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No easy answers in West Asia AttacksinAnkaraandBerlinshowit’s toughtoavoidfalloutsofIslamistterror
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HINDUSTAN T IMES, NEW DELH I WE DNESDAY, D ECEMBER 21, 2016
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ABHIJIT BANERJEE
Bad economics can bite back Even if demonetisation is a mistake in pure economic terms, it could be worth it for the prime minister in terms of political dividends
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ilton Friedman, the great Chicago economist,arguedthattheGreatDepressionhappenedbecauseofshortageofmoney.Noone hadmore faithinfree marketsthan Milton, but even he did not believe that a market economy can function when there is an acuteshortageofmoney.Manyyearslater,agroupofeconomists including Ben Bernanke spelt out why a shortage of meansofpaymentcanhavedisastrouseffects:Putsimplythe factthatRamdoesnothavethemoneytopayRahim,means RahimnowdoesnothavethewherewithaltopayRuth,who in turn cannot pay her banker, and so on till it eventually rebounds on Ram. In other words, Ram now has even less moneytopayRahim.Thereisacascading effectontransactions, with the result that the GDP shrinks by much more than the original shortfall in liquidity. What Friedman meant by money included checks and other forms of money that only live on the books for banks. But recall that USA even in 1929 was more financially integratedthanIndiaisnow,wherethereisstillahugepartofthe population that transacts only in cash. If, for example, the middlemen who buy the crops start cutting back because theydon’t haveenough cashinhand, farmerswillhaveless cashaswell,forcingthemtostophiringlabourandsoon,and entire village economies could go into a tailspin. Ofcourse,allofthisdependsonhowinnovativeeveryone is with finding ways to pay. Everyone has heard of the local pansellerwhohasPaytmnowandthecyclerickshawpuller who is getting one, and Paytm seems to be doing very well indeed.Therearealsostoriesofincreasedinformallending. On the other hand, in a small survey of retailers and wholesalers we carried out a couple of weeks ago in a large Indian city,mostsaidthattheirsalesweredown,often50%ormore. We have no way to know how representative that is, but if it iswearetalkingaboutnegativeeffectsthataremuchbigger than the 0.5% that is being talked about. But of course this is meant to be short run pain for long-
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Nand Lal, a former soldier, who missed his spot in a bank queue, became the face of the PARVEEN KUMAR/HT antidemonetisation protests
I AM WILLING TO BELIEVE THAT THE ISI COULD BE MINTING RUPEES TO FUND OPERATIVES, BUT FIND IT HARD TO IMAGINE THAT TERRORISM WOULD STOP IF WE HAVE A BETTER CONTROL ON THE CURRENCY, GIVEN THAT THESE OPERATIONS COST MUCH LESS COMPARED TO PAKISTAN’S DEFENCE BUDGET termgain.Sowhataboutthepotentialgains?Therewasinitiallyalotoftalkaboutfakecurrencyandterrorists,butthat seems to have subsided, mostly because there seems to be much less counterfeiting than the original claims. I am still willingtobelievethattheISIcouldbemintingrupeestofund its operatives, but find it hard to imagine that terrorism wouldstopifwecouldhaveabettercontrolonthecurrency, given that these operations cost peanuts compared to Pakistan’s defence spending. If it comes to that, the ISI can just buy the rupees on the world market. Another argument is that it will reduce corruption. I am willing to believe that the corrupt have been stockpiling rupees, and even that some of that ill-gotten wealth will be sacrificedtoavoidunpleasantencounterswiththelaw.But presumably what the government really cares about is not the stock of corrupt moneys from the past but the incentive to take fresh bribes. And given that there will now be 2000 rupee notes that can be used to make the necessary payments, I simply don’t see why anything should change, unlesswekeepdoingthesesurprisedemonetisationsevery few months. But then we are talking about long-term pain. Thethirdargumentisthatitwillpromotefinancialinclusion.Iamsurethisistrue,thoughnotallthemoneythathas now flowed into the jan dhan accounts will stick — a lot of them will eventually go back to their real owners, who just
needed a place to park it. On the other hand it is clear that more people will use Paytm and its competitors. The evidence on MPESA, Kenya’s popular answer to Paytm, reportedinarecentpaperinSciencebyBillyJackfromGeorgetownUniversityandTavneetSurifromMIT,suggeststhat ithadsubstantialwelfareeffects—pulling2%ofthepopulation out of poverty. My problem with this argument is that there areless costly ways to get to this.Thelast argument is thatnotallthecashwillcomeback(sincetheirownerswon’t own up to having it) and so the government is in a position to print more bills without creating inflation. This, it is argued, can be a large windfall for the government. Unfortunately,thisargumentforgetsthatalotofthecash thatwillnotcomebackwasnotincirculationtostartwith— it was more a way for the crooked to hold on to their wealth. Moreover, the recent adoption of other payment technologies means that the demand for cash has fallen. In other words,thetransactiondemandforcashwasalwayslessthan thetotalamountoutstandingandithasfallenfurther.Going back to the pre-November 8 levels of cash would almost surely create inflation. Andyetthereform,atleastatthebeginning,waspopular. The same mini-survey that I mentioned asked people what theythoughtofitandthemodalanswerwasthatithurtsbut itisgoodforthecountry.Thepositivesentimentreflectedin part admiration for the chutzpah that the PM had so obviously displayed and perhaps more importantly a delight in the fact that the bad guys who usually get away with everything, were finally getting one in the neck. Forthatreason,evenifthewholethingisamistakeinpure economic terms, it could be worth it for the PM in terms of political dividends.Onthe otherhand, itmay not.Schadenfreudeisapowerfulsentiment,butbadeconomicsoftenhas a way to bite back. Abhijit Banerjee is Ford Foundation International Professor of Economics, and director, Abdul Latif Jameel Poverty Action Lab, MIT The views expressed are personal
nEwsmAkEr RAHUL GANDHI Congress vice-president
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THINK IT OVER ››
THE NOVEMBER 8 [DEMONETISATION] DECISION WAS NOT AGAINST BLACK MONEY OR CORRUPTION, BUT AGAINST FARMERS AND THE POOR...THE PRIME MINISTER HAS GIVEN 60% OF INDIA’S WEALTH TO 1% OF ITS POPULATION. DEMONETISATION IS ONLY MAKING HONEST TAXPAYERS SUFFER. WHEN I ASKED HIM [NARENDRA MODI] TO WAIVE FARMER LOANS, HE DID NOT ANSWER MY QUESTION.
HAPPINESS IS WHEN WHAT YOU THINK, WHAT YOU SAY, AND WHAT YOU DO ARE IN HARMONY. MAHATMA GANDHI
Illustration: SIDDHANT JUMDE
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he assassination of the Russian ambassador to Turkey and the bus-borne attack on a Christmas market in Germany should be seen as reminders of how difficult it is for any country to avoid the consequences of Islamist terror. But this would be better understood as examples of how difficult it is for any country, especially in Europe, to escape the consequences of State collapse in West Asia. The contradictory geopolitical interests and interventions of regional powers like Turkey, Iran and Saudi Arabia and great powers like the United States and Russia have so far only added tinder to the sectarian flames that burn in the region. Russia may have intervened militarily to stop the Islamic State from capturing Syria. However, the assassination of their ambassador is a sign that the more they involve themselves, the more Russia will become a target for Sunni Muslim anger and frustration — as the US was a decade ago. Germany’s terrorist attack seems to have been an indirect fallout of chancellor Angela Merkel’s decision to allow a million West Asian refugees to enter her country. Both policies, while as different as guns and butter, are placebos for what really ails the region, which is why neither has stopped terrorism from striking either country. There is certainly a crisis within the Arab Muslim world, often compared to the sectarian conflicts that rent the Christian world several centuries ago. But radical and apocalyptic visions like those of the Islamic State and similar groups find ready adherents because for those who live in the region between the eastern Mediterranean and the Persian Gulf feel as if the world has come to an end. The siege of the Syrian city of Aleppo and the humanitarian crisis that is unfolding there are a microcosm of all that is wrong today in West Asia and why nothing that is being done there is actually resolving the core problems that beset the region. Unfortunately, creating a stable State structure in this span of West Asia is beyond any single country and would strain even the most comprehensive international coalition. The only hope is that, over time, a series of terrorist attacks and Aleppo-style tragedies will lead all the external powers and some of the domestic players to recognise that the present scorched earth policies are getting them nowhere. Even if the Islamic States is defeated, another version will take its place. The fact Turkey and Russia, bitter rivals only a few months ago, accept they have to work together is hopeful evidence of a trend that needs to find greater momentum.
povErtylInE
They must walk the talk ThePMandNitishKumarwanttocleanuppollfunding. Theleadersmustnotabandonthecauseafterelections
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f demonetisation is the flavour of the season then cleaning up of election funding is the second-most discussed topic these days. On Monday, news reports said the Election Commission (EC) has recommended that anonymous donations above or equal to ₹2,000 should be prohibited. If accepted, these recommendations would give more power to the EC to keep a check on anonymous donations, which are right now capped at ₹20,000, as well as help crack down on political parties that are formed only with “an eye on availing the benefits of income tax exemption”. In a piece in The Wire, two Association of Democratic Reforms researchers write: “While there are several laws that governing the disclosure of finances of political parties, it becomes increasingly apparent through this analysis of the parties’ disclosure that there is an inherent resistance or a lack of political will to be more transparent, and thus accountable.” An analysis done by ADR shows that between 2004 and 2012, the sources for more than 75% of the funding received by six national political parties could not be traced. The EC’s recommendations found support from some quarters. In Kanpur, Prime Minister Narendra Modi urged the EC to pressure political parties to create transparency over the donations. In Bihar, chief minister Nitish Kumar went a step ahead: Talking about the poll panel’s proposal, he said that the law should be amended and that parties must reveal who has given even “one rupee or ₹10 to it”. He, however, expressed doubt if the BJP-led NDA government would bring such an amendment. It’s heartening to note that two senior leaders are on the same page on cleaning up the political funding, which becomes the primary source of black money. But as they say, the proof of the pudding is in the eating: The leaders must not abandon the cause once the elections are over; their commitment to it will be measured against the actions they take after the election poll season is over to clean up political funding.
A delay in GST rollout could be a good thing The State can use the time to work on the nuts and bolts of the law and industry can fix its backend systems Pratik Jain
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he storm over demonetisation and lack of consensus on the “dual control” issue has impacted the GST bandwagon, which was running smoothly till now. The recent GST council meetings did not yield much result and one hopes that the meeting scheduled on December 22 and 23 will take things forward. However, it means that the earliest the GST laws can be passed would be the budget session starting end of January 2017. This effectively means that there is a possibility of the GST getting delayed, anywhere between three to five months. To me, it is good news, both for the government as well as industry. The industry was always running against time to implement the GST, slated to come into effect from April 1, 2017. Neither the laws nor the schedule of the GST rates have been finalised as yet. This poses several challenges for businesses, the most critical being IT systems readiness, where changes can only start once the laws are finalised. This is why other countries gave at least 12 to 18 months for the industry to prepare. Further, the industry needs to look at the vendor ecosystem as well and ensure that they are technology enabled for doing the GST compliances, which is critical for claiming the GST credits. With a bit of delay in the GST implementation, industry will be better geared up for transitioning their systems and processes. Preparing the business plans in a postGST era also requires the final GST rates. While the overall rate structure has been finalised (0, 5, 12, 18 and 28%), the schedule of rates for various commodities and services are still not known. In absence of this, industry is not in position to take critical decisions such as budgeting, pricing and demand forecasting for the next year. Things are further complicated in view of the proposed “anti-profiteering clause” in the revised GST laws, which mandates that any benefit arising out of the GST would need to be passed on to the customers. This benefit cannot be computed unless the rates are known and the law is finalised. The GST rollout would also entail substantial changes in supply chain models,
innervoice
Live your life with joy and not with regrets or fear Madhu Mehrotra
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The GST rollout would also entail substantial changes in supply chain models, particularly AFP for consumer products
particularly for consumer products such as FMCG, electronics, durables, etc. This in turn means taking several critical decisions such as import vs domestic manufacturing, make vs buy, multiple stock points vs fewer warehouses and so on. These decisions are long-term in nature and have wide ramifications. Many of these are contingent upon the finer aspects of law, such as treatment of current excise/VAT holidays, tax arbitrage available in case of domestic manufacturing vis-à-vis imports (eg, mobile handsets), etc. Once these aspects are clarified in the final laws, industry would expect at least three to four months to realign their business models. Last but the not the least, the last quarter of a financial year is always a busy time for the industry with sales push in the distribution chain, accounting closure, etc. The GST from April 1 would have meant an additional challenge in the last quarter and would have had a larger business impact. While the delay gives us much needed time, it is important that we are not complacent as the industry has realised that complexities involved in this transition are much more than what was envisaged
earlier. Even a simple transaction of receiving an advance or a sales cancellation could translate into an implementation nightmare in the new regime. International experience tells us that even a transition period of one to two years is not enough for a GST transition and hence industry needs to make most of this additional time. From a government’s perspective, there is additional time to work on the nuts and bolts of the laws. It also gives them an opportunity to assess the impact on diverse sectors and issue detailed guidelines for implementation. The government may also like to use this opportunity to have a more effective public outreach programme so that benefits of the GST are well appreciated and do not lead to chaos initially. It might be worthwhile for the government to also study the “after-effects” of demonetisation and take necessary measures over the next few months, including in the upcoming budget scheduled for February 1, 2017. So, a delay in the GST rollout may not be bad, after all. Pratik Jain is partner and leader indirect tax, PwC The views expressed are personal
Parapet walking is a much loved activity in the hills. On one side is a deep gorge and on the other a road. The narrower the parapet, the greater the thrill. A school bag on the back makes the task even more exciting. If you totter, you stretch your arms to restore balance. This morning, when I looked down towards the hill slopes I noticed a braveheart trying to walk a parapet. The five-year-old climbed it deftly and when he reached half way, he bent and used his hands to climb. I couldn’t resist intervening. I tried to coax him to go higher. The bag on his back was interfering with the balance. He had no option but to slide back in reverse, all the way calling for help to his brother. When he came down half way, he called out in my direction and asked ‘Who was that?” I responded by asking him to jump. And to my delight, he did, even though he landed in a heap. Again, I called out to him, ‘Stand up and walk!’ and he did, with a smile . With his adventurous spirit, I am looking forward to spot him on the same parapet on another morning. Maybe another braveheart will go to the top of the parapet with no fear. That’s the joy of childhood — a life without fear and a life of taking adventures in one’s stride. See a challenge? Scale it. Can’t do it? Call for help, , jump down and carry on. (Inner Voice comprises contributions from our readers The views expressed are personal) n
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