Narendra Modi Demonetization or Demonization / राहत या आफत
Experts
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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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