Demonetisation: 5 reasons you just can't trust the economists

Last week, I braved a long, serpentine queue to triumphantly emerge a couple of hours later with some cash from my bank. It is an altogether different aspect that most of the cash was in the new Rs 2,000 denomination, which neither the milkman nor the green grocer would accept. I had to talk them into a sort of installment payment option. But that is a different story.

The media has been flush with economists of every hue and political leaning, speaking for and against demonetisation - right from the doomsdayers to the overtly optimistic ones. Economists have different models, estimates, opinions and obviously political opinions. So the experts are speaking either half-truths or slanted truths, and a few neutral ones are probably choosing sides.

If economics is a science, the results of a given probability cannot so varied. So, logically, you should not take them at their face value. Here's why:

Begin with black money stashed in tax havens 

This is an emotional issue, more than an argumentative one. Other than vague, sometimes spurious third party estimates, we do not have any assessment of how much black money is really parked abroad. Tax havens do not ask how you got the wealth you are parking there and, in such a scenario, they can simply not be traced. Huge estimates of 15 and 25 lakh crores are being made for some high electoral rhetoric, but these figures can never be justified on the ground.

The government, preferably with the Opposition's support, should start implementing smaller, solid steps like a cap on cash transactions, putting an end to the generation of black money in educational institutions, setting up of additional courts for pending tax cases, controlling and cracking down on stock market malpractices, ensuring the misuse of capital gains tax stops, and the most important of all - regulating participatory notes issues by FIIs, most of which come from from tax havens.

Most of the black money is laundered abroad or tied in assets

If you are hoarding illegal money the best way to do is either stash it out of teh country or invest it in assets like gold and real estate or land. The argument forwarded is that crackdown on cash is not going to have the desired effect as tehre is no huge tranche of cash in the country. Hawala dealings do happen and domestic and international agencies -  from time to time - come out with estimates.

But this does not account for the entire volume of black money in the country. The media regularly carries reports of staggering amounts of recovery by I-T department.

Estimates say that 30 per cent of the economy is black. A sudden announcement, like the one that we are seeing, will kill large sums of black money before they can be siphoned off. That would be a significant part of the black money in circulation, but not all of it. Some would get laundered and such a move will have no effect on the black wealth abroad.

Launderers will find a way

Hoarders shall find a way to get around to change or exchange the now illegal notes. There will be agents who will convert bad cash into gold or other precious metal, say by using pre-dated bills. Since most of these transactions involve higher risks for the launderer, this segment will probably involve small quantities. For instance, say someone uses Jan Dhan accounts to launder money.

Look at the numbers - even if the tax officers do not question deposits of more than Rs 2.5 lakh in bank accounts, which, in itself is highly unlikely. One will have to arrange for 200 account holders to launder an amount of say four or five crores. And you are cooked if one of them sings. Precious metal sales can be tracked too, relatively easily. So it is not as if you can dismiss the initiative easily. It makes the argument "launderers will find a way" a half truth at best.

People will continue with black transactions

Absolutely true - when was the last time you asked your neighbourhood kirana shop for a receipt? Or, for that matter your presswala or milkman? So in layman's terms we are earning white money, but willy nilly fuelling a black economy.

The cash portion of the Indian economy is very high. Only about two per cent of the transactions is "online". What is surprising is that the government is yet to unveil a plan to break this vicious circle. Are we in for a re-run of the demonetisation exercise every few years? The gains then will fall way short of the suffering such moves will cause the common man. Maybe the government has follow-up plans, maybe the FM's hints at increasing the tax net has implications beyond the GST as well. Let us see.

The decision was taken after extensive planning

What was to be an action that would have flushed out black money turned out to be an exercise, which unleashed misery upon the poor, daily wage earners and small businessmen. Even with their vaunted background and training and as they insist - planning economists of the reserve bank and the ministry failed us.

Let us have some non-expert perspective. Rs 100 notes make up about 10 per cent of the cash. Which economist predicted that it would be enough to tide over the shortage of 85-86 per cent of the currency (made up by Rs 500 and Rs 1,000 notes) in circulation?

Who came up with the bright idea of releasing the Rs 2,000 currency notes before the new Rs 500 ones? If a labour contractor has a weekly cash limit of Rs 10,000-12,000 (yes, labour contractors operate on savings bank accounts mostly, those with current accounts are a rarity - pity such knowledge does not form part of our economics curriculum), how will he pay the labourer?

A farm hand can be given some foodgrains or the likes, what happens to the daily wage earners like masons and carpenters? Where are the mitigating steps? The government needs to think out of the box to counter the brewing tornado. It is surprising so many experts did not see this coming.