The Trouble with the Economic Verdict and Politics
By: Amit Bhushan Date: 16th Nov. 2016
The difference between the Political verdict and Economic Outcomes (or verdict) is that there is often a time lag in Economic outcomes while the political verdicts are almost always delivered instantaneously. However, the dependency of politics to be able to deliver better economic outcomes and thus claim good governance; demands that economic decisions are taken with a huge amount of caution. The politics however demands that leaders are able to score instant ‘goals’ at the opportune time, and thus there is pressure to do away with caution in the view of timing related woes. And of course, the next steps are rarely the questions/suggestions in politics where roll-back demand is often seen as a big win for itself as well as junta (ordinary public), and this may hardly be true from the perspective of economics. It may be noted that the author may be ambivalent (in the aftermath of the decision) about the decision itself, however this may be an attempt to explore if there is any rationale behind taking a roll-back move or pursue with some other decisions. As a government, planning tough measures and sequencing it in palatable measure may be required but this usually requires well thought out planning and resolve to chase the betterment of people depicted through carefully calibrated communications as well as governance measures. The criticism then becomes a measure of support as it helps in careful calibration or to avoid any pitfalls either in the planned measures or in communications.
Taking the political arguments from an economic standpoint, there are several issues being voiced. One of them is that it has equated the unaccounted wealth and black money with Cash Savings of the people. Now this can only be true if all of black money can be recycled in the system. We shall soon know, how much of the currency in circulation comes back in deposits. Yes, the hardship of those savings in Cash cannot be overlooked though, including their inability to be able to use this money for family events which some of these people may have been confronted with. There also seems little banking effort to reach out to some of these people (in need of education/guidance) to canvass deposits as some of these people may have little education and bank seems to be tied up with branch visitors for now. While the society needs to take care, however many of them are tied with their own currency woes and those with formal responsibility should not be abdicating the same. With these points underlined, people with Cash Savings do have a way to come out of these issues and thus may be at a different plane as against with unaccounted wealth.
Next is the set of arguments that the assets prices have collapsed and all those people who used hard earned money to create these may have lost the wealth. Added to it is the argument the rich may have got away by buying services of agents for shipping out their wealth already. If these allegations were true, then there should be a flood of foreign fund inflows in an effort to take advantage of a temporary situation. India’s image of being a beacon of investment destination with robust economic growth should help. However this has not been so. Also, people with stashed up money abroad would normally be the first to roundtrip the money as white to buy the assets at depressed prices and so would the Non-residents. Nothing of sort seems to be happening and it may be too early to reach such conclusions at this juncture. But basically the asset prices are guided by future earning potential. Since the earning potential of the middle class salaried employees (other than corrupt) has not been hit while the impact of other professionals seem minimal. Some impact on upper middle business class and the lower class (for a brief period) isn’t ruled out. The economic activity will take some time to bounce back in a compliant fashion to recoup labours from the lower classes although unless loopholes in the system are addressed, will again be overtaken by those who may not be compliant. This is because an economic activity has almost always has its economic rationale and procedures affect the same only for a brief period while the ‘value’ outcomes can be affected on account of taxation (legitimacy might be the other factor) and so there may be some curbs while expansion of some other activities. Some amount of see-saw in prices of assets may not be ruled out but if would affect mostly the upper echelons of the market.
That the people have been condemned to slog while normalization is far away. This may appear to be politically correct, but from an economic standpoint of a state (as opposed to individual), is far from truth. The state gains from such activity which we are likely to see and is also being talked about by politicians (so being skipped here). The individuals would get no remuneration for the effort may be correct unless there is expansion of legitimate economic activity and a rise in wages on account of it. With the politics of roll back rather than supporting steps by the center and state and talk around next expansionary steps and further supporting, this may be more precisely so. Actually, the political aim might be not just on the current elections but the future elections as well and holding on to the past rather than hypothecating the future may help some. What may be needed is some decisive action both and center level on further steps amid the roll back talk. This should include smoothening of procedures for the electronic payments market, incentives for the transparent deals especially the property market which is high employment amongst others. A bold step like reduction in stamp duty on account of anticipation of a much expanded market could be a confidence booster although would impact the state’s revenues already hypothecated to GST. Kick-starting some of the state sponsored Smart City projects or Slum re-development projects on a larger scale might be other options on the back of already fallen prices for acquiring land and ultimate cost to the prospective buyers.
While some people may have concerns about the agri-market or even jewelry sector workers. The agri-markets might soon pick up as soon as the curbs on withdrawal of Cash are eased out. What may be important is to get a section of these players to embrace electronic payments rather so that a huge reliance on Cash can be curbed. While Cash based disruption may not be the best way given the sensitivity of the sector, but pushing e-NAM based buying & delivery of say cane/cotton/milk/tobacco/oil seeds etc. and recording of any dues towards farmers might help in the longer run for the estimation of overall production as well as extant of credit in the sector. This could be on the back of some government persuasion for the buying corporate or large traders. Similarly we also hear the woes of jewelry sector especially on employment. What needs to be encouraged is recycling transactions even as purchase of fresh gold or imports drop. A tax differential on recycling transactions might help including some amelioration of the sector. Some encouragement for exports of jewelry might also help to re-coup a bit more of the international markets. It may be noted that people with life events or immediate concerns are not being covered in this article but already been voiced earlier.
Then we also have the specter of license raj and killing of the unorganized sector being raised as issues. The need to have facilitators rather inspectors for almost all agencies (barring the police/investigative and may be environ protection) is already well understood but remains unimplemented. Now there might be an urgency to look into the issues and facilitate businesses to become more compliant. There may also be the need to look into the credit needs of the businesses which so far have reliant on the costly unorganized markets for the same. This may be done by looking into accounting rules or more specifically limiting the maximum amount of depreciation that can be claimed under proprietary and partnerships and making Aadhar ids. as mandatory for filing the returns/statements. While the exits from such businesses should be made easier but at the same time not filing returns should have some penal provisions including some hindrance from claiming benefits or tightening of the credit from organized sector.
The war on black money is a multiple-dimension problem and cannot be fought with uni-dimensional thinking. It would be unimaginative to suggest that demonetization alone will curb the problem. Also, that the war on black money would be required to be fought with an expansionary economic mind set rather closed loop thinking a set of problems are attended too, only to leave imprints of another set of issues. While the government has depicted that it is alive to a problem that has been fought in a measly manner over the years, however it needs to prove that it is adept in thinking through and mitigating the various consequences of its decisions. It would also need to ensure people that the economic expansion on the back of such a decision is for real, rather than mere talk show in the face of questioning. Ability to rapidly expand electronic money would not only ameliorate some of the hardship, but would also go a long way in persuading people that alternate economic methods to deliver outcomes in a more compliant fashion are likely taking shape in a planned manner. Aspects, that bring the economic expansion back on track especially in employment intensive real estate and retailing need to be taken on priority since the economic activity and the overall employment in the sector may have been affected for the sins of a few people’s fetish to manipulate the system. It is resolve to understand the overall scope of the problem and sincerity to fight the menace is what may determine the longer term economic as well as political outcomes.