Demonetization - a bungle if not a scam and now, an opportunity being squandered

Few problematic questions:
Q1. Why did PM not get enough Rs.500 notes printed three to six months before November 8, 2016 Demonetization announcement and get all ATM's ready beforehand?
Q2. Why did he not order banks to become compliant with UPI and USSD or AEPS technologies three months earlier?
Q3. Why did he not (or does he not) launch a training campaign and mobilise all teachers (in schools and colleges) and even bank staff to learn and then teach others making digital transactions?

What was he aiming for, really?

It would appear that PM was driven by the urgency of dealing a coup de grace (surgical strike) to the opposition parties in U.P. elections and he couldn't care less for other consequences (like during 2002 riots). TOI's chief cartoonist captured the situation strikingly accurately (10-Dec-2016 Page 9 of TOI A'bad).



Demonetisation is estimated to have cost India Rs.1.25 to 1.5 lac crores. Additionally demonetization is costing lives. It has already cost many lives and the way things are panning out and the utter callousness of the government in not tweaking rules in favour of the helpless and the poor, many more will die in queues, hospitals or even homes without access to their own money!

Only a very powerful Prime Minister can commit such an expensive project without consulting experts or the cabinet. Apart from the human distress and hit on economy, the humongous monetary cost may well exceed the tax on "black money" expected to be recovered or extinguished until the amnesty scheme (PMJKY) runs out on 31st March 2017. 

 
Modi and team have no understanding of how large scale transformative systems (like Aadhar) are rolled out. For making India go from 98% cash transactions to even 50% digital (mobile) transactions, it would take much more than exhortations by PM or enthusiasm of Niti Ayog's Amitabh Kant (he declared lucky prizes to promote digital transactions). Migration from cash to mobile money transactions could easily be justified to be scaled up and formulated as an all-time biggest project. Instead Modi is squandering this opportunity of transforming India on an important dimension. Due to a ham handed campaign, and no training resources deployed, the available technology and resources remain grossly underutilised; sadly people prefer to queue up for cash when most of them could have switched to mobile (digital money) in less time! The  bank staff could have been deployed for opening bank accounts and teaching those in the queue to learn the use of UPI or USSD enabled mobile transactions - technology and infrastructure already exist to include both smart phone users (with Internet connectivity) and feature phone users (without Internet connectivity). Queues for cash would reduce dramatically. Constraints in going digital are not mobile coverage or transactions technology coverage. In India we have over 1 billion mobile users (may be 600 million unique subscribers - i.e. practically every household).

Constraints are

1) awareness ; training and
2) individual bank accounts (practically 99% of households have bank accounts) and linking them to Aadhar (particularly important for the less literate because biometrics security enabled transactions are desirable for them).

Modi and team have bungled on estimating the gains of demonetizing on the economic front. Almost all the demonetized currency is going to get back into banking system before expiry of the deadline. Modi and team are now expecting the tax base will expand. Millions of notices will be sent out to depositors to explain their income which the Income Tax officials will want to tax or confiscate! This will be the biggest opportunity for the I-T Department, one of the most corrupt departments of the government, of milking innocent (gullible) citizens who have been lured by the Modi team to deposit funds below Rs.2. lacs by telling them that no questions will be asked.

Many individuals and political parties can deposit cash they are holding in 500 and 1,000 rupee currency without inviting any questions - for e.g. all political donations - election funds collected by parties and agricultural income are tax exempt. No wonder folks declare agricultural income which is bogus or political parties collect fictitious donations below Rs. 20,000, where source need not be declared, to launder or hoard black money (hoarding black money also helps in making expenses below the table). Since cash withdrawals have been controlled by RBI (at the behest of Modi government), in the U.P. elections, the BJP is expected to have an advantage. Due to insider knowledge, ruling party and their friends, would have had enough time ahead of November 8, 2016 to park cash properly. Bank deposits in September and October 2016 had spiked like never before! Will these be investigated?

It would seem very unlikely that Congress would not have dug up evidence of insider machinations of the Demonetizing project engineers. After all this is not a small size project. If one party chooses not to expose another party, it can only be due to a quid pro quo.

What will Modi Government do with the surge in bank deposits? The politically smart idea of demonetization, of impairing the financial muscle of opponents, could boomerang soon with cash starved people getting restless in North India. Modi government needs to recapitalise banks due to mounting NPAs. Also the ruling party bosses may want to make good their promise to masses to recover back black money and gift the poor people some (or part of the Rs.15 lacs promised to each). BJP strategists may also favour meeting many other political demands prior to elections (Niti Ayog team talks of big data but the cash distribution to 1.25 bank branches, 1.5 lac ATMs and 1.6 lac Post-offices is hardly being informed and guided by a coherent policy). Meanwhile, Congress has preempted one populist gimmick of loan waiver to farmers. One needs to wait and see what BJP decides to do with (temporarily) bloated bank deposits.

India's freedom from black money and corruption will not come from demonetization. It may not even come from converting cash dominated economy to digital transactions dominated economy, although that is a great opportunity and it must not be foregone due to lack of energy or ham handed execution. Freedom from corruption will not come without reforms in political funding rules and utterly unrealistic caps on election expenses that force out honest and meritorious aspirants and reward candidates who are crooked or who give in to crooked practises :(
 

The idea of tolerance of corruption or defining a standard of corruption and - A Fortuitous Telecom revolution? How hypocritical do we want to get?

Fact #1                  Idea of nuanced ethics

The published annual accounts of major political parties, as Gurucharan Das writing in TOI recently explained, reveal that official receipts of funds were less than 10% of the estimated funds required for only fighting the central government and state government elections by the number of candidates the respective parties typically field. By his calculations, Congress (biggest party) declared less than Rs.500 crores annual receipts leaving Rs.4500 crores to be raised by other means. BJP’s respective figures are about 25% lower, not because they are cleverer or more honest but because they field fewer candidates.

Everyone knows that better part of political party’s fund requirements must be met from quid pro quos or cuts built into large deals – based either on patronage (benign form in which the beneficiary is complicit) or arm twisting (malevolent form in which victim must cough up cash under threat of prosecution for violation of laws which are designed to be difficult or impossible to comply or denial of a contract or permission which in normal course ought to be granted).

That there may be spill overs from collections meant for party’s account into the personal accounts of fund raisers is obvious from the rate of growth of declared assets of many politicians during the period they wield power. It is hard to follow or define an ethics framework which permits beating the rules for the party but not for self-enrichment. Therefore, if there are indeed such people who when put in a position to raise funds for the political party have proved to be successful in discharging their responsibility without enriching themselves, then these people should be rated as having ethical standards far higher than those who just benefit from party’s or other people’s efforts and do not themselves contribute any sums for running of the party or an enterprise that needs to survive in a “corrupt eco system”  – this should include majority of the population which does nothing about supporting political processes except wailing that all politicians and all businessmen are corrupt.

Therefore, when a politician is caught in the act of taking money under the table, it becomes doubly important to ascertain if the funds were meant to go into his/her party’s coffers or the recipient’s personal account? Intent is not all that difficult to establish in such transactions – one has to dig into prior transactions, if any, and check known sources of income to reliably settle the question of illicit gains. Until evidence of intent is at hand one should desist from  running down the person caught in the act because that person may be one having far higher ethical standards than those of the accusers :)

FACT #2                Benchmarking execution efficiency or “Standards” of corruption

Government processes and machinery may be rated as excellent for the purpose the British designed them for, decades and centuries ago. After independence, politicians and bureaucrats have knowingly or unknowingly taken the place of colonialist rulers and vastly reinforced the methods of exploitation of the masses. Various government schemes of distributing subsidies or largesse are like ATM machines for the politicians and government staff who siphon off a large proportion (according to late Rajiv Gandhi, "administrative" costs sometimes equalled 85% when you consider government’s money collection costs and spending costs). There is no reason to believe the trend of "administrative cum leakage" costs would have reversed, chances are these costs have climbed up over the years.

Reality check - The question of Justice and Standards – case of A Raja, ex-Telecom Minister

If we have a minister who works a miracle of a scheme in which hundreds of millions at the base of the pyramid benefit through affordable mobile phone connectivity because of multiple Telcos competing with each other in introducing low-cost phones in urban as well as rural areas, and in the bargain, makes an alleged quid pro quo of a mere Rs. 200 crores, should we reward him or jail him?

The telecom companies in India now generate billings of lacs of crores of rupees p.a. (Rs.1.67 lac last year) so Rs.200 crores is a fraction of one percent when compared with the value of benefit delivered to masses of India. With this high standard of performance, the telecom regime should be cited as a shining example of successful policy that served the needs of the masses and moved India’s GDP forward faster¹ and not a “scam”.

The judiciary, auditors, members of the public and opposition leaders who are shouting “scam” will find it hard to compare their own standards of honesty with that of UPA-II, while assessing its telecom policy execution, that has delivered such fantastic results at near zero cost – government recovered the stipulated fee consistent with the FCFS policy. Following table is taken from TRAI's annual report of 2010-11.

CAG’s (Comptroller & Auditor General) contention is that the policy should have been modified in a way that Telco would have paid lacs of crores (up to ~ Rs.1.76 lac crores) to the Government for license and spectrum usage – Did the CAG say that this is a call that was of the government of the day to take? [This call had to be made on an assessment of several factors. According to an Economic Times editorial of 23rd Sep 2011 cited below, CAG did not estimate the taxes and share of revenue that accrued to the government from Telcos' billings nor did it estimate the impact on GDP and quality of life improvements due to affordable and higher levels of mobile penetration and connectivity provisions to the people of India. It is also necessary to calculate the price elasticity of demand, income segment wise - at the base of the pyramid the sensitivity is bound to be highest and when the telecom prices rise, it is the segment of the poorest who need the mobile connectivity most (because they don't have land lines and they don't work in offices having phone lines), that will shrink first. Did CAG do this calculation also? It is doubtful that auditors are trained to do this sort of anlaysis.] As Kapil Sibal tried to explain – government’s policy was NOT revenue maximization from licenses or spectrum but to encourage investment in making a key infrastructure more accessible – so as per the existing rules, A Raja caused zero loss to the government – if at all there is an offense committed, Raja could be prosecuted for subverting the FCFS policy (First Come First Served policy was a formulation of NDA govt.).  So far there is no evidence of anyone in the government making any money apart from A. Raja’s alleged quid pro quo of Rs.200 crore that Unitech advanced to DMK’s TV channel (which DMK Boss’s daughter Kanimozhi, a co-accused, has returned).  

Assuming that Rs.200 crore advance to DMK's TV channel was the result of A Raja favouring Unitech which was not a qualified Telco, the aggrieved party is not the people of India but some qualified Telco which was not granted the license and which had to fork out a larger sum of money to buy equity offered by Unitech (alleged to be few thousand crore rupees).

Assuming that A Raja would personally have benefitted to the extent of Rs. 200 crores for which there is no evidence at all, it would still make him a super “economical” functionary when we calculate the leakage incidence [compare Rs.200 crores quid pro quo with Rs.1,66,752 crore which is one year billings of all Telcos – in a non-corrupt situation the annual billing would have been less by Rs.200 crore (or less by a few thousand crores if we load the additional costs incurred by a qualified Telco which could have been awarded license with proper administration of FCFS policy) as this benefit would have gone to the consumer or the bottom line of the Telco].

To summarise the situation -

Our governments (central, state and local) have given us a set of rules that are many times impossible to follow or extremely difficult to comply with. One of them is about election funding and expenditure: "no MLA may spend more than Rs.16 lacs and no MP may spend more than Rs.25 lacs." Because of this rule, every political party without exception is forced to raise and spend funds illegally - since the actual requirement is ten times higher than the allowed limits, 90 % of funds the parties handle has to stay unaccounted. A Raja was DMK's man in the government and he was doing his job.  He also had the guts to continue FCFS policy and get on with the task of spreading the benefits of Telecom to the masses without falling for the temptation of making money from selling the spectrum through an auction. Therefore, DMK should declare A Raja a hero and build a statue to commemorate his actions of tightening leakages and setting a new bench-mark – he took it to less than 0.1% of revenues arising from a government contract. Mayawati built statues of elephants costing hundreds of crores and we may have many more expensive statues being sanctioned by CMs.So what is the big deal in building one 5'6" statue?

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1 Revenue maximization of telecom licenses or spectrum auction is a bad idea

A recent World Bank study (graphic in citations below) reveals that developing countries benefit more than developed countries with the penetration and accessibility of telecom services, particularly mobile phone, internet and broadband services. Countries that auctioned spectrum failed to achieve the penetration and accessibility that India has achieved. In fact India is the champion in this regard. Few states have exceeded 100% penetration and accessibility is there for everyone to see – fishermen, farmers, street vendors and hawkers have all benefited by realizing better revenues and margins – consumers have benefited with lowered costs and less idle time in calling for required manpower and getting work done quickly. All of these benefits would not have accrued to the extent they did, had India opted for revenue maximising of telecom licenses and spectrum.

Ironically, now the courts and the government bureaucracy are all set to change the telecom regime that will set the country back, particularly the people at the base of the pyramid for whom the marginal utility of mobile phone connectivity is the highest. I remember in the 70s Dr Homi Bhabha and Dr. Vikram Sarabhai’s forecast of growth of electronics was subverted by protectionist zealots who had a free reign after these two enlightened scientists died. The government (Department of Electronics) imposed 500% import duty on electronic items, including computers and put onerous export obligations on those who wanted to import. This ridiculous policy was reversed by Rajiv Gandhi but by that time India was left far behind, its electronics output was less than that of Taiwan – we missed the forecast of Bhabha and Sarabhai by 95%. 

Telecom spectrum revenue maximization policy, advocated by the courts (and unthinkingly adopted by over enthusiastic TRAI bureaucrats) will be somewhat like a repeat of the DOE’s policies of 80s. It seems the stellar results we achieved in the last decade in Telecom were fortuitous or a sheer accident and not as a result of a consciously reasoned policy. Sometimes we do good things unknowingly or may be if we have achieved something good, it must necessarily have been by fluke  :)

More info about:

Election funds, candidate’s declaration after election of expenses incurred and party accounts:

http://sabhlokcity.com/2011/04/accounting-of-political-party-funds-and-election-expenditure/

Less than 2% of funds of political parties are accounted by donations of corporates: 

http://articles.economictimes.indiatimes.com/2012-01-10/news/30611967_1_parties-anil-bairwal-aditya-birla-group 

http://www.somethingaboutthelaw.com/2012/01/12/electoral-reforms-and-corruption-in-india/

http://realityviews.blogspot.in/2011/09/indian-political-parties-collect-crores.html

How to or how not to manage spectrum:

http://blogs.timesofindia.indiatimes.com/men-and-ideas/entry/think-of-the-spectrum-like-the-village-commons

Impact of telecom on economy:

http://www.itu.int/ITU-D/ict/wtim11/documents/inf/006INF-E.pdf [9th World Telecommunications /
ICT Indicators Meeting (WTIM-11)] 

What sort of connectivity other countries are providing to its citizens:

http://www.telegraph.co.uk/technology/broadband/6337698/Finland-makes-fast-broadband-a-legal-right.html
 

Charges against A Raja:

http://articles.economictimes.indiatimes.com/2011-10-23/news/30310760_1_realty-md-vinod-goenka-swan-telecom-siddarth-behura

http://articles.economictimes.indiatimes.com/2011-09-23/news/30194140_1_auction-2g-spectrum-telecom-policy-telecom-ministry