Geopolitical Notes From India
M D Nalapat
PRIME Minister Narendra Modi cannot be faulted for a lack of boldness. If there were any doubts about this quality, they were dispelled on November 8, 2017 at 8pm, when he announced that 87% of India’s currency was being declared illegal in four hours time. The measure has caused substantial dislocation in economic activity, and even its supporters admit that millions of jobs were placed at risk as a consequence of the measure, which was unprecedented in any economy of India’s size.
However, with cash once again made available by the Reserve Bank of India, the economy is slowly returning to the level it was before DeMo (demonetisation) was implemented by India’s PM. It may be remembered that the US dollar has never once been demonetised, even though new variants have been introduced. While the new notes were placed in circulation, older notes continued to be legal tender. There were sound reasons why US monetary authorities declined to follow the demonetisation route, despite the dollar being the most counterfeited currency on the planet, with some countries even witnessing official sponsorship of such illegal activities.
The dislocation caused by DeMo is immense, and in many cases,the worst suffering is endured by the underprivileged. In contrast to the poor,whose transactions are almost wholly in cash, that of High Net Worth Individuals (HNI) is usually through banks. It is estimated that as much as 81% of the unaccounted money held by Indian citizens and their nominees is in bank accounts. Of such “banked” cash, about 73% are estimated to be held in overseas bank accounts, while the remainder is in bank accounts in India. Because of increased transparency in the global banking system, it is becoming easier to pinpoint accounts secretly held abroad by the nationals of individual countries.
However, the ten years of office of Prime Minister Manmohan Singh (who was subject to the political direction of Congress President Sonia Gandhi the way the Prime Minister of the USSR was under the control of the General Secretary of the Communist Party of the Soviet Union) proved a blessing for holders of illegal assets abroad. They were given ample warning, and if the passports of several prominent Indian citizens get scrutinized during that period, there will be several visits to Switzerland and to other offshore banking havens such as Macau and the Bahamas, of course for “holiday”. The only way that the incoming National Democratic Alliance (NDA) government led by Narendra Damodardas Modi could have got back tens of billions of dollars from secret offshore accounts of Indian citizens and their nominees would have been to declare an amnesty.
However, the bureaucracy was opposed to such a move, as also the political class, which was wary of charges of softness towards Black Money holders. Hence stiff penalties were imposed on those declaring such foreign bank accounts, while discretion was given to officials to send to jail or levy confiscatory penalties even on those who declared such accounts. The consequence was that very little money was actually recovered from the scheme, despite the Special Investigation Team headed by two retired judges sitting ever so often to try and get back Black Money. The Sonia Gandhi-controlled 2004-2014 administration imposed several harsh punishments and penalties, while sharply increasing the power of officials and the discretion given to them. Instead of a rollback, such punishments and powers have only increased since Modi took charge, although the expectation is that India will soon see evidence of the Prime Minister’s desire for “Minimum Government, Maximum Governance”.
Officials in India have been allergic to tax reductions, a trait seen clearly in former official Manmohan Singh when he was Prime Minister or Finance Minister earlier. Singh lowered taxes on foreign goods and gave concessions to foreign companies but came down hard on their domestic competitors. The consequence is that there has been a substantial rise in the percentage of foreign control and ownership of key sectors such as banking, telecom and aviation. In contrast to China, where domestic defence companies meet more than 80% of critical needs, in India the reverse is the case, with the share of foreign companies in the total of core items procured crossing 80% in several instances.
DeMo was supposed to (1) stop generation of Black Money (2) prevent counterfeiting (3) stop terror funding and (4) make banks healthy through the disappearance of an estimated Rs 500,000 crores of cash that officials thought would not get returned to the banks. While none of this happened, the good news is that the shock therapy increased the taxpayer base. Also, more than a hundred million more people are now operating bank accounts regularly while online commerce has risen sharply. On July 1, Prime Minister Modi will implement the next Economic Shock Therapy after DeMo, which is the Goods and Services tax (GST).
Certainly the measure has several drawbacks in the way it has been designed, but nevertheless, GST will create a unified market in India for the first time. The medicine being prepared by Modi may be bitter at first taste, but the gift of better economic health is expected to come later. Supporters of Prime Minister Modi are hoping that the economy will recover sufficiently by 2019 to a repeat performance of the BJP’s 2014 victory at the polls.
—The writer is Vice-Chair, Manipal Advanced Research Group, UNESCO Peace Chair & Professor of Geopolitics, Manipal University, Haryana State, India.