that are middle class commonplaces were taxed heavily as “luxuries”, in a manner which implied that the ideal lifestyle citizens should follow was the Spartan lifestyle of Mahatma Gandhi. Those who designed GST, in their haste to ensure “revenue-neutral” outcomes, also failed to factor in the sharp rise in government revenue that would result from the faster growth created by a simpler and less high tax system. The GST matrix brought into operation in India has ensured that lawyers and chartered accountants are needed in matters of compliance even for businesses that cannot afford such services. “Saral” ought to have been the watchword in compliance, rather than the nightmare that the system became in practice to many. It took substantial effort by the PMO over 2018-19 to ensure that glitches in ease of compliance as well and even in ensuring seamless online access of the GST payments mechanism got reduced. Such fine-tuning remains a work in progress for a needed reform which came into force on 1 July 2017. The good news is that the Ministry of Finance during Modi 2.0 gives indications of being much more “Modi-fied” than was the case in the past. Now it is time for the Agriculture Ministry to inter alia reverse the UPA-era situation where cultivators get low prices, consumers pay high prices and middlemen (which are usually large companies and commodity speculators) make extortionate profits. In particular, food grains need to be bought after harvest, rather than have cultivators face a situation of excess stocks with them. At the same time, food grains need to be regularly handed over to the poor, something that is at last being done, at least for three months. Vultures, who cheat the farmer and the consumer, need to be made to suffer financial and penal consequences rather than laugh all the way to offshore banks.
FINANCE MINISTRY BEGINS DELIVERING
An indication of welcome transformation within the Finance Ministry during Modi 2.0 has been the two sets of relief measures thus far announced during the same week by Finance Minister Nirmala Sitharaman. Had her first set of measures—which pushed back the deadline for compliance on a host of financial, tax and procedural matters from 31 March to 30 June—not been announced when she did, by April there would have been a flood of compliance disasters and defaults, many of which would have led to failures of financial entities and to catastrophic levels of additional NPAs. The second set of measures announced by the Finance Minister have to an extent taken care of some of the emergency needs during the Covid-19 pandemic of sections of the poor. In common with his childhood hero Mahatma Gandhi, Prime Minister Modi clearly cogitates at length about how to improve the lives of the poor in India. Imagine how much worse the effects of the Civid-19 epidemic would have been if the progress made in programs such as Swachh Bharat had not been initiated. These successes have come despite the “ancien regime” elements that still remain within the bureaucracy and in the political system who do not share PM Modi’s objectives, and many of whom seek to sabotage efforts at fulfilment of people-oriented missions. More steps are needed to be taken by the Finance Minister, such as a reduction in taxes and adding to the RBI’s three-month moratorium on interest and other payments with other mechanisms designed to ensure that jobs are protected and not lost. PM Modi’s longstanding well-wishers (i.e., those who supported him many years before it was clear by 2013 that the Gujarat CM would be the next PM) expect that such additional steps will soon get taken. Not just small industry but large and medium industries need their employees protected through taking care of salary costs as well as working capital needs. It needs to be ensured that moneys doled out to companies through the RBI and the Finance Ministry go to the workers and for genuine working capital needs and not to further enrich shareholders and top management, for example by facilitating share buybacks. The 2008-09 Sonia-Manmohan bailout in India and the Bush-Pelosi bailout in the US shovelled taxpayer cash in the hands of those who already had immense wealth, rather than be directed to the genuinely needy, who were offered only flowery language. The 2020 Covid-19 bailout needs to be directed towards employees and workers rather than land up in the pockets of the wealthy. FM Nirmala Sitharaman announced a spend of Rs 170,000 crore on alleviating some of the needs of the poor. This needs to be followed not just by a moratorium on interest but the giving of interest-free loans to SMEs and MSMEs and even cash-strapped elements of large industry. Such loans should have a repayment period of 3-5 years. This is the time that it will take for such units to get back to health after the shocks they have previously suffered. Credit lines have to be opened for large industry as well, especially those sectors employing large numbers of people. Ideally, while there needs to be a Joint Session of Parliament called to get passed legislation on matters such as land and labour reform to promote income, investment and output, at the least a supplementary budget needs to get passed, the way the Federal Republic of Germany did. Chancellor Merkel got such a budget unanimously passed in the Bundestag amounting to more than 40% of the outlay of the regular budget. In the UK, 350 billion pounds have been set aside by Chancellor of the Exchequer, Rishi Sunak to pay production units 2,500 pounds per month per worker, so as to prevent layoffs caused by the pressing of the economic pause button because of the spread of Covid-19. In Germany, social security payments take care to ensure that layoffs be avoided, while in the US as well, a similar scheme has been accepted by President Donald Trump that would reimburse the salaries of employees forced to remain idle because of the need to remain at home during the course of the epidemic. It was expected that the rupee would return to the Rs 45 per dollar rate that prevailed when the UPA took charge. It had fallen to around Rs 61 per dollar around the period Prime Minister Modi took charge, but instead of rising in value, the rupee plummeted to Rs 75 per dollar, the lowest rate in the history of the currency. Expectedly, the value rose immediately after the Finance Minister announced her Rs 170,000 crore plan, thereby proving wrong those vulture fund managers who have long been advising North Block to be parsimonious where the common man in India is concerned, while urging it to remain generous to FII interests. Coming to monetary policy, the RBI leadership has long argued that increasing money supply will lead to a fall in the value of the rupee when the massive increases in money supply by the US Federal Reserve ($4 trillion in Quantitative Easing over and above the $2 trillion approved by Trump) has in fact led to a rise in the value of the dollar vis-a-vis the rupee. A lower rupee benefits foreigners and those with foreign accounts, while penalising Indians holding rupees and a domestic economy where commerce is more tilted towards imports than exports. Much of the recent fall in the value of the rupee has been caused by speculators and currency manipulators who seem confident that the RBI will do nothing to prop up the currency it is tasked to defend. Thus far, despite the cosy interaction between FIIs and top officials in North Block and the RBI, no senior official or market punter to speak of has been held accountable for insider trading. This is in contrast to the US, where several such persons are (or were) in prison. Given corruption in the bureaucracy, it has been child’s play for crooked crony capitalists to get their business rivals enmeshed in criminal cases based on manufactured charges of technical breaches of the myriad laws that get passed in this country the way raindrops fall during the monsoon. A businessman based in Bangalore made a stray remark about a crony capitalist at a party, and was immediately warned by an official present that he would soon pay for such effrontery. A little over two weeks later, his establishment was raided by a posse of tax officials. The same crony capitalist has in the past often used the machinery of government to persecute and paralyse business and personal enemies, and he is not alone. The good news is that such misuse of bureaucratic power has been sharply reduced during Modi 2.0.
RBI GOLD PURCHASE TO POWER ECONOMY
PM Modi showed courage in conceiving and bringing into operation a currency reform of the scale of the DeMo 2016. The time has now come for him to go ahead with a 2020 ReMo (remonetization) of the Indian economy, involving not only currency placed in the hand but deposits into individual bank accounts as well. Successive Prime Ministers have chosen as RBI Governors either civil servants or professionals whose retirement homes are in the UK or the US. It is, therefore, not surprising that monetary policy in India has usually served to promote foreign currencies and interests at the cost of domestic industry and the rupee. It is time for the RBI to change its adherence to FII-centric policies at a time when substantial Quantitative Easing needs to get carried out so as to keep the Indian economy from seizing up. A possible method would be for the RBI to offer to buy gold from the public at a premium on the market price, paying for the same in currency freshly printed for the purpose. Such gold could be accepted on a “no questions asked” basis as to source, with the money going into bank accounts that will have only a 15% income tax levied on the amount and an assurance that there will be no prosecution unless it can be shown (through electronic and other intelligence) that the individual concerned has been involved in activities related to terror. The people of India are estimated to hold more than a third of the total private stock of gold in the world, and the RBI can become a major holder of gold (just as China with its estimated 12,000 tons of official gold stock is), while at the same time pumping in liquidity into the economy. Seeking to get control of privately held gold in anything other than a wholly voluntary way may be the favoured method of a colonial-minded bureaucratic apparatus, but to do so would be a disaster. Apart from the economic consequences, which would be severe, the way Finance Minister Morarji Desai’s disastrous Gold Control Order was. Creating additional cash in private hands through purchase of gold at a premium by the RBI would be a painless method of ensuring a much bigger gold reserve for the RBI at a period when gold increasingly seems on the verge of a comeback vis-a-vis the dollar as the reserve asset of a central bank. Had North Block shaken itself off from the “Police Constable” or PC mentality of the Chidambaram era and adopted realistic measures rather than the draconian Black Money Disclosure Scheme of 2016, 12 to 15 times more than the Rs 65,000 crore garnered by the scheme would have resulted. North Block has for long favoured the carrot where foreign interests are concerned, but usually the stick where domestic interests are concerned. Such a colonial-era bias needs to change. Most, in fact almost all, the unaccounted cash in the system has been generated through otherwise lawful businesses, and such “brown coloured” money needs to be dealt with differently than what should alone get classed as “black money” i.e. the monetary proceeds of serious crime and terror. “White money” is money which has been fully declared and taxed. The less onerous the tax system, the more “brown” money will be converted into “white”. The stick has to be the last resort and should always be used for transparently fair reasons, in a world where capital can move with ease to other countries and leave India with less jobs and income than would otherwise have been the case.
RS 7.5 LAKH CRORE NEEDS TO BE SPENT
There has been much discussion on the additional funds required to ensure that the Indian economy bounces back to a high growth track after the Covid-19 scare disappears, as it hopefully will within weeks. Even Rs 500,000 crore may be insufficient for such an outcome. The extra spend may need to reach Rs 750,000 crore, shared between the RBI and the Finance Ministry. At the same time, to avoid increased inflation, regulatory bottlenecks to growth in all service, manufacturing and other job-creating sectors need to be dismantled so that India ceases to be regarded as a graveyard of private enterprise and innovation. Venture capitalists usually fund Indian unicorns on condition that they subsequently incorporate outside. India has 34 unicorns, but 18 of them are incorporated outside, and more will follow unless the present governance mechanism understands that Indian talent can access multiple countries to locate in, and that Make in India will undershoot potential unless the ecosystem in India is as conducive to innovation and genuine (as distinct from crony) entrepreneurship as is found in the US and the UK. Given a regulatory expressway rather than what can only get described as dirt tracks, India can emerge as the manufacturing hub of the globe, displacing China. The country can become a centre of gravity for innovation, just as the US and now increasingly China (the two other superpowers of the 21st century) are. Many years ago, a youthful chaiwalla from a humble background dreamt of leading India into prosperity. After nearly four decades of rigorous “On the Job” training for this task, Narendra Modi’s first government job was to become in 2001 the CM of Gujarat. The second such job is what he has been holding since 26 May 2014. The time has come for the India Dream to begin the takeoff into actuality under PM Modi’s leadership.