As I pen this, we are in the 4th night of the great demonetising crisis in India. Social media is polarized, the media is polarized and the nation is polarised.
There are tales of hardships faced by the masses and yes I still am part of the masses. There is talk of what next and there are voices of what now. In all the chatter the main purpose of the demonetising is being forgotten.
I am no Raghav Bahl with my own news channel to talk about Shyambhai and Rambhai.
I am no Raghuram Rajan who said demonetising any currency is not worth it.
I am no Appu Esthose Suresh who claims that the move MAY FAIL to win the war against war (Don’t know Appu? I don’t either. But Hindustan Times thought it fit to give him space to air his views).
At best I am a blessed Indian. At worst, I am an average Indian. The key to me is (and I say this with all humility), is that I am an Indian (Indian = above average human being)
Here are some facts that I would like to seek clarity on. I am sure my own understanding is skewed.
In his article in Bloomberg Raghav Bahl talks about black money being used to buy a Jaguar XF. For a moment lets agree that some dubious dealer is accepting the entire payment in cash. Here is what the transaction involves.
The car has to be paid for in WHITE by the dealer. To the best of my knowledge you cannot send cash to the manufacturer.
It will be registered (it can’t even get on to the road without that – no insurance company would cover it).
The dealer CANNOT register it in his name. He HAS to register it in the name of the purchaser.
The purchaser is BOUND to share his PAN number and photo ID for any transaction above Rs. 50,000. For a moment lets even agree that a dubious ID and PAN card is used. But what happens at registration? Will the car be in a benami name or in the purchaser’s name? It doesn’t really matter. Every single Jaguar XF WILL be checked sooner or later. Then what? Will the purchaser simply wish the Jaguar away?
Sorry Mr. Bahl, I don’t think you have made any arguments here.
Mr. Rajan has left for Chicago University and its best we let him pursue his academic interests. His work is done. His opinion noted but he isn’t here feeling the pain. He is best left where he is.
Mr. Appu talks (like many others) that cash is only a fraction of all ill-gotten wealth; 6% I believe.
The rest is in gold, real estate etc. So his point is that only 6% at best will be the %age of what gets captured in the demonetising exercise. I am dumbfounded and I must explain why. I will use the analogy of a business to explain the point.
In any business you need capital (read cash) to do business. Cash is spent in two ways. The first is to buy machinery, buy computers etc that are classified as purchasing fixed assets. Cash is also used to buy raw material, pay labour etc to end up with a final product that gets sold or traded or otherwise converted back to cash, at a profit.
If Black Money is the primary product (or raw material) and gold, real estate etc versions of how black money is stored then it is important to never forget that it still is black money! So if Black Money was used to buy gold and real estate, the reverse is also true. You will need Black Money to convert the gold into cash and real estate. Let’s never forget, we are NOT in a barter system where I could walk into a Jaguar showroom and buy many cars by ‘trading’ my apartment papers for it. The showroom would have to show cash/check/transfer, CURRENCY of some sort of to be able to let me drive that Jaguar out of the showroom. Here is a simplistic way to understand the cycle.
What begins with Black Money has to come back to Black Money. It cannot be converted to White Money that easily. Yes there are conduits and agents and someone’s aunt who will do this. They have always existed and they always will. But that isn’t the point of the demonetising exercise. The point is to find out ways to make these agents/conduits/aunts irrelevant. And that is the point that is being sorely missed.
When the money is to be changed and or otherwise deposited in accounts, the existing systems will capture the transaction. There will be questions asked and there will be answers sought. When there isn’t cash in the system, it is pointless to ask for it. Going back to the SME analogy, the two types of use of cash are classified as FIXED ASSET PURCHASE and WORKING CAPITAL. In an SME the working capital requirement is HIGH. But in any business if WORKING CAPITAL = TOTAL ANNUAL REVENUE (money the business generates by selling its products in a year) then the company will fold within 3 months of its operations. In a small business it is normal to turn the Working Capital 4 times in a calendar year. This means a business with Rs. 100 as working capital will try to generate Rs. 400 in a year. Large businesses will be around the 10 or 12 mark.
The outliers turn their working capital beyond 20 times in a year.
Yes Black Money is a super-efficient business every Rs. 6 turns into Rs 100 every year. But the key is to remember, it all starts with Rs. 6!!! Black money is further disadvantaged because for the Rs. 100 revenue to turn a profit, it has to go back into the system as Black Money. Too complex? Here is a simple way to understand it. A flat purchased at Rs. 1 crore White and 20 lakhs black can only be sold at more than Rs. 1.20 crore to show a profit. Every investor wants a profit so lets not split hairs that there is no profit motive. Even if the White component is close to Rs. 1 crore to avoid taxation, someone HAS TO have more than Rs. 20 lakhs in cash to buy the property so that the seller makes a profit. Modi’s action hits at the Rs. 20 lakhs. The Rs 1 crore will automatically take care of itself.
Let me explain this with another live example.
Imagine another Rambhai who has inherited 1 acre on the outskirts of a major city. He cost of acquisition is ZERO, so there is no black money as long as the land exists in Rambhai’s name.
ABC builders comes to buy the 1 acre of land. He values it at Rs. 1000 per sq foot.
He pays Rambhai at the rate of Rs. 400 through a bank transfer and Rs 600 per sq foot is delivered to Rambhai’s house in suitcases. The first transaction in Black Money is created.
The builder builds a complex and insists that he receive Rs. 4000 per sq foot by check and Rs. 2000 per sq foot in cash.
Shyambhai buys the flat on the builder’s terms.
Two levels of black money are transacting.
With Modi’s demonetising Shaymbhai no longer has cash. He wants to buy the apartment but wants to pay in WHITE. ABC Builder has two options – he agrees to sell or he doesn’t. In the time before demonetising, ABC would wait for a Krishnabhai or Jigneshbhai to come along and agree to his terms. But post demonetising there isn’t anyone left to agree to his terms. Then what? Will ABC still sell at Rs. 6000 per sq foot or would he opt to take Rs. 4000? The answer isn’t that simple and I am not going to attempt to answer it here. The point however is, the Rs 2000 has walked away from the system. And that is the point of the demonetising.
I want to share two recent experiences to show what black money is all about.
I was recently stopped by a cop for what he thought was a violation of the RED (TRAFFIC) LIGHT. I showed him my dash-cam and that it wasn’t plugged in or his claim wouldn’t stand trial. I knew I hadn’t violated the RED LIGHT, even though he thought I had. I removed my wallet and said that I was willing to pay the fine. The cop sized me up, the size of the car, the size of the wallet and asked to see my papers. I removed a large file while handing him over my Driver’s License. The license was valid. He had to go through a mound of papers. I had next to nothing in cash but had enough credit cards. I volunteered to pay the full fine against a receipt. He asked me to leave without asking me for anything.
I came from Bali where I had bought a beautiful wood carving. I walked across to the Red Channel at Delhi Airport. I declared the value of the carving, it was well within my duty free limit. The customs officers asked me to put this through the X RAY machine. The lady at the machine salivated looking at the wooden carved dragon; it is a magnificent piece I admit. It was well packed and she asked me to open it. I politely refused. I stated clearly, that if she wanted to open it she would pack it herself. She said she wouldn’t. I whipped out my camera phone and told her that I would record her opening it and I would leave the carving with her AND not take it back unless it is packed.
The alternative was that I would send a large car to pick it up the next day but she would be responsible for it overnight if she opened it. It was minutes before the customs supervisor showed up and asked me to leave with my dragon.
The point is, we need to stand up for what we need to believe in. At least with the cop I am sure I was let go because he could see I would rather pay the full fine than slip him some money. The same is true for black money. You cannot spend what you don’t have.
I am truly sad that people are suffering. My own hired help at home are live examples for me. But when they had the opportunity, I forced them to open bank accounts. I have got them into the habit of receiving their salary through a bank transfer and for them to withdraw cash only when they need it. They represent the absolute bottom (or near absolute bottom) of India’s tiered citizenship.
Today they hold their head high because even if they don’t have hordes of cash, they have enough to keep their noses above water. This phase too will pass and I ensure I make them believe that.
But first I must believe in it myself.
In 1992 when I was struggling with the excise department and its intervention in the food processing unit I was associated with, I witnessed a demure Sikh finance minister of India remove excise duty from a category of processed foods that helped me. I became his ardent fan. He sought to bring in reforms that ensured that I would have a future. I owe him a lot.
He was followed by another finance minister who wore a traditional South Indian dhoti. He continued with the reforms and ensured that banking interest rates were brought down. It helped me in the work I was doing.
I dreamt of the two as a dream team. The duo would change India forever I believed. But when the two came together, they disappointed fans like me. I have met them both personally and I have conveyed my gratitude. That hasn’t changed the fact that they couldn’t continue the work they had started.
Modi is a person I have not been a fan off. I have found him to be boorish and his secularism questionable. Then I met the man. I listened to him in private. I watched his eyes glistened when he talked about the hardships he had to go through to get through life. He wasn’t a hot-shot lawyer or Western educated economist. He was a simple Indian. He walked the talk. He did what he thought was right. He will err and he will stumble and he may even fall. He is human after all.
Meeting him reminded me why I left the USA, a cushy job, a house, and a potential green card to come back home where I spent close to 14 years in humiliation and borderline penury. I was reminded of a Gandhi who said (paraphrasing what I heard) “my India is young. My India dreams of a future that is devoid of poverty. My India needs to rise above its past.” As a student in NY, I sat transfixed in the visitor’s gallery where India’s youngest prime minister was giving his maiden speech. In 1984 the seeds of my return were sowed even if the return had to wait until 1987.
Modi’s demeanor reminded me of the words of a foregone era. His actions talk to me of a better future.
Modi’s actions have led me to believe, India just might make it to becoming what its citizens want it to be.
I know I don’t want to pay a bribe. I don’t know if demonetising will make it go away but I believe it will surely make the asker and the giver pause to consider if they can or should (consider a bribe).
I know black money won’t be wiped out by wishing it away. I don’t know if demonetising will make it go away but I believe it is surely going to make things more WHITE.
I know people will face hardships. I don’t know how many can face it but I know this too will pass.
I know that this is at worst, just an act. I don’t know if it will achieve its objectives but I know it is better than not acting at all.
For too long have I sat and wished things were different. Its time I stood by those who want to get off their behind and try to make things different. I don’t want to sit and watch my country’s dream go by. I want to take part in every small way that I can. If this is a pipe dream then I don’t really want to wake up.
Jai Hind!