Demonetisation — just the right medicine

All strong medicines have some side effects. But we take them to get another lease of life. That’s what medicines are for. And so is demonetisation — as the midnight ban on 86 per cent of the total value of currency value is loosely termed. It is more about forcing a change in business, politics and even personal habits, than merely wiping out black money and fake currency accrued over the years.

The bigger idea is to make the system accountable and transparent to prevent future distortions. It is just as well that this has happened before the GST rollout, otherwise many would have given the net a slip. The decision has come as a consequence of events. And, it must not be the end. The disease has taken such deep roots that it started to mutilate the nation’s DNA. Hence, the fightback will be long.

Corruption has always existed, and will exist anywhere in the world. But there is a difference between the reckless rent-seeking across all economic activities that we now see in India and the big-time deal making like, say, Bofors or Kargil coffin scams of the past.

The spark probably came two decades ago, when real estate and private education businesses started mushrooming. Suddenly ‘black’ became new normal. The ball started rolling faster in the last decade. Remember the first-come-first-serve 2G spectrum scam? Yes, some politicians made bagfuls. But so did many others. Delhi was flooded with hookers having spectrum in their pockets.

The model was repeated in a bigger and wider format in coal scam, iron ore scandal, money collection scam in West Bengal, Assam and Odisha. Too many people, from the big cities to the villages, cutting across party lines minted money.

Unofficial election spending shot up. It now takes ₹10-15 lakh to win a village Panchayat seat in Bengal and ₹2-3 crore to be a corporator in Delhi. Money moves Southern states. And many voters in Punjab get cars. High election spend is justified by allowing illegalities including tax avoidance or evasion and charging a fee for every service. In Bengal, the going rate for Indira Awas housing assistance for the poor is ₹30,000 cut for ₹1 lakh. Low-paid ICDS jobs in villages cost up to ₹3.5 lakh.

Travel in East and Northeast and you will know BPL (below-poverty-line) enrolment is a business. Indeed, a 2015 World Bank report pegged the poverty count at half of the government estimates. The point is, we have created a much wider and stronger ecosystem for corruption than we tend to believe.

The distortions are visible. Kolkata offers few decent job opportunities. Tax-GSDP ratio is barely 4 percent, the lowest among major States. But real estate has boomed. Smaller cities like Durgapur, Siliguri make national news in topline inflation. Guwahati has every high street fashion brand available. Raipur is a top 10 buyer of premium consumer products. Poor Odisha is addicted to luxury cars.

One may argue that corruption contributed to consumption-led growth. Yes, it did but at the cost of choking future growth. Higher corruption margins disturbed business viability. Banks were saddled with bad assets. And, courts became shadow governments, impacting policy stability. Why do you think China launched a crackdown on corruption in 2012? It was imperative for Narendra Modi to act. But no one expected him to dare a frontal attack on cash economy – the nerve centre of illegalities — as it chokes funding to the entire political class. Modi broke the myth. At Kolkata’s Burrabazar, one of the country’s largest wholesale markets, people are still gripped by disbelief. For ages, they support BJP and do business in cash so as to keep the taxman at bay. Modi asked them to change the business model.

They are not alone to face the heat. According to SP Singh, a Delhi-based transport researcher, 50 per cent of nation’s cargo is booked in cash, mostly from the SME segment! Don’t SMEs have access to banks? No wonder too many people suddenly became generous enough to pay advance salaries, in banned currency notes, for months. Demonetisation is the face of the move. The real purpose is to give formal economy a chance to grow and establish the long arm of law.

At a single stroke, Modi destroyed the ₹25,000 crore per year cattle smuggling and fake currency racket on the Indo-Bangladesh border. Under normal circumstances, they will take at least a year to come back to shape. And, if Modi is successful in reducing the use of cash, which nearly 90 per cent, it will never come back to the earlier shape.

All these have left politics, especially the regional politics, breathless. They now have to look for new avenues of funding. Many are in trouble to dispose of unaccounted cash. It was not long ago we saw them taking cash in the Narada sting.

But the economy will surely gain. For years, the jute industry in Bengal followed a simple operating principle. Raw jute farmers were paid in cash. Four lakh workers got wages in cash. Lack of transparency made it easy to fudge costs. And, 70 per cent of the produce was sold to the government on cost-plus basis.

Politics never enforced change, for understandable reasons. A distorted marketplace pushed out good operators and grievances against non-payment of workers’ dues, including statutory dues, are common. The paradigm shift came this month, ignoring State Chief Minister Mamata Banerjee’s loud protests against demonetisation. Workers are now paid through banks. And 25 per cent farmers took payments in cheques.

The organised tea industry employing 12 lakh in Assam and five lakh in Bengal is going through a similar churn. From December they will pay salaries through banks. Siphoning of funds or non-payment of workers dues will be difficult. Trade unions may see a drop in ‘hafta’ collections.

The pressure is not only on industry. Banks are forced to fill up gaps in services. They are rushing out to extend the banking correspondent network and set up micro ATMs in remote tea-growing areas.

Contrary to popular perception, small business is responding to the change rather quickly. At Jadubabur Bazar (market) in Mamata’s assembly constituency of Bhabanipur vegetable vendors have started accepting Paytm.

Who said business will suffer due to cash crunch? Vested interests want them to remain unclean.

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