Saturday, December 3, 2016

Fact File – I (Note Bandi) 1st Dec.2016

Narendra Modi Demonetization or Demonization / राहत या आफत 

Experts View :
At a time when populist nationalism is confusing ideological battle lines across the world, no nation is more confused than India. Politics here divides into camps for and against Prime Minister Narendra Modi and this is once again evident in the reaction to the demonetization plan. Ironically, Modi’s enemies on the left find no merit in this scheme to apparently soak the rich, and his supporters on the right see no reason to question this clumsy exercise of state power.
Like other low income countries India is cash dependent, but not out rageously so. Cash in circulation amounts to 12% of GDP, somewhat higher than the emerging world norm but not out of line with even countries like China and Thailand where the number is around 10% of GDP. The black economy is about a quarter the size of the formal economy. That is similar to low income peers like Indonesia, and in fact smaller than in higher per capita income nations like Mexico and Russia.
Modi also chose and odd moment to attack corruption, which appeared to be in retreat. On Transparency Internation al’s ranking of the most and least corrupt nations, India was getting worse until 2011, when it bottomed out at 95th, and lately it has rebounded to 76th. India currently ranks as less corrupt than average in its income group, ahead of peers like Pakistan and Vietnam. The least corrupt countries tend to be richest countries from Norway to Singapore.
There is also a better way to downsize the black economy, which Modi’s government tried but with underwhelming results. Earlier this year, it offered a tax amnesty and imposed a punitive tax of 45%. The result: Indians came forward to declare assets worth less than $10billion (around Rs. 64000cr).
Contrast that to Indonesia’s recent amnesty, which imposed a tax of just 4% and drew out $300 billion in hidden wealth – reportedly including $30 billion declared by a son of former dictator Suharto. Of course, such a move in India would not deliver an instant populist punch and would not deliver an instant populist punch and would entail the hard work of marketing the benefits to the masses.
It might be more satisfying to punish shady fortunes, but revenge is not a development strategy. Scrapping large bills may destroy some hidden wealth today, but the black economy will start regenerating itself tomorrow in the absence of deeper changes in the culture and institutions that foster it, which in turn is a function of a country’s per capita income. Only as a nation gets less poor do corruption, black money and the role of cash decline. There is no shortcut.
India will have to climb the development ladder one rung at a time. But for now, as economic growth slumps here, the message to other populists in the world is: be careful when draining the swamp.

Ruchir Sharma – A global investor

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